Coal Stock Report
One Coal Stock Set To Skyrocket… We think the coal sector remains an attractive long-term play. As the energy situation in the world continues to deteriorate, demand increase for coal will steadily increase, and coal stock companies like Foundation Coal Holdings Inc. (FLC:NYSE) should do very well.
Foundation Coal is the nation’s fourth largest coal producer. The name is fairly new, but it has been digging, scraping, mining and selling coal for decades under other names, most recently RAG American Coal.
FCL operates a total of 14 mines in the Powder River Basin, northern Appalachia, central Appalachia and the Illinois Basin. Nine of these are underground and four are surface operations.
Coal Stocks-Current Coal Mine Operations
The main function of these mines is to yield high-quality steam, metallurgical and industrial products for distribution to domestic and export markets.
The Powder River Basin is the fastest growing coal producing region in the United States, and FCL happens to be right in the middle of it. Since 1972, the Powder River Basin Mines have produced over 900 million tons of coal, and there is still proven reserves in excess of 676 million tons. In 2005, subsidiaries of FCL produced 43.6 million tons of coal. That is 66% of the total production.
The Belle Ayr Mine in Wyoming is a truck and shovel mine located in the heard of the Powder River Basin. This mine produces 100% raw coal, which does not need ‘washing.’ This is a low cost, high revenue mine that produced 19.5 million tons of coal in 2005, and has 330.7 tons of proven reserves. The mine life is approximately 13 years. The other aspect of this mine that makes it very appealing is that it happens to be located near both the Santa Fe Railroad and the Union Pacific Railroad. This allows FCL to ship coal on both of the major western railroads.
The Eagle Butte Mine is extremely similar to the Belle Ayr Mine in almost every aspect. The truck and shovel method is used on 100% raw coal. It produced 24.1 million tons of coal in 2005, and has proven reserves of 341 million tons of coal. These production levels here are expected to be sustained for another 14 years.
I’m starting to sounds like a broken record here. Remember that I have just given you data on two mines. They currently have 14 mines producing coal! I wanted to give you a brief touch of why this company is the fourth largest coal producer, and why they will continue on that path, and increase production in the coming years.
Coal Stock-Promising Financial Data
FCL has quite the portfolio of mines, but that doesn’t mean much if they can’t turn that coal in the ground into green numbers in the book.
Over the last five years, FCL has increased revenue every year. Revenue in 2006 was $1.47 billion, up from $1.31 billion in 2005. Compare that to the 2002 revenue of $903 million. FCL has increased revenue an astounding 39% in just 5 years.
We see a similar coal stock story in coal shipments. I like this statistic because it encompasses all the coal that was mined, refined, and put on a train or some other form of transportation vehicle. In 2005, coal shipments were 68.8 million pounds. In 2006 that number hit 73.9 million pounds. In 2002 FCL shipped 64.2 million pounds of coal. Again we see a large 5 year increase of 15%.
These two statistics bring us to a very interesting point that really gives us a tell all of the coal market and FCL’s ability to be an efficient producer. From 2002-2006 FCL experienced a 39% increase in revenues from a 15% increase in coal shipments. That’s rather amazing when you think about it. This is due to the increase in coal prices over that same period combined with FCL’s implementation of increasingly efficient coal producing technology.
FCL is in a position to benefit from increasing levels of production as well as a bull market in coal. That carries a multiplier effect for revenue numbers, and allows for an aggressive coal producing company like FCL to really take advantage of the increasing prices of coal. Don’t forget that we haven’t seen the largest upward moves in the price of coal yet.
Coal Stock-Technology and Efficiency
FCL takes technological advancements in coal mining very seriously. They realize that better technology equates to higher production and lower costs. I would like to explain a very simple notion here. The longer the mine life, the more profitable it becomes to implement newer technologies. We are talking about mines that have a life expectancy of up to 26 years here. So you can see why it is rather profitable for FCL to spend a little money on
Let’s look at exactly what sort of technologies FCL is using at their mine sites. FCL has the widest longwall panels in North America. What is longwall production? I will keep this brief being that it’s a fairly simple notion. Longwall production is one of the most efficient coal production techniques used today. Basically, large underground roads are formed in a rectangle around a large coal reserve. The rectangles are approximately 300m wide and somewhere between 450-500m below surface level. A machine called a shearer moves back and forth along the ‘longwall’ stripping the coal. The coal is sent up on a conveyer and mechanical supports are put up behind the shearer as is mines the coal.
Cumberland Coal Resources LP, an affiliate of FCL, has recently won, for the second time, the Industry Top Performer award at Longwall USA 2007 International Exhibition. Mining Media Inc selected the award recipient. This is just one of many great examples of how FCL and its affiliates excel in the coal mining industry.
None of the several above mentioned reasons to buy this company mean anything without a good, solid, experienced management team. In today’s world of corporate scandal and options backdating, this is one of the most important pieces of the puzzle. FCL has exactly what you want in a mining companies management team. The senior executives have an average of 25 years in the coal industry. That’s great right? Yeah, but these guys not only have experience in the coal field as a whole, but they also have an average of 13 years of working with FCL’s land assets. They know their projects, and they know the future potential of these projects as well as the future potential of this company. They understand the value of implementing the most modern of coal technologies in order to increase production. The management team are veterans of the coal business and know how to run a large coal mining operation and the results can benefit owners of this coal stock.
Coal Stock– Related Links
Are Coal Stocks Really Diamonds? -Motley Fool
As Coal Prices Rise so Do Coal Stocks -WashingtonPost.com
Why I’m Bullish on Coal Stocks -seekingalpha.com
The State of Coal Stocks is Strong -MSN Money