Christian DeHaemer’s latest ad pitch for his entry level commodities-focused newsletter Bull and Bust Report ($49/year, used to be called Bubble and Bust Report) is all about coal… with the big premise that President Trump is behind coal and will be forcing the Chinese to buy a lot of U.S. coal as part of any trade deal. Here’s a little taste from the ad:
“When the Clock Strikes Midnight on March 8, 2019…
“CHINA LOSES & YOU ARE RICH
“President Trump Just Signed These Secret Trade War Plans… And Now YOU Can Collect Checks for $2,493… $4,112… and $6,383 — Every Month!”
And he goes into the “china will buy more coal” bit here…
“For years, China has manipulated its currency, taken advantage of unfair tariffs, and totally gamed the system against America…
“But the biggest problem America has had with China is the trade deficit.
“We buy way more of China’s stuff than they buy of ours.
“$375 BILLION more.
“That’s a problem!
“And President Trump has made it clear that China must buy more American products…
“Or he will just tax the stuff China buys from us to make up the difference.
“And guess what?
“China just caved.
“China has an insatiable thirst for one specific thing…
“China can’t use its own coal because it’s not as high a quality as ours.
“And they need it — lots of it — for energy and building infrastructure.
“As a matter of fact, China was on pace to buy 89 MILLION TONS of coal from America this year.
“And it just agreed to order even more.”
And that’s pretty much the big picture theme of the ad, once you get past the hyperbole, but he sums it up here:
“Any American can now ‘stake a claim’ in an operational coal mine…
“And rake in the guaranteed cash that a claim can bring.
“It’s easy to do!
“You don’t have to visit any mines or know anything about coal.
“You just have to know three things:
- China caved to Trump and is buying more coal to close the trade deficit.
- Trump ordered power plants to buy more coal.
- Trump is a HUGE supporter of coal, and he’s fulfilling yet another campaign promise.”
I’m skipping over most of the political malarkey, mostly because that’s just there to get you riled up and cheering for or against a particular “team,” making sure that you don’t waste your time thinking deeply about the investment ideas mentioned.
So then we get to the meat of the spiel… the pitch for four actual “coal contracts” that DeHaemer thinks you should “claim” to get these massive monthly checks that will flow from Trump’s love of coal. I’ll go through them one at a time and see if we can get you some answers.
“Coal Contract Claim #1
“Claims: Limited Supply
“Operating in the Illinois Basin, this company controls 2.1 BILLION tons of coal deposits.
“Its four mines specialize in producing thermal coal — exactly the type needed by not only Americans but also overseas buyers like China.
“It has invested heavily in state-of-the-art mining operations and the related transportation infrastructure.
“That means it produces the kind of volume Trump’s directive requires and can move it quickly and turn fast profits.
“And you can make a claim for less than $4!”
That one is Foresight Energy LP (FELP), owner of, indeed, about 2.1 billion tons of (mostly) thermal coal that they mine and sell to US power plants as well as other customers around the world.
Here’s how they describe themselves:
“Foresight is a leading producer and marketer of thermal coal controlling nearly 2.1 billion tons of coal reserves in the Illinois Basin. Foresight currently operates two longwall mining complexes with three longwall mining systems (Williamson (one longwall mining system) and Sugar Camp (two longwall mining systems)), one continuous mining operation (Macoupin) and the Sitran river terminal on the Ohio River. Additionally, Foresight has recently resumed continuous miner production at its Hillsboro complex and continues to evaluate potential future mining options. Foresight’s operations are strategically located near multiple rail and river transportation access points, providing transportation cost certainty and flexibility to direct shipments to the domestic and international markets.”
Foresight is a MLP and is probably primarily owned by income-seeking investors, and carries a pretty high debt burden that they are gradually paying down, so it is likely to be both interest-rate sensitive and sensitive to changes in the price of thermal coal. They certainly have enough reserves to keep producing coal for years as long as prices remain high enough, and that will presumably lead to continued cash distributions to unitholders (since it’s not a corporation, they aren’t called “shares” or “dividends”), and distributions are unlikely to be taxed since the operating losses, including depreciation, are so high that the distributions will be mostly classified as “return of capital” and will just lower your cost basis… this is not uncommon among MLPs, whether the partnership is a natural resource producer like this or an infrastructure owner like the pipeline MLPs, though the producing MLPs are far more sensitive to commodity prices and operating costs.
