Wednesday, November 26, 2008

Bloomberg: Soros and Citadel Building up Coal Stakes

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I'm still a fan of coal - this is why as I've dumped much of my global growth/commodity plays as hedge funds collapse - I've keep fertilizer and coal since they should be the LEAST economically sensitive. In theory you'd want your home heated or the ability to eat food even in a Great Depression - as opposed to say the need for copper to build new buildings. But that is sense, and the market does not use sense - it's all pack trading and every commodity is either bad, or good. Program trading does not seem to discern between coffee, copper, natural gas, or potash. The irony is some commodity drops actually help miners (steel, petrol, et al) as their input costs fall... but again, that would be logical fundamentals talking and we can't have that as we "student body left" trade.

As safety standards start to hit in China, many coal mines are closing (less supply) - and once more 80% of all Chinese electricity is coal. India is ramping; and even progressive Western countries trying to protect the environment, such as the UK are building coal plants. But again - those are fundamentals. We spoke about these things as coal stocks used to go up 7% every week, and I still speak about them - they have not changed. Only sentiment and hedge funds being blown up have.

Most important for the last 2-3 long term investors left in the world - as we've been writing; this credit contraction and lack of high enough prices is going to cause a lack of investment in the commodity complex - which will mean not enough supply and much higher prices in the future once the global economy just returns to neutral. If the global economy dare return to "growth" someday in the future - look out. For those that can look out past the "immediate" - this should be plainly obvious.

It appears other smart money is jumping in at these absurd valuations in coal.
  • 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. 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., the biggest miner. T. Rowe reported purchasing stock in Peabody, Arch, Consol Energy Inc. and Indonesia’s PT Bumi Resources.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.”
  • 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.
  • 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 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.” (I cannot stress how important this is) Production in Indonesia, the world’s biggest exporter of power-station coal, will slow as the global credit crisis hampers expansion plans (again)
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