Arch Coal Attracts Soros as Peabody Lures Citadel

By Arijit Ghosh and Christopher Martin

Nov. 24 (Bloomberg) — Billionaire investor George Soros, Citadel Investment Group LLC and T. Rowe Price Group Inc. are snapping up coal mining shares, taking advantage of the cheapest valuations in five years as demand for electricity rises.

Soros bought 2.9 million Arch Coal Inc. (ACI) shares last quarter for a 2 percent stake in the second-largest U.S. coal producer, filings with the Securities and Exchange Commission show. Citadel, the Chicago-based hedge fund, and Invesco Ltd. in Atlanta bought 3.5 million shares of Peabody Energy Corp. (BTU), the biggest miner. T. Rowe reported purchasing stock in Peabody, Arch, Consol Energy Inc. (CNX) and Indonesia’s PT Bumi Resources.

While coal, the cheapest fuel for power, is up 88 percent in Pennsylvania, shares of the companies that mine the mineral have slumped along with the rest of the commodities industry. Now, investors are betting that Peabody, which traded at 3.7 times projected 2009 earnings as of Nov. 21, and Arch at 2.5 times are cheap because coal use will increase. The valuations were at more than a 54 percent discount to the MSCI World/Energy Index.

“Coal is the best commodity to get into right now,” said Daniel Rice, manager of BlackRock Advisors Inc.’s $1.5 billion Global Resources Fund in Boston, which is among the largest holders of Peabody and Arch. “It’s a lot less sensitive to downturns because it’s needed for basic power generation, and demand is growing.”

Crude oil in New York has dropped 43 percent this year compared with a 6.1 percent decline in Australian coal prices.

Consol surged $4.08, or 20 percent, to $24.88 in New York Stock Exchange composite trading. Peabody climbed $2.82, or 15 percent, to $21.57 and Arch Coal rose $1.40, or 11 percent, to $13.70.

Electricity Demand

Demand for electricity in major economies, where coal is used to generate 52 percent of power, will increase 3.3 percent by 2010, according to a UBS AG report on Nov. 17. Global coal use will rise 2 percent a year through 2030, led by China and India, the Paris-based International Energy Agency said Nov. 6.

Coal company shares tumbled this year as the U.S., Europe and Japan entered their first simultaneous recession since World War II. As of Nov. 21, Peabody dropped 79 percent after reaching a record in June and Arch lost 84 percent. Consol, the third- largest U.S. coal producer, slipped 82 percent. Bumi fared the worst among the world’s biggest producers, plunging 92 percent in Jakarta.

The MSCI World Index has declined 49 percent this year, while its energy sub index fell 44 percent. The Bloomberg U.S. Coal Index slumped 75 percent and the measure of coal stocks in Asia dropped 73 percent.

‘Particularly Irrational’

Analysts say the decline has been overdone. While oil company profits will fall this year after New York crude futures dropped, coal producers have the advantage because mining companies have long-term sales contracts that cushion them from falling prices.

“People are dumping all equities and it’s particularly irrational for coal,” said Richard Price, an investment banker at Westminster Securities in St. Louis, who advises coal producers and utilities in the U.S. and China. “Even if contract prices come off next year, they’ve still got the ones signed this year at higher prices.”

Michael Vachon, a New York-based spokesman for Soros, declined to comment. Heather McDonald, a Baltimore-based spokesman at T. Rowe, also declined to comment. Aysha Mawani, spokeswoman at Invesco and Katie Spring at Citadel didn’t respond to e-mails seeking comment.

Bumi Gain

Bumi may advance fivefold, according to the average forecast of 20 analysts compiled by Bloomberg. Peabody will probably more than triple to $58 in the next 12 months, the analysts surveyed by Bloomberg said. Arch has an average target price of $37.69 among 13 analysts, more than three times its Nov. 21 close, the data show.

“I wouldn’t say we’re recession-proof, but certainly recession resistant,” Steven Leer, chief executive officer of Arch, said in a Nov. 19 interview. “People will still be turning on their lights. Electricity demand rarely goes down.”

Profits at Peabody and Arch, both based in St. Louis, will rise next year as less lucrative contracts get replaced with ones signed at this year’s higher prices, analysts forecast. Lower costs for diesel, steel and explosives will help reduce mining expenses, Leer, 56, said.

