From BI Research: “After a tough couple of years while the world worked through a global recession, prospects for the coal industry have improved considerably. But this is not just a recovery story. It’s also a story about the growing middle classes in India and China and the rest of the developing world. As their ranks swell they want TVs, refrigerators, A/C and other appliances that all run on electricity. In these two countries electricity is 80% coal fired. ... The incremental amount that has to be imported is likely to increase 50% this year to nearly 140 million tons. For scale, my new recommendation, International Coal Group, Inc. (ICO), produces about 17 million tons per year.
“And then there is demand for metallurgical coal, (coking coal or ‘met’ for short) which burns at higher temperatures and is used in steel-making. Look no further than the car industry for a prime example of the rebound going on in the steel industry, which is back up to 75% of capacity, and climbing, along with met prices. ... Meanwhile, in the U.S., where 50% of electricity is produced from coal, electric demand increased 6.5% over the past year. And utility stockpiles of thermal coal have been reduced by over 20 million pounds, which is helping thermal pricing. ...
“International Coal mines coal from 11 surface and 11 underground mines located primarily in Northern and Central Appalachia. These mines produce a broad range of mid to high BTU, low to medium sulfur steam and metallurgical coal. ... As of September 30 the company estimates its owned (72%) or controlled/ leased (28%) coal reserves at 770 million tons thermal and 320 million tons metallurgical, vs. production of 16 million tons. In addition, they own or control 431 million tons of non-reserve coal.
“And that is my lead-in for my primary investment thesis here. Despite 32% of its coal being metallurgical, in 2009 the company produced just 1 million tons of met coal out of the 16 million tons mined. In 2010 ICO mined about 2.4 to 2.5 million tons and in 2011 it expects to mine between 3.0 and 3.4 million tons of met coal. Now this is important because metallurgical coal sells for a LOT more than thermal coal, recently 3 times as much. While it costs somewhat more to mine because it is primarily mined deeper underground, the margins are still much better. So this, coupled with rising prices and volumes as the economy recovers, turbo charged with new and increasing demand from the developing world, is expected to juice 2011 results and beyond.
“In its Q3 report, Intl. Coal forecasted that it would produce 15.6 to 15.7 million tons of coal and sell 16.7 to 16.8 million tons (the difference would be coal purchased for resale and coal from inventory) in 2010. This includes 2.4 to 2.5 million tons of met coal. The average selling price for the year was expected to be about $66 per ton with an average cost of about $52.50 per ton excluding selling, general and administrative expenses. In 2011 the Company expects to produce and sell 16 to 17 million tons of coal, including 3.0 to 3.4 million of metallurgical coal with the average overall selling price projected to be $71 to $76 per ton. Doing the math and including SG&A, interest expenses and taxes, I calculate $0.82 a share for 2011. However, I’m new to this story and for one there is the convertible to consider and maybe other things, but at the very least I’m more comfortable with the Street’s $0.70 for now.
“Let me just note that 9-month EPS per GAAP is $0.10, but both this year and last year had some refinancing and other charges, and when you adjusted for that, YTD EPS increased from $0.07 last year to $0.23 this year. More telling, cash flow from operations for the first nine months was $132.5 million. ... At first I was skeptical of analyst consensus of 63% for ICO’s long-term growth rate, but with [a new mine] coming on and the growth of higher margined metallurgical (which is currently 15% of production, but 32% of reserves), I get it now. Analysts give it 6 Strong Buys and a Hold, Zacks rates it Buy, the IBD composite rating is very high at 95, and the BI Rank weighs in at a very strong 12.3. The shares are a Buy to 10.”
Tom Bishop, BI Research, 1/26/11
