2 Plays on Ole King Coal

by Richard Young | December 31, 2011 8:00 am

The U.S. coal industry’s long-term prospects look increasingly attractive.

Coal is, of course, an essential commodity in the U.S., where it accounts for half of all electricity generation. But it’s also an essential in Asia. According to the 2011 BP Statistical Review of World Energy, the Asia-Pacific region consumed more than two-thirds of the world’s coal last year.

Much of Asia’s coal demand comes from China, which consumes almost half of the world’s annual coal output — more than the Americas, Europe, the Middle East and Africa combined. Since 2002, Chinese coal use has more than doubled, while coal demand in industrialized economies has flat-lined.

On the surface, China’s large and rising share of the coal market doesn’t appear to create an opportunity for U.S. coal companies. According to the BP statistical review, China is self-sufficient in coal. In 2010, it produced 1.8 billion tonnes of coal and consumed about 1.7 billion tonnes (both on an oil-equivalent basis).

But in reality, China must import coal because much of its own reserves are lower-quality coal. What’s more, China’s 48% share of global production isn’t commensurate with the country’s 13% share of global reserves.

At current production rates, China will deplete its remaining reserves in 35 years — 83 years before the world runs out of coal. With limited domestic supplies of higher-quality coal and rising demand, China is likely to become increasingly dependent on imported coal.

The U.S. should be a big winner here. With 28% of the world’s known reserves, or 241 years worth of domestic demand, the U.S. is the Saudi Arabia of coal.

My favored coal plays for you are two high-yielding coal master limited partnerships (MLP), Alliance Resource Partners (NASDAQ:ARLP[1]) and Natural Resource Partners (NYSE:NRP[2]). I’m adding both stocks to my Common Stock Monster Master List. I have followed and advised both ARLP and NRP in the past.

Alliance Resource Partners is the fourth-largest coal producer in the Eastern U.S. and the 10th-largest in the nation. As of year-end 2010, the company owned almost 700 million tons of coal, or 24 years of reserves at current production rates.

Alliance was the coal industry’s first publicly traded MLP. Since the IPO, the stock has delivered a compounded annual return of 28%. Alliance shares yield 5.2%.

Whereas Alliance Resource Partners owns and mines coal, Natural Resource Partners is in the coal royalty business. Coal miners pay Natural Resource Partners a fee to mine coal from the company’s properties.

NRP owns, manages and leases 2.3 billion tons of proven and probable coal reserves in three major regions of the U.S. The coal royalty business is a more conservative way to gain exposure to coal than investing in coal miners.

This article first appeared on MoneyShow.

Endnotes:
  1. ARLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARLP
  2. NRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=NRP

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