Rystad Energy shows coal prices are soaring, hitting $462 per metric tonne on 10 March. That’s up 148% from $186 per metric tonne on 23 February and is increasingly likely to exceed $500 per metric tonne this year.
With oil and gas prices sky-high, some industries return to coal to meet their industrial needs. Europe’s heating costs are soaring, and restrictions on Russian energy are compounding the problem. Coal is also relied on when particularly harsh winter conditions arise in many parts of the world.
In January, coal imports to the EU climbed 56% year-over-year.
Why is Coal Needed?
Thermal coal is used to generate electricity, while coking coal is used with iron ore to manufacture steel. The use of thermal coal has been significantly curbed since environmental awareness grew. But coking coal is still heavily used.
Unfortunately, the renewable industry also needs steel, so moving away from coal entirely is not as easy as we might think. Most of the world’s coking coal mines are in Russia and China, but Australia has announced plans to open or expand its coking coal mines.
Coal is undoubtedly the dirtiest of fossil fuels, so it’s something investors prefer to shy away from. Nevertheless, with demand climbing, some companies are set to profit. So, for investors happy to overlook the ethical and environmental concerns, here are a few companies operating in the coal industry.
Peabody Energy Corp. (NYSE: BTU)
Peabody Energy Corp. (NYSE: BTU) has been making headlines recently, and the BTU share price is up 103% year-to-date. Peabody is a US coal miner. It operates in Wyoming, Illinois and Indiana, as well as New Mexico, Arizona, and Colorado. Peabody also has mines in Queensland, and New South Wales, Australia.
Peabody Energy has a $3bn market cap and a price-to-earnings ratio of 7.7. It is also the largest private-sector coal company in the world.
Amid the COVID-19 pandemic, energy demand fell as industry slowed. This was bad for the coal business, and Peabody hedged its bets agreeing to future contracts at a fixed price. This didn’t account for a soaring coal price and led Peabody to fall victim to a $534m margin call last week.
Goldman Sachs lent Peabody Energy $150m to help it deal with the margin call at a whopping 10% interest rate. Now Goldman is coming under fire from activists who don’t believe it’s sticking to its pledge to limit fossil fuel financing. And Peabody is at risk of further margin calls if the price of coal continues to soar.
Arch Resources (NYSE: ARCH)
Arch Resources (NYSE: ARCH), previously known as Arch Coal, is an American coal mining and processing company. It is the second-largest coal supplier in the United States, behind Peabody Energy.
Arch displays a strong history of shareholder rewards via dividends and share buybacks. This suggests its management team objectives are aligned with keeping investors happy.
The ARCH share price is up 66% year-to-date.
Hallador Energy (NASDAQ: HNRG)
Hallador Energy (NASDAQ: HNRG) is a traditional coal producer moving into renewables. Hallador’s Sunrise Coal is Indiana’s second-largest coal producer and is focused on safely and efficiently mining high-quality bituminous coal from the Illinois Basin. Meanwhile, Hallador Renewables will help customers transition to solar and batteries.
Unfortunately, while the price of coal is soaring, HNRG is at a disadvantage because it has agreed on customer contracts at a fixed price. By the end of Q3, HNRG had contracted 6.8 million tons of coal for 2022 at $39.50 a ton (total production this year should be around 7 million). However, it does seem to be keeping shareholders in mind by paying off debt. During Q3, it generated $24.1m of operating cash flow and paid down bank debt by $15.2m.
Hallador’s subsidiary Hallador Power recently announced plans to acquire a 1-gigawatt coal-fired power plant from Hoosier Energy. Hallador believes it will be able to run the plant economically, and it secures demand for up to half of its coal production for years to come by striking a deal with Hoosier.
Hallador Energy CEO Brent Bilsland said:
“This transaction is an example of how Hallador intends to help the market transition from coal to renewable energy by providing base load capacity in the near term utilizing existing coal-fired power generation while transitioning to renewables in the longer term. It’s a great transaction for all involved parties.”
The Hallador Energy share price is up 34% year-to-date. The company will report its Q4 earnings on 28 March.
Alliance Resource Partners (NASDAQ: ARLP)
Alliance Resource Partners (NASDAQ: ARLP) is a natural resource company that produces and markets coal to United States utilities and industrial users.
The company generates revenue from operations and royalty income from the production and marketing of coal.
