In a world struggling to cope with climate change, investors might expect coal stocks to be plunging in value. Such a decline was indeed the case through much of the past year. Coal was losing its dominance due to growing awareness about emissions and its negative impact on climate change. Meanwhile, alternative energy shares kept surging.
However, now that the global economy is rapidly growing, the global appetite for energy keeps on surging along with the prices of various fossil fuels. According to the U.S. Energy Information Administration (EIA), “The price of coal varies by coal rank and grade, mining method, and geographic region… Prices are generally higher for coal with high heat content… Coal prices at surface mines are generally lower than prices at underground mines.”
In 2021, coal made a comeback from its ashes. Coal demand, especially from China, has rebounded from its pandemic lows, mainly due to high natural gas prices and increased infrastructure spending. In turn, soaring demand along with constrained supplies have led to a swift surge in coal prices — sparking a rally in the stock prices of many U.S. coal companies.
Moody’s suggests “U.S. coal producers will create more than $1 billion in positive free cash flow in the second half of 2021 and in 2022, before dividends on a combined basis, compared to less than $100 million generated during the first half of 2021.”
The recent rise in coal prices could help coal producers in the transition from the thermal coal sold for power generation towards metallurgical (met) coal for steelmaking. However, risks around environmental, social and governance (ESG) issues still constitute a long-term headwind. In turn, coal stocks face environmental obligations and increasing difficulty in accessing capital for new projects.
So, with that information, here is a list of three coal stocks that could generate handsome returns to value investors over the next year.
Now, let’s dive in and take a closer look at each one.
Coal Stocks: Arch Resources (ARCH)
52-Week Range: $27.86 – $105.58
Dividend Yield: 1.21%
St. Louis, Missouri-based Arch Resources produces metallurgical coal, also known as coking coal. The company sells its coal to power plants, steel mills and industrial facilities. The group operates through three segments: Powder River Basin, Metallurgical, and Other Thermal.
Arch Resources released third-quarter results on Oct. 26. Revenue totaled $594 million, up 56% year-over-year (YOY) from $382 million. The company also posted a net income of $89 million, or $4.92 per diluted share, compared to a net loss of $191.5 million, or $12.64 per diluted share, in the prior-year quarter. Lastly, cash and equivalents ended Q3 at just under $190 million.
On the results, CEO Paul A. Lang remarked, “With the start-up of Leer South at the end of August, Arch took a quantum step forward in its strategic transformation into a premier producer of high-quality coking coal for global steel markets.”
Despite increasing profitability from thermal coal, Arch is shutting down its thermal operations to generate electricity by the end of 2023. It leaves the company as a pure-play met coal operator.
Moreover, the company estimates 2022 free cash flow to rise, which it will likely use to pay down debt. Analysts highlight that financial institutions have become more reluctant to provide capital for the coal industry. Part of the free cash flow will also go to share buybacks and dividend. Management has declared dividend payment at an annualized $1 per share.
Right now, ARCH stock hovers at $88, up 101% year-to-date (YTD). ARCH stock shares are trading at around 2.06 times forward earnings and 0.84 trailing sales. With that in mind, interested readers could find value around these levels.
Teck Resources (TECK)
52-Week Range: $14.41 – $29.92
Dividend Yield: 0.59%
Teck Resources is a diversified miner with coal, copper, zinc, and oil sands operations in Canada, the U.S., Chile, and Peru. It is one of the largest exporters of seaborne metallurgical coal as well as a top zinc miner worldwide.
The group released Q3 results on Oct. 26. Revenue increased 73% YOY to 3.97 billion CAD. Adjusted net income came in at 1.02 billion CAD, or $1.51 per diluted share, compared to 130 million CAD, or 11 cents per diluted share, in the prior-year quarter. Total liquidity stood at $5.4 billion as of Oct. 26.
CEO Don Lindsay cited, “The extremely favourable commodity price environment – particularly for steelmaking coal – combined with solid operational performance resulted in record quarterly adjusted EBITDA and record adjusted profit in the third quarter.”
Due to the worldwide transition to clean energy, Teck has recently revealed strategic plans to boost copper production and cut back on operations from coal. Now it is on track to double copper production by 2023 as demand for copper continues to surge. Additionally, the electric vehicle (EV) industry as well as wind turbines and solar panels rely on significant amounts of copper.
Thanks to the rally in coal and copper prices, TECK stock could surge higher through 2022. It currently trades at $29, up nearly 60% YTD and about 95% over the past year. Furthermore, shares are trading at 6.2 forward earnings and about 1.6 times trailing sales. And with all of that in mind, interested readers could buy the dips.
Coal Stocks: Warrior Met Coal (HCC)
52-Week Range: $15.07 – $28.40
Dividend Yield: 0.88%
Warrior Met Coal operates two underground mines in Alabama. The company sells met coal to steel producers located primarily in Europe, South America and Asia.
Furthermore, the company issued Q3 results on Nov. 2, and the figures were solid. Revenue was $202.47 million, up 12% YOY. Adjusted net income per share stood at 97 cents compared to an adjusted net loss of 28 cents per diluted share in the previous year. Cash and equivalents ended the quarter at more than $268 million.
“During the third quarter, we were pleased to deliver our most profitable results since the onset of the COVID-19 pandemic, driven by the resiliency and efficiency of our operational base,” CEO Walt Scheller said on the results. “We were ideally set to take advantage of the record high pricing we saw this quarter, enabling us to leverage the strong global economic recovery by increasing our average net selling prices and delivering strong production during the ongoing union strike.”
Moreover, the demand for steel and met coal is expected to surge worldwide through 2022. So, despite supply chain issues, the rally in coal prices has significantly increased the company’s capacity to generate free cash flow. In addition, the recent ban from China on Australian coal imports also implies significant top-line growth potential.
Overall, HCC stock has declined more than 16% over the past month, offering value investors an opportunity to buy the stock at a reasonable valuation. Nonetheless, it sits slightly below $22.50, up 5.2% YTD. Also, HCC stock is trading at 6.85 times forward earnings and 1.32 times trailing sales.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.