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Simply put, coal is hot.
Rising global demand for energy and soaring oil prices get much of the credit for an amazing surge in this red-hot sector. The boom-and-bust industry is very much booming right now.
And though environmental concerns may put the sector off-limits for some socially minded investors, there's no denying the profit potential.
Here's a list of coal miners turned up by MSN Money's Deluxe Screener showing their stocks' past 12 months of gains:
| Company | Recent share price | 12-month price gain |
|---|---|---|
$86.90 | 319.8% | |
$134.77 | *268% | |
$72.35 | 138.7% | |
$104.55 | 103.7% | |
$70.66 | 66.2% | |
$10.47 | 56.8% | |
$72.74 | 56.5% | |
$77.00 | 46.9% |
* Patriot started trading Nov. 1, 2007
The reason for all the excitement, at first glance, parallels the story of crude oil.
Emerging countries are driving increased demand for coal to make steel and to generate power. China, the biggest coal producer, is becoming a net importer. Oil-rich Persian Gulf states such as Abu Dhabi are building cities like crazy. With oil and natural-gas prices going through the roof, they are turning to coal to generate electricity.
And The New York Times recently reported that European nations are about to make the same move, with 50 coal-fired plants going online in the next five years.
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Meanwhile, flooding in Australia and snowstorms in China have cut coal production. Thus demand is outstripping supply, driving up prices. This time last year, U.S. coal was going for $42 or so per ton. Now, it's over $100. According to a recent news report, one analyst sees coal going for $130 per ton next year and for $250 per ton in 2010.
However, coal is not crude oil. Unlike oil, where we are depleting existing reserves faster than we can bring new discoveries online, there is plenty of coal still in the ground. For instance, at current production rates, the U.S. has more than a 200-year supply. Eventually production will be ramped up to meet demand. However, analysts say that may take several years.
Despite the huge run-up in coal stocks, some analysts say there's still money to be made in coal. If you're in that camp, here are some ideas for working these mines.
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The new case for coalEnergy Strategist editor Elliott Gue likes a US coal company that should prosper from the increasing global demand for coal, mainly in China.
Exchange-traded fund: An easy solution
Buying an ETF is the easiest way to ride the coal train (I couldn't resist saying that). For coal, picking an ETF is especially easy. There is only one choice.The Market Vectors Coal ETF (KOL, news, msgs) holds 40 or so stocks. Most are mining stocks, but the fund also holds mining equipment makers Joy Global (JOYG, news, msgs) and Bucyrus International (BUCY, news, msgs). It holds several Chinese miners, and foreign stocks make up almost half of its portfolio.
The fund started trading Jan. 15. So far, it's up 38%.
Going with stocks
If you want to buy individual stocks, here's the list of stocks I showed you earlier, this time sorted according to estimated reserves, measured in tons.| Company | Estimated annual production(tons) | Estimated reserves (tons) | Reserve years |
|---|---|---|---|
Peabody Energy | 235 million | 9 billion | 38 |
Consol Energy | 65 million | 4.5 billion | 69 |
Arch Coal | 130 million | 2.9 billion | 22 |
Massey Energy | 40 million | 2.3 billion | 58 |
Foundation Coal Holdings | 70 million | 1.5 billion | 21 |
Patriot Coal | 20 million | 1.3 billion | 65 |
International Coal Group | 19 million | 950 million | 50 |
Alpha Natural Resources | 25 million | 600 million | 24 |
The table shows that Peabody Energy's (BTU, news, msgs)reserves total 9 billion tons, and it is producing around 235,000 tons of coal annually. At that rate, its reserves would last for 38 years.
In my experience, bigger stocks are safer bets than smaller ones. However, smaller companies usually have better growth potential. So where you draw the line depends on your investing style.
Continued: Coal mining industry
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