ARLP is currently the second-largest coal producer in the eastern United States with seven operating underground mining complexes in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia, as well as a coal-loading terminal in Indiana.
Last year the company sold 32.3 million tons of coal and produced 32.2 million tons. The company enjoyed a strong Q3, and the ARLP share price has risen over 10% year-to-date.
Warrior Met Coal (NYSE: HCC)
Warrior Met Coal (NYSE: HCC) is dedicated entirely to mining non-thermal metallurgical (met) coal used as a critical component in steel production.
HCC’s prices tend to align with the benchmark spot prices for coal.
The HCC share price is up 46% year-to-date. Jefferies analyst Christopher LaFemina raised his share price target on HCC to $36 on 8 March.
Ramaco Resources (NASDAQ: METC)
Ramaco Resources (NASDAQ: METC) deals with metallurgical coal mining properties in Virginia and southwestern Pennsylvania.
The METC share price is up 17% year-to-date, and the company should benefit from higher coal prices this year. METC stock features in 44 mutual funds and is owned by 95 institutions.
Analyst Christopher LaFemina at Jefferies maintained his share price target on METC at $19 on 8 March.
Consol Energy (NYSE: CEIX)
Consol Energy (NYSE: CEIX) produces bituminous coal. It focuses on the extraction and preparation of coal in the Appalachian basin.
CEIX expects to sell approximately 23 million to 25 million tons at its Pennsylvania Mining Complex in 2022. And it expects this to sell at an average of $55 to $57 per ton, with an average cash cost of $29 to $31.
Analyst Lucas N. Pipes at B Riley Securities raised his share price target on CEIX to $46 on 7 March.
The CEIX share price is up 33% year-to-date.
China Shenhua Energy (OTCMKTS: CUAEF)
China Shenhua Energy (OTCMKTS: CUAEF) is the largest state-owned coal mining enterprise in Mainland China and in the world. It is a subsidiary of Shenhua Group.
China accounts for more than half the world’s coal demands, but the region is out of favor with foreign investors. China often imposes regulatory limits on its booming businesses, and coal is one of the latest to incur such price curbs. The country will limit the price of coal in its three biggest mining regions from May in an effort to keep prices stable.
China Shenhua Energy recently won China’s Golden Bull Social Responsibility Award for its outstanding performance in green development, finance and taxation, overall benefits, public opinion management, shareholder responsibility, business innovation and ownership structure.
The CUAEF share price is up 9% year-to-date.
Yancoal Australia (ASX: YAL)
Yancoal Australia (ASX: YAL) is majority-owned by Yanzhou Coal and is dual-listed in Australia and Hong Kong. The company released its full-year 2021 results at the end of February, reporting record revenue up 56% year-over-year. This led Yancoal to reinstate its dividend.
Yancoal sold coal to 19 countries last year and enjoyed an operating margin of 46%. The company voluntarily repaid a $500m debt in October. All this positive news has helped boost the YAL share price, which is up 55% year-to-date.
Whitehaven Coal (ASX: WHC)
Whitehaven Coal (ASX: WHC) is another coal stock benefiting from the rise in commodity prices. Its recent results boasted its biggest half-year profit leading the company to reinstate its dividend and commit to a 10% share buyback.
Paul Flynn, Whitehaven Coal Managing Director and CEO, said:
“High prices for thermal coal have driven record half-year earnings and cash flows. Our rate of cash generation means debt is now all but paid down and affords considerable flexibility in regards to capital management,”
“We expect the second-half will deliver better results than the first-half. We will see better volumes, better production and hopefully less impact from the weather and COVID. ”
The WHC share price is up 45% year-to-date.
Future Coal Outlook
The ongoing success of all these stocks depends on elevated coal prices and demand continuing. Commodities like coal are cyclical, so demand fluctuates and share prices too.
Globally the aim is to steer away from reliance on coal, so this recent boost to industry shares is likely to be temporary.
As steel demand has risen, so has the price of coking coal. This could reverse if demand for steel slips. Likewise, when energy prices become too high, industries have no choice but to shut down. Steelmakers and paper mills have already had to cut production as the energy costs were simply too high to justify continuing.
People are very good at adapting, as the COVID-19 pandemic proved. Therefore, when forced to by rising electricity and home energy costs, people will again adapt and cut their reliance, thereby reducing demand.
With geopolitical tensions, war and energy demand altering the narrative, the long-term outlook for the industry remains uncertain and investing in coal stocks remains speculative.