More Demand

Increased demand from utilities and analyst forecasts for 22 percent profit growth at Bumi attracted U.S. buyout firm TPG and San Miguel Corp., the Philippines’ biggest food and drinks company, to vie for a stake in the company, Asia’s biggest thermal coal exporter. PT Bakrie & Brothers, which agreed to sell its 35 percent stake to North Star Equity Partners, expects TPG’s Indonesian affiliate to decide on the purchase by Nov. 28.

Change in ownership will attract investors because Bumi’s stock is undervalued, said Bryan Collings, who manages $250 million at Hexam Capital’s Global Emerging Markets Fund in London. Bumi is the only Southeast Asian stock he owns.

“If you are looking to buy the stock, it’s a wonderful environment,” said Collings. “Energy hasn’t gone out of fashion and it’s still the core business for Bumi.”

Coal and nuclear plants are the cheapest to operate and more difficult to start up or shut down than natural gas generators. That’s why coal is used to produce half of U.S. electricity and 78 percent of China’s.

India’s government expects imports to double to 40 million tons by 2012 as Asia’s third-largest economy increases coal-based generation capacity by 72 percent. Japanese utilities plan to add 11 percent more coal-fired capacity by 2010, and Indonesia 40 percent by 2011.

Coal Power

China intends to increase coal power by 2010, while the U.S. Energy Department forecasts the world’s biggest economy will boost use of the fuel 24 percent by 2030.

Still, a deepening global economic downturn may drive coal shares lower and curb energy demand.

The 32 percent gain in the Reuters/Jefferies CRB Index to an unprecedented 473.97 on July 3, was followed by a 51 percent decline in the measure. The gauge is set for its worst annual performance on record.

Spot coal prices at Australia’s Newcastle port, an Asian benchmark, dropped 56 percent from a record $192.5 a ton in the week ended July 4. Prices at South Africa’s Richards Bay declined 18 percent this year to $78.15 a ton.

South African prices may average $70 a ton in the next three months and return above $90 within 18 months, Manqoba Madinane, a Johannesburg-based analyst with Standard Bank Group Ltd., said in a Nov. 18 interview.

Falling Prices

Coal prices “will continue to fall” as economic activity deteriorates “very rapidly,” Francisco Blanch, a London-based Merrill Lynch & Co. analyst, said in a Nov. 14 report.

“While there is uncertainty in today’s economy, any easing of demand growth is likely to be offset by diminished coal supply,” Peabody President Richard Navarre said on an Oct. 16 earnings conference call. “Tight supply will be further compounded by the global credit freeze because a significant amount of planned production expansions and new mines will be at risk around the world.”

Arch plans to cut output next year at some of its higher- cost mines in the western U.S. In the east, producers Consol and Massey Energy Co. say they’ve been curtailed by increased mine safety inspections and more difficult reserves to tap.

Indonesian Production

Production in Indonesia, the world’s biggest exporter of power-station coal, will slow as the global credit crisis hampers expansion plans, Fitch Ratings said in Nov. 21 report without giving figures. The Indonesian Coal Mining Association on Aug. 21 forecast a 15 percent increase in output to 270 million metric tons in 2009.

Bumi will remain profitable even at lower coal prices because its production costs are among the lowest in the world, said Peter Ball, a director at the Jakarta-based company.

Bumi expects to sell coal at an average $77 a ton this year and at least at that level in 2009, he said. It cost Bumi $33.10 to produce a ton of coal in the first half, according to regulatory filings. That compares with $75 to $80 a ton in Russia, where coal costs are the highest in the world, according to Ball.

“It’s clear that we’ll keep on making a lot of money no matter what,” Ball said.

