Back In Coal
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For those following along in the “All In” Portfolio, I have officially went swinging right back into coal equities. Recent news surrounding the entire met coal complex was released last week which gave me the conviction to re-enter my previous position and go “All In”.
Long-time readers will remember that I sold out of coal equities a month or so ago due to China risk. More specifically, when the news on Evergrande emerged.
My decision to sell was pretty simple. I had already doubled my investment in a few months and when the Chinese real estate market started to show cracks I sold. If the Chinese real estate market fell apart, it would take down the global steel and iron ore market, taking down met coal prices with it.
Fast forward a month or so later. There are met coal shortages on a global scale. The price of both thermal and met continues to increase. And the global steel market is one fire. China has even tried to enact price controls that looks to have failed epically.
I ended up scaling back into my favorite little met coal producer a couple weeks ago when the stock sold off. I had been monitoring global met coal prices for almost a year now and they are stronger than I have ever seen them. With the backdrop of a red day, combined with the strongest met coal prices on history, I thought the risk and reward were pointing in my favor.
Then on Friday I took my small position and went all in.
Subscribers of Alpha Letter Pro may remember me saying in one of my first met coal write-ups that I was pretty bullish on 2022 met coal contracts. In the write-up I was forecasting a small little miner to lock-in contracts at $120/ton, materially higher than the $87/ton they were booked at in 2021.
As with most miners when the price of your commodity rises, your costs typically don’t go up, resulting in operating leverage. At $120/ton with a cost basis of $70/ton, this miner was locking in $50/ton margins.
At the time this looked great. $50/ton margins were $25/ton higher than 2021, resulting in strong free cash flow for 2022. Fast forward today and results are looking materially higher than what I expected.
On October 20th, 2021 Coronado Global Resources posted their third quarter results. In the results the company stated the following:
U.S. domestic annual contract negotiations for FY 2022 are largely complete. Coronado anticipates a volume weighted average price across all grades of Met Coal products to U.S. domestic customers of approx. $187 per metric tonne (FOR), reflecting a price that is $100 per metric tonne higher than the price achieved in FY 2021. These fixed price and tonnage contracts currently cover 32% of annual U.S. production and 92% of all U.S. operating costs. Strong post pandemic recovery in global economic and industrial activity, coupled with a shortage in supply of Met Coal, saw price indices reach all-time records in the September quarter.
This is the first locked-in met coal contract that I have seen to-date and it is material. Contracts locked-in at $187/ton represent around $100/ton in pure margin. This will drop straight to the bottom line, resulting in massive free cash flow and deleveraging opportunities.
After seeing this news I sold off the small $20,000 position in the All In Portfolio and bought my favorite met coal miner. At the current valuation, they are trading at an implied forward 2022 P/E of 1. Even better, they are the cheapest met coal miner I can find on a relative basis. Should this miner lock in prices even remotely close to where Coronado locked-in prices, it has a real chance of re-rating much higher.
I now have over $52,000 invested back into this met coal producer. The entire “All In” Portfolio is officially fully invested in one idea. For new readers, the goal of the All In Portfolio is to invest all of the capital in high return ideas to compound my money as quickly as possible. Year-to-date the portfolio is up 122% and counting.
If you want access to all of my research articles, along with the All In Portfolio feel free to subscribe to Alpha Letter Pro. If you have any questions regarding the service please feel free to reach out. I can also send samples of my prior research reports to anyone who wants to see what kind of service I offer.
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