Coal, An Answer to Our Current Energy Crisis?

Greetings Rogue Investors,

Coal is one of the most plentiful energy sources on earth. It has also been a favorite source of heat for humanity throughout the last several centuries. However, it has some big drawbacks when compared to oil and natural gas. First, it is mined and transported as a solid, increasing transportation and infrastructure costs. Second, it produces a lot of pollutants when it is burned. I know this first hand because in my younger days, I worked as a geologist characterizing and remediating sites that were contaminated with coal wastes. Coal waste, the solid material left after coal is burned is a nasty pollutant that is toxic to humans and wildlife and difficult to cleanup.

In the Midwest where I am from, coal has served as one of the main sources of heat from the early 1800s to recent times. For example, Kansas City and many other large Midwestern towns are powered entirely from coal-fired power plants. To comply with the federal Clean Air Act, these power plants must use scrubbers to clean the smoke and other byproducts produced during combustion prior to discharging them to the environment. Unfortunately, in foreign countries where regulations are more lax, cities using coal as an energy source can become smoke filled and covered with soot.

But given its drawbacks, coal will almost certainly remain one of the most important sources of energy for the foreseeable future for the following reasons:

• The world is covered with coal deposits. Coal is much more plentiful than oil or natural gas and it is estimated that the world's supply of coal could last for 500 years or more.
• Technological advances have led to economical ways to convert coal into gasoline and other liquid fuels. Several coal liquefaction plants have been started in the United States and China, both countries with lots of coal but declining reserves of oil and natural gas. If the price of oil and natural gas remain high, coal liquefaction will become a big business.
• When scrubbers are used and the waste is managed properly, coal can be burned without destroying the environment.
• Coal deposits are scattered throughout the world. As a last resort, the United States, China, most of Europe, Russia and many other areas in the world can rely on their coal supplies to get them through an energy crisis.

However, also important for investors, the coal industry is under appreciated and undiscovered. This leaves a handful of companies who can execute their business models an excellent opportunity to make money.

Three areas of investing in the coal market look promising: reserves, transportation and liquid fuels.

Probably the king of the coal industry is Peabody Energy Corporation (BTU). Peabody has been around forever and they own enormous coal reserves in the United States and Australia. Although I am not a fan of big cap companies because they cannot grow their earning as fast as small companies, Peabody is a good, solid investment for someone looking for safety and a small dividend yield in the coal market.
Website address: http://www.peabodyenergy.com/index-ie.html.

A second coal reserve company I discussed previously because it is a coal royalty trust is Fording Coal Trust (FDG). This company has vast reserves of metallurgical coal, or met for short. If you are new to the coal industry, coal comes in grades and met is the highest-grade coal. Because of its high grade, met burns very hot making it the coal of choice for making steel. Only a small percentage of the coal deposits around the world are met coal. This Canadian company has access to huge met coal beds and with China completing so many large construction projects, steel production and met use have gone up substantially.

Fording also owns huge deposits of Wollastonite with their subsidiary, NYCO, being the world's largest supplier of Wollastonite. What is Wollastonite? Wollastonite is a very important mineral that is used in many industrial applications including ceramics, plastics, metal production and paints. Also, because Fording is a trust, most of the profits are paid back to shareholders every quarter through dividend payments. The dividend yield of Fording Coal trust is already well above 15% and rising. If you are looking for exposure to the coal industry with the goal of obtaining a balance of growth and income, Fording is a good choice.
Website address: http://www.fording.ca/cache/page_1.html.

Coal has unique challenges when it comes to transportation. It takes 100 rail cars everyday to supply the coal needed for one Midwestern power plant. This keeps Burlington Northern (BNI) pretty busy since they are the only major railroad with rail lines leading from the massive coal beds of Wyoming to many of the coal fired power plants across the United States. I started recommending this stock in the late 1990s, when it was selling for less than $30 per share, but even at a price of $60 now, I still think this stock has a long way to go. In addition to supplying the coal industry, rail lines are one of the cheapest ways to transport goods long distances. As diesel fuel costs rise, trains can move freight much more cost efficiently than trucks. This bodes well for BNI.

Renetech (RTK) is both an alternative energy play and a coal to liquids play. Renetech is currently a very small company but they own patents covering a process called the Fischer-Tropsch process for converting solid coal to liquid fuels including gasoline. Several coal liquefaction plants are under construction and more are planned. For countries rich in coal but lacking oil, coal liquefaction could be a good alternative. Because Renetech is small company and still not making any money, it is a speculative stock at this point but still worth considering if you have a little risk capital.

Happy Investing,

Bryan Rundell