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2 Responses to Arch Coal Attracts Soros as Peabody Lures Citadel

  1. Doctor Alpha says:

    Coal is the Future, Gasification of Coal. Rentech (RTK) Significant Announcement on the Horizon

    Company: Rentech

    Ticker: RTK

    Company Snapshot: Rentech is composed of two business segments each focusing on a major global issue, alternative green energy and fertilizer production. Rentech’s alternative energy segment is one of the world’s leading synthetic fuels technology and development companies. Over the last twenty-five years, Rentech has developed and patented the Rentech Process, an advanced version of the well-established Fischer-Tropsch process. The Rentech Process can convert a wide array of carbon-bearing materials, including green resources such as biomass and municipal solid waste, into ultra clean fuels and chemicals ranging from jet fuel to diesel gasoline. Rentech’s objective is to help the world reduce its dependency on oil and lower emissions, including greenhouse gases. Rentech’s second business segment is their fertilizer plant Rentech Energy Midwest Corp. -REMC-, located in East Dubuque, IL. REMC is one of the country’s largest nitrogen manufacturers producing nitrogen-based fertilizer products and industrial nitrogen products.

    Recommendation: Buy

    Recommendation Date: Friday, November 21, 2008 at .50 cents per share

    Recommendation Results:
    ** Friday, November 21, 2008: UP 8.00%
    ** Monday, November 24, 2008: UP 12.96%
    ** Tuesday, November 25, 2008: DOWN -1.72%
    ** Wednesday, November 26, 2008: UP 3.42%
    *** Since Date of Recommendation: UP 24.00%

    ________________________________________________________________________________
    On Friday, November 21, 2008 we recommended Rentech (Ticker: RTK) with a buy rating at .50 cents a shares. Since then a few positive and significant developments have taken place.

    * November 22, 2008 Indiana and Illinois announce they are pursuing major clean coal power projects. Illinois Attorney General Lisa Madigan has announced a measure that will create 2 clean coal projects including a $2.5-billion plant near Taylorville, Illinois. That plant comes in the wake of another $2 billion coal gasification project in southern Indiana.
    http://www.wthitv.com/dpp/news/news_wthi_Indiana_and_Illinois_Clean_Coal_200811212155

    * November 22, 2008 Baard Energy has received its final air permits from the Ohio EPA which in turn allows them to build a coal to liquid plant in Wellsville along the Ohio River. One of the first of its kind. The permit is the third and final state environmental permit necessary for Baard Energy to proceed into final design and construction of the 53,000 barrel-per-day coal/biomass to liquids plant at the Columbiana County Port Authority site in Wellsville. Baard has yet to release who will supply their Fischer-Tropsch technology.
    http://www.reviewonline.com/page/content.detail/id/507886.html?nav=5008

    * November 22, 2008 President-elect Barack Obama reaffirmed his support for alternative energy. This includes Rentech’s Fischer-Tropsch technology that converts biomass, natural gas, and coal into liquid fuels ranging from jet fuel to diesel gasoline.
    http://news.yahoo.com/s/ap/20081122/ap_on_bi_ge/obama_economy_12;_ylt=Anucx2RdHWzyzTRuGeA1tl0Gw_IE

    * November 24, 2008 The US Air Force concluded analysis of the effects of using a natural gas-based synthetic fuel with its Lockheed Martin F-22, as work to trial the technology accelerates through its trainer, transport and fighter fleets. The office of the assistant secretary of the air force for installations, environment and logistics is expected to select a private partner during December to develop a Fischer-Tropsch production facility at Malmstrom AFB, Montana.
    http://www.flightglobal.com/articles/2008/11/24/319113/us-air-force-completes-f-22-synthetic-fuel-trials.html

    ________________________________________________________________________________
    As of Friday, November 21, 2008 for an Aggressive short-term trade we like Rentech at these current levels. Rentech will release fiscal year 2008 financial statements December 16, 2008. Rumor has it these numbers will be very positive.

    Rentech’s stock price has been down significantly along with everyone else:
    15 days down –43%
    45 days down –62%
    65 days down –79%

    The last time Rentech hit .46 cents a share was October 27, 2008 and the stock proceeded to rally .43 cents to .87 cents. An 89 percent increase in 7 days. Since March of this year a 40 to 80 percent fluctuation in price has been common and we look for this type of volatility to continue. Rentech could easily exceed a $1.20 per share before year-end based on a number of reasons.