And the current yield is fairly high — they just raised the distribution to six cents/quarter, for a total of 24 cents a year, so that’s a yield of better than 7% if you buy at about $3. Whether that turns into a meaningful depends, of course, on how much you invest and for how long they can keep paying and raising the distribution, but it’s not a free cash rebate or anything like that. This is an investment with some level of risk and an expected cash return, but it’s also an investment in a depleting asset.
The lowest “monthly check” that I saw referenced in DeHaemer’s ad was $2,009, which would be $6,027 per quarter… so to get that with this particular investment you’d have to have just over 100,000 shares, at a cost of roughly $300,000. It’s a decent cash return, as you’d expect for a high-yield investment that investors perceive as being at least somewhat risky, but it’s not a windfall… and I guess it should go without saying, but if you start with $20, you’re not going to get massive monthly checks.
Coal has obviously been in decline for decades, broadly speaking, though there have been pockets of strong price performance as well — sometimes particular kinds of coal, sometimes just surges in Chinese demand or in natural gas prices (natural gas is the biggest competitor for coal when it comes to electricity generation, and is less of a pollution risk, and natural gas has been made cheap by fracking). This particular MLP has been around for almost five years, and investors who bought in 2014 would have seen their investment lose around 75% of its value, mostly, it appears, because the price collapsed in 2015 as the cash distribution was slashed from about $1.46/year to zero, before they restarted the distribution in 2017.
Yes, President Trump has talked a lot about coal and how much he loves it, but there are probably limits to what he can do for the coal mining business in the long run — and having a President who loves coal does not mean it becomes instantly more profitable to own all coal stocks… if you had waited until the 2016 election to buy shares of this coal MLP, you would currently be sitting on a loss of 48%.
Maybe that means this is a perfect time and coal will have a long resurgence, I have no idea… but I wouldn’t expect it to be a smooth ride one way or the other.
And the others? Let’s see the clues:
“Coal Contract Claim #2
“Claims: Limited Supply
“With coalmines based in Ohio and Wyoming, this company produced $7.4 million tons of coal last year.
“It specializes in thermal coal and is strategically located near rail and barge transportation.
“With Trump’s new initiative, it will be a dominant player in the Midwest, Northeast, and Rocky Mountain regions.
“You can snatch up a claim today for less than $2!”
This is odd, because going by both the hints and the little map image they they include in the ad, this one must be Westmoreland Resources (was WMLP, now delisted at WMLPQ in bankruptcy restructuring)… which, far from paying out a big distribution on March 8, filed for bankruptcy on October 9, 2018. Yes, you could have bought it for $2 on October 8, and it was expected to pay a dividend at the time (and had been paying distributions since 2015, though the fact that the indicated yield was ~30% last summer was certainly a red flag), but today it’s in “restructuring” and the MLP units are trading for less than a penny… which is a pretty good indication that the common unitholders don’t think they’re going to end up owning anything of value once the restructuring is complete.
I suspect that the copywriter put together a lusty “Trump loves coal, but the new House Democratic majority wants to steal your coal money so act fast!” ad without getting an update on DeHaemer’s favorite coal stocks, I can’t imagine any rational person is urging you to buy the delisted shares of a hugely indebted company in restructuring… but that is indeed an odd one to find in this list (and no, it’s not Westmoreland Coal, the non-MLP part of the company — that’s also a disaster and is part of the bankruptcy filing (ticker WLBA, now WLBAQ), but it’s been over a year since that one was near $2 (it’s now three cents) and I don’t think it ever paid a dividend.
We can only go up from here, right? What’s the next one?
“Coal Contract Claim #3
“Claims: Very Limited Supply
“This company is flying under everyone else’s radar.
“It is a smaller mining company recently acquired by a huge mining juggernaut with 1.9 billion in cash reserves.
“That gives it the infrastructure and funding it needs for fast growth.
“You can stake a claim for $13!”
This one is a little tricker — not many coal stocks have traded near $13 in the past year or so, even if we give some flexibility for the fact that it looks like at least one of these stocks is being teased with old data. Actual cash reserves of $1.9 billion, if that number was meant to have a dollar sign in front of it, would put it in pretty rarefied air among natural resources companies and therefore my best guess for you here would be Glencore (GLEN in London, GLNCY for the ADR, or GLNCF OTC in the US).
