China has been hit with a new commodity shortage.
Forbes reports, “Power cuts and rationing are hitting parts of central and northern China as winter coal supplies fall short of surging energy requirements due to extreme cold and transport disruptions.”
Boring old coal has become the commodity du jour. And investors have been bidding up anything and everything related to coal.
The excitement around coal has been building for months. The recent shortages have only brought more attention – and investment capital – to coal.
But investors who look at recent history will quickly see the coal industry is exceptionally prone to booms and busts. Heck, it just the last 10 years has been through two cycles and started a third.
The current cycle is certainly not different this time. But with the run-up in shares of the big coal miners and a great story to push them to even greater heights, a high-potential (1,000%+ gains) opportunity is being created. It is not, however, going to be where most investors look.
Keep it Simple
One of the best aspects of the coal story is its simplicity. As we’ve discussed in the past, a simple story is the starting point for any bubble. And they don’t get much more straightforward than the emerging story.
Basically, you have China and India hitting their economic growth strides again. Their energy demands are growing right along with their economies – about 10% per year.
They have been very publicly paying lip-service to green technology (that’s really only surviving on government life-support because it desperately needs a technological breakthrough while the urgency to find one is steadily declining) and throwing a tiny fraction of their energy development budgets on windmills and solar panels.
They know coal is the only real solution to keep the lights on well into the future.
That’s a very good thing for investors looking to double or triple their money in the months ahead.
History is Rhyming
The coal industry has gone through this type of boom before.
The chart below shows the booms and busts through the shares of some of the largest coal miners including Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI), and others over the past decade:
Coal stocks have certainly had some big swings. But now we’re back in an uptrend and there’s a real catalyst to push them to new highs and beyond.
The visible hand of government is “here to help” keep this up cycle going longer and pushing it higher than either of the past two.
The Associated Press details additional factors in China’s coal shortage:
The entire region has just over two weeks’ worth of coal, with many power generators having stockpiles equivalent to less than three days worth of demand.
Coal supplies also are being stretched by closures of smaller coal mines as part of a restructuring of the industry aimed at improving safety and increasing efficiency.
The combination of surging demand, low stockpiles, and government interference can go a long way to keeping this coal boom rolling and everyone knows it.
Make 10 Times Your Money in the Coal Boom…Again
Investors and Wall Street have bought into coal completely.
A few recent analyst reports predict more supply crunches in thermal coal (used for burning in power plants) and even bigger ones in metallurgical coal (used in steelmaking and industrial processes).
The emerging coal story is going main stream. In the inevitable “Peak [insert commodity X] Theory” comparison that comes along with booms like these, the New York Times says, “China now consumes approximately 47 percent of coal produced globally but by most estimates has just 14 percent of global coal reserves.”
Now we just have to break down the story to see where most of the “hot money” will be headed.
We have coal shares at multi-year highs and headed higher. Coal companies flush with cash and able to used their high-priced shares as currency.
We have the short-term thinking investors anxious for growth whether it’s through new mines, expanded capital investment, or outright acquisitions.
The combination of those two has sparked a surge in coal mergers and acquisitions (M&A). For instance, $47.1 billion of coal M&A have been announced so far this year. That’s an increase of 79% from last year and the third-highest activity level for the coal sector ever. Unsurprisingly, nearly two thirds of the deals are on coal assets and companies in emerging markets.
The result of this flurry of activity is a genuine boom in junior coal stocks usually reserved for those rare and life-changing profits from big gold discoveries:
Lucky Strike (TSX-V) shares have soared from 15 cents to more than $1.60 per share in two months
Corsa Capital’s (TSX-V:CSO) market value doubled from $115 million to $230 million in one day after announced it acquired a big coal project
Prophecy Resources (TSX-V:PCY) shares have more than doubled in the past few weeks after announcing it had received preliminary mining permits for its Mongolian coal assets (side note: your editor had lunch with Prophecy’s President and CEO John Lee when he was “building a company the Chinese would practically have to buy out” by buying up assets around the world they’re desperately in need of including nickel, platinum, and coal – 400% in gains later he and Prophecy are well on the way)
Puda Coal (NASDAQ:PUDA) has been rewarded handsomely with a 150% run up for adding projects, completed a big financing, and plans to expands its existing coal mines in China all in the span of a couple of months
A Few More Innings in Coal Bubble
This is certainly an exciting time to be in coal. Almost too exciting, really.
Knowing the boom and bust history of coal stocks, we can’t help but remember the legendary Bob Farrell’s second and fourth rules of investing:
2) Excesses in one direction will lead to an opposite excess in the other direction
4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
Basically, this coal bubble won’t last. It will, however, likely last longer than we expect. That means the light is still green in coal stocks as long as we move prudently.
It’s too to jump in the middle of the big coal stocks where the risks and rewards aren’t extremely in our favor. But junior coal stocks, which despite their run up are trading at a fraction of the value of their major counterparts, are primed for even more gains.
Remember, it was the Fed’s interest rate slashing and cheap money antics which played a key role in the mid-2008 oil/coal/agriculture bubble.
This time around the story’s the same – China, India, energy, etc. – but the Fed’s input has been exceptionally bigger. The potential gains should be exceptionally bigger as well.
By Andrew Mickey