    Rentech’s management is currently in a pickle. The stock has dropped significantly and the officers of the company need results ASAP if they want to be able to justify their year-end bonuses. In addition, all stock options are underwater including those belonging to the board of directors. As we have seen in the past, Rentech actively manages their stock price by issuing press reports before releasing their latest financial numbers. Only to be followed with additional press releases over the coming weeks, all in an attempt to influence the stock price. One news release could easily move Rentech’s stock price .50-.60 cents like it has done so many times in the past. Two or more press releases could be very significant.

    Press releases for Rentech’s alternative energy segment could focus on:
    * Technology licensing partnerships = Revenue increase
    * Revenue and cost sharing relationships = Revenue increase and cost decrease
    * New business strategies and directions = Shareholder assurance
    * New product sales revenue generated by their Product Demonstration Unit -PDU- leading the way to future business opportunities as companies discover value in Rentech’s numerous gas to liquid products = Revenue increase and shareholder assurance
    * Continued process improvements at their Product Demonstration Unit -PDU- facility in Commerce City, CO = Shareholder assurance

    Rentech’s fertilizer plant, Rentech Energy Midwest Corporation -REMC- located in Dubuque IL, is an extremely valuable asset that generates a tremendous amount of cash. The value of this plant alone creates a support at current levels helping to reduce downside risk. Rentech currently has 166 million shares outstanding and their fertilizer plant alone is valued between 120-210 million. A quick back of the envelope calculation, 122/166 and 210/166, suggests a stock price between .73 to $1.27.

    Rentech recently reaffirmed EBITDA guidance for their fertilizer plant and there’s a good chance Rentech will post a net income, something they haven’t done in years. Moving from a net loss to a net income would be a significant event and I think the street HAS NOT priced this into the stock. Last quarter Rentech successfully completed their Product Demonstration Unit -PDU- that converts natural gas into various petroleum based products like jet fuel and diesel gasoline. The completion of the PDU means a reduction in expenses. Combine reduced expenses with record fertilizer sales revenue, coming from greater demand for corn that is used in the production of ethanol based fuels, could translate to a positive earnings per share. Management needs a homerun if they want to justify year-end bonuses; there’s an incentive for them to be aggressive. Shareholders are less likely to be pissed off when they hear about seven figure total compensation packages when the stock is trading at $3.15 versus .50 cents a share. Again, management has a strong incentive to move this stock and all stock options are currently underwater.

    Press releases for Rentech’s fertilizer segment could focus on:
    * Record fertilizer sales revenue growth for fiscal year 2008
    * Very favorable EBITDA guidance for 2009
    * Favorable asset valuation discussion of their fertilizer plant

    As reported at Mutual Fund Facts About Individual Stocks -MFFAIS- the overall number of institutional owners has recently increased 20 percent from 81 to its current level of 97. This is very positive.
    Institutions adding to an already existing position include:
    Goldman Sachs added 825,221 shares
    Vanguard Group added 5,662,885 shares
    Barclays Global Investors added 1,918,971 shares
    Credit Suisse added shares
    Putnam added shares
    Oppenheimer added shares
    Northern Trust added shares
    Bank of New York Mellon added shares
    Bank of America added shares
    Wells Fargo added shares

    There’s a large short position, I believe 8-9 million shares and it’s probably a safe assumption that these sellers are in the money since Rentech is currently near 52-week lows. If Rentech’s stock price does move quickly, press releases and an overall market rally, we could see short sellers add to the buying as they lock in profits. This 1-2 combo could move Rentech’s stock price in excess of .40 cents a share.

    Because of a crisis in confidence the major indices, DJIA and S&P 500, have seen a record setting retreat in the last 30 days, especially in the last 7, and the market is due for a 1,200-point rally. This alone could move Rentech’s stock price .30 cents a share.

  2. Jason says:

    Doctor Alpha thanks for contributing.

    I am behind both major long term trends of alternative energy and commodities.

    I have trouble buying penny stocks on microcaps at their 52 week lows though. I like the h&s bottom working just under $0.50, but the stock is well below any technical buy points. Your argument above is solid, but it really takes a leap of faith to buy the stock. I’m not saying ACI, BTU or even KOL look much better at this point, but at least the risk of manipulation and vaporization are much lower. JRCC is actually shaping up to be the best high risk choice for me here.

    Why hasn’t this company been purchased by one of the majors? Why aren’t Soros and Citadel buying it outright?

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