Glencore’s ADR did trade near $13 earlier this year, and they have been acquiring coal miners in recent years as they try to consolidate a hold on an unpopular and troubled industry, so coal is still a fairly small part of their business (about a third of EBITDA in 2018 came from thermal coal), but they’re becoming a larger coal player now — not as big as BHP Billiton (BHP), but still big, and with a hand in much of global commodities trading. And they have been buying back shares of late and pay a decent dividend (last year’s dividend was 40 cents for US ADR holders, payable in two installments in June and November, so that’s roughly a 5% yield at the current $8 share price — I don’t know what the dividend will be in 2019, it will depend on the financial results). Coal will be important for Glencore, for sure, though their Democratic Republic of the Congo mining operations for copper and zinc will arguably be more important, so there’s also clearly some political risk.
And that one counts as a guess, to be clear, DeHaemer could easily be talking up something else given those limited clues.
How about the last one?
“Coal Contract Claim #4
“Claims: Limited Supply
“Rating: VERY HIGH
“This is the most expensive claim I recommend, but it’s for good reason.
“Its coal deposits and mining operations span from one end of America to the other: Appalachia, the Illinois Basin, Louisiana, and the West.
“Its management and operation teams are packed full of the best in the business.
“And it is ready to take advantage of the new money rolling in thanks to Trump’s order.
“For around $30, you can stake a claim right now.”
This one is almost certainly Peabody Energy (BTU), the US coal mining giant that came out of bankruptcy protection about two years ago (they filed in 2016 along with lots of other coal companies, mostly because coal prices had fallen so far that they could no longer service their debt). They still have a good chunk of debt on the books, a couple billion dollars, but it’s much more manageable than the $10 billion or so in 2016, and the somewhat improving business has allowed them to pay down debt and buy back stock over the past year even as they pay out regular and special dividends. They have a special supplemental dividend pending now, in fact, they will pay out $1.85 per share to holders as of March 12, so that represents a solid yield of almost 6% on top of the “regular” dividend that is paid quarterly (the regular dividend is 52 cents/year, so that’s another 1.6%).
The shares have been volatile, as with pretty much all coal stocks, but they are currently at $31, way off of the July 2018 highs ($47 or so) and near a 52-week low (and, coincidentally, very close to where the stock was priced when it relisted for trading after bankruptcy, though it fell 25% or so immediately upon the resumption of trade in 2017).
There is a little bit of analyst coverage for Peabody, which has also been working to consolidate the industry a bit with some acquisitions in the past year, and if you want a relatively large “pure play” coal stock Peabody is probably the most reasonable choice — though analysts don’t see any revenue growth for BTU over the next few years, and earnings are expected to fall considerably from the 2018 highs… you can see the company’s 2018 results conference call transcript here if you want to get an idea of how BTU sees its own future.
And that’s all we have for your coal names for today.
Yes, President Trump still talks up coal and seems to be trying to fulfill his promises to coal-mining state voters, but it’s still a hard slog to prop up an industry that is generally disliked by pretty much all non-coal states, relies on foreign demand at a time when the dollar is quite high, has large environmental costs, and is no longer the cheapest baseline power option for US utilities (that’s now natural gas in a lot of places). Coal plants are still being shut down for economic reasons, even though coal companies enjoy a much friendlier relationship with regulators and the federal government. Things are better for the coal companies than they were in 2015-2016, but that’s not necessarily saying a whole lot — those were the years when most of the US coal miners went into bankruptcy (or at least came close).
I have no idea where it will all go, of course, and times of maximum pessimism do tend to be profitable times to invest in downtrodden natural resources stocks… but buying them in these huge slumps is still painful and a tendency is not the same as a promise, so be careful, sometimes whole businesses and sectors of the economy just die or get supplanted, too.
And, of course, the “coal contracts” checks you might receive by buying into these companies are not “free money” and they are commensurate with the investment you put at risk — the yields range from about 5-8% for the three that are still paying dividends or distributions (for those who are unfamiliar with the concept, expected yield is just the payment you receive as a percentage of your investment at the current market price — so if the yield is 5%, you’d expect to receive $50 a year on a $1,000 investment, and these are equity yields, distributions and dividends, not bonds, so the amount can grow or shrink and is not at all guaranteed… and the folks who owned coal stocks in 2015 and 2016 can probably vouch for the fact that the $1,000 you invest is not at all guaranteed to not go to zero, either).
That’s about all I’ve got for you today on these “coal contracts” … whaddya think? Find this downtrodden industry appealing? Think President Trump or increased Chinese demand will manage to drag the miners out of the doldrums again, or is the decline more of a persistent trend? Have any other favorites in the space? I’m not terribly optimistic about coal in general, but I’ll always try to keep an open mind… let us know what you’re thinking with a comment below.