Coal Tycoon Making Last Stand for U.S. Industry

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Coal Tycoon Making Last Stand for U.S. Industry

By Tim Maverick, Commodities Correspondent

A cloud of coal dust continues to hang over the U.S. coal industry.

Lately, the industry has been dealing with some bad publicity from the coal ash spill into North Carolina’s Dan River last year.

Coal ash is what you get after coal is burned by utilities for power. This remaining ash can contain a toxic combination of arsenic, selenium, boron, and other substances.

On top of that, the coal business in the United States is looking bleak.

It’s facing pressure from competing fuels, like natural gas; a strong U.S. dollar; and the Obama administration, which would like to see the industry go away.

Down in the Dumps

The terrible state of the American coal business was highlighted by a recent analysis from energy consultant group Wood Mackenize.

The company found that about 17% of the forecasted U.S. production for this year – about 162 million tons – is “unprofitable.” More specifically, the study said that 14% of thermal coal production and 58% of metallurgical coal production were money-losing operations.

Wood Mackenzie pointed to Central Appalachian coal as being in the deepest hole, with 72% of that coal output being unprofitable. Conditions were found to be better for North Appalachian coal and Illinois Basin coal.

But the hardest hit is metallurgical coal.

Prices are predicted to hit a six-year low (below $110 per metric ton) globally later this year. This is despite 30 million tons of production cutbacks already announced by the likes of privately held Walter Energy and Alpha Natural Resources (ANR). Canada’s Teck Resources (TCK), the world’s second-biggest exporter, says at least another 15 million tons in cutbacks are needed to stabilize prices.

However, Wood Mackenzie’s Senior Research Analyst, Dale Hazelton, did say, “If you’ve got the money to buy a coal asset, this is the time to do it.”

Scooping up Hot Deals

And it seems Murray Energy is doing just that. The company is forking over $1.4 billion for a controlling stake in Illinois Basin coal producer Foresight Energy, L.P. (FELP) and its general partner, Foresight Energy GP, LLC.

The deal is expected to close in the second quarter of this year.

In late 2013, Murray also acquired five longwall coal operations from CONSOL Energy Inc. (CNX) to position itself as a leader in North Appalachian coal.

In October 2014, Murray made yet another deal with CONSOL, buying its assets in the Illinois Basin.

According to SNL Energy data, with all those deals, Murray is now the top producer in the United States’ two hottest coal basins. These basins have benefited as coal mines from central Appalachia have suffered.

The newly combined company is the number three U.S. coal producer overall and the lowest-cost coal producer. Foresight’s average cost of operations was only $20.80 per ton in 2014.

Snatching Some Embers

The interesting aspect of the deal is not that Murray is staying private company, but that Foresight will remain publicly traded.

There is also a very real possibility that some of Murray’s assets will be put into the limited partnership in the near future.

This should translate directly into growing distributions. Prior to this, growth depended solely on Foresight opening new coal mines. Currently, its distribution yield is about 9% annually.

This should appeal to income investors, allowing Foresight to easily outperform other coal miners like, Alpha Natural, Arch Coal (ACI), and Peabody Energy (BTU). These stocks have collapsed 98%, 96%, and 89%, respectively, over the past five years.

Is this deal the last stand for the U.S. coal industry? Maybe. But if so, it is likely that these dealmakers will be the last survivors.

And the chase continues,

Tim Maverick

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By Tim Maverick