I Am Down $12,000
Investors,
Holy crap. The All In Portfolio is getting absolutely slaughtered right now. In the past week the All In Portfolio is down 15% or $7,316. From the high of $52,500 to a current level of $40,491. Since rebuying into coal equities the All In portfolio is down 18.28% or $9,057.
I was first buying coal equities back in early summer. They were all trading at basement level valuations. Sure, the equity prices were up 200-500% from COVID-19 lows, but still cheap. My timing was almost perfect. After I bought two of the three coal equities they both ran up over 100%.
My thesis was pretty simple at that time. Met coal prices were surging, yet the equities had languished. If the price of met coal held out through the summer, every producer would have the chance to lock in contracts for 2022 at significantly higher prices. Given the fixed cost business model, most of the price increase would drop straight to the bottom line.
The thesis worked out even better than I had expected. In the first writeup I ever did I had one of the coal equities locking in pricing at $120/ton for 2022 as my best case scenario. My bear-case scenario was $100/ton. That company recently announced that they locked in 56% of 2022 production at a whopping $196/ton.
I won’t go into great detail what this means for free cash flow as I have detailed it extensively to Alpha Letter Pro subscribers. If any of the members have missed these notes please find them below:
Contracts for 2022 were starting to get leaked a month or so ago. When I saw the pricing on 2022 contracts I decided to start rebuying into coal equities. The contracted pricing was extremely high and met coal prices were at all time highs.
Since I have rebought into coal equities, almost every single coal equity has fallen off a cliff? The selling has been relentless.
I’d much rather buy a stock and have it re-rate immediately. That is the dream. A quick reversion to the mean based on improving fundamentals. But that’s not how the market works. If the market worked like that we’d all be rich and there wouldn’t be a market. Price discovery would be gone. The fun of finding an undervalued business wouldn’t exist.
The real success in the stock market comes from having the conviction in an idea and holding for the long-term. If you panic sell anytime there is blood on the streets your results will be subpar. Building the conviction, holding and even doubling down is what turns boys into men.
Despite the dramatic fall in my coal portfolio, I continue to hold. I have not sold one share or bought anything since my last note. I believe that 2022 will be a record year for most met coal producers given the locked-in contracts and higher pricing.
Right now I think investors are focused on Seaborne pricing into China, which is spooking markets. There has been a large drop in pricing from $625 per ton to around $400 today. Met producers are still netting over $300 per ton in margin at current pricing, but the wild swings are scaring people off.
In addition China is slowing down their steel production. China wants steel production to be flat from 2020, which will make the back half of the year weaker as the first half of 2021 was operating at a ramped up basis. This cut in steel production is due solely to environmental issues, not a demand slowdown:
“It’s very difficult to do,” Larry Hu, chief China economist at Macquarie Group, said of Beijing’s balancing task. “The cut on steel production is due to environmental issues and high iron-ore prices, but not a calibration on [the extent of] a demand slowdown.” - WSJ
This new steel policy of flat production from last year requires China to cut production by 11% (59 million metric tons) in the second half of 2021. I’m guessing when 2022 comes knocking, which is only 45 days away, steel production will ramp back up again.
What is most interesting is the entire world is producing steel at a record level. Demand for met coal remains high and steel producer need coal. I mean why else would you lock in met coal prices close to $200 per ton in 2022 if you thought prices were going to come down?
In addition, the supply and demand dynamics are getting pretty interesting. Met prices are at record highs, but there is very little incremental tons coming online over the next few years. Usually high prices are cured by more supply, but in this case it doesn’t appear to be happening, given the dirty nature of coal, ESG concerns and lack of project specific financing in the space.
Peak capex for coal has happened years ago. If you are a miner you typically mine the best stuff first, a process called high grading. As the mines age it becomes harder to get coal. Eventually mines will close down due to economic inefficiencies.
With the largest coal miners in the world focused on decarbonizing and generating cash flow, there is a very real chance that coal stocks are headed into a multi-year commodity cycle. Combine that with contracts for 2022 at record highs, I am holding onto my coal equities.
If I am wrong, maybe they go down another 20%. A decent loss, but not life changing depression type loss. I don’t think any of the assets I am holding will go to zero given the contracted book for 2022 and improving balance sheets. If I am right on the other hand, we could be looking at major cash flows for a few years. I’m staying patient and thinking long-term. Nothing in the short-term really matters at this point.
Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.
Alpha Letter is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.
THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.
Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.
The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.
For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.
alphaletter.co (“Alpha”) is a website owned and operated by Substack. Alpha is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Alpha in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Alpha is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Alpha does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Alpha does not verify the adequacy, accuracy or completeness of any information. Neither Alpha nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Alpha nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis
I Am Down $12,000
Long and strong. DCA is your friend right now.
Great write up. Thanks. Why not buy more shares? It sounds like risk is far less than the reward.