Arch Coal Attracts Soros as Peabody Lures Citadel (Update4)
By Arijit Ghosh and Christopher Martin
Nov. 24 (Bloomberg) -- Billionaire investor George Soros,
Citadel Investment Group LLC and T. Rowe Price Group Inc. are
snapping up coal mining shares, taking advantage of the cheapest
valuations in five years as demand for electricity rises.
Soros bought 2.9 million Arch Coal Inc. shares last quarter
for a 2 percent stake in the second-largest U.S. coal producer,
filings with the Securities and Exchange Commission show.
Citadel, the Chicago-based hedge fund, and Invesco Ltd. in
Atlanta bought 3.5 million shares of Peabody Energy Corp., the
biggest miner. T. Rowe reported purchasing stock in Peabody,
Arch, Consol Energy Inc. and Indonesia’s PT Bumi Resources.
While coal, the cheapest fuel for power, is up 88 percent in
Pennsylvania, shares of the companies that mine the mineral have
slumped along with the rest of the commodities industry. Now,
investors are betting that Peabody, which traded at 3.7 times
projected 2009 earnings as of Nov. 21, and Arch at 2.5 times are
cheap because coal use will increase. The valuations were at more
than a 54 percent discount to the MSCI World/Energy Index.
“Coal is the best commodity to get into right now,” said
Daniel Rice, manager of BlackRock Advisors Inc.’s $1.5 billion
Global Resources Fund in Boston, which is among the largest
holders of Peabody and Arch. “It’s a lot less sensitive to
downturns because it’s needed for basic power generation, and
demand is growing.”
Crude oil in New York has dropped 43 percent this year
compared with a 6.1 percent decline in Australian coal prices.
Consol surged $4.08, or 20 percent, to $24.88 in New York
Stock Exchange composite trading. Peabody climbed $2.82, or 15
percent, to $21.57 and Arch Coal rose $1.40, or 11 percent, to
$13.70.
Electricity Demand
Demand for electricity in major economies, where coal is
used to generate 52 percent of power, will increase 3.3 percent
by 2010, according to a UBS AG report on Nov. 17. Global coal use
will rise 2 percent a year through 2030, led by China and India,
the Paris-based International Energy Agency said Nov. 6.
Coal company shares tumbled this year as the U.S., Europe
and Japan entered their first simultaneous recession since World
War II. As of Nov. 21, Peabody dropped 79 percent after reaching
a record in June and Arch lost 84 percent. Consol, the third-
largest U.S. coal producer, slipped 82 percent. Bumi fared the
worst among the world’s biggest producers, plunging 92 percent in
Jakarta.
The MSCI World Index has declined 49 percent this year, while
its energy sub index fell 44 percent. The Bloomberg U.S. Coal
Index slumped 75 percent and the measure of coal stocks in Asia
dropped 73 percent.
‘Particularly Irrational’
Analysts say the decline has been overdone. While oil
company profits will fall this year after New York crude futures
dropped, coal producers have the advantage because mining
companies have long-term sales contracts that cushion them from
falling prices.
“People are dumping all equities and it’s particularly
irrational for coal,” said Richard Price, an investment banker
at Westminster Securities in St. Louis, who advises coal
producers and utilities in the U.S. and China. “Even if contract
prices come off next year, they’ve still got the ones signed this
year at higher prices.”
Michael Vachon, a New York-based spokesman for Soros,
declined to comment. Heather McDonald, a Baltimore-based
spokesman at T. Rowe, also declined to comment. Aysha Mawani,
spokeswoman at Invesco and Katie Spring at Citadel didn’t respond
to e-mails seeking comment.
Bumi Gain
Bumi may advance fivefold, according to the average forecast
of 20 analysts compiled by Bloomberg. Peabody will probably more
than triple to $58 in the next 12 months, the analysts surveyed
by Bloomberg said. Arch has an average target price of $37.69
among 13 analysts, more than three times its Nov. 21 close, the
data show.
“I wouldn’t say we’re recession-proof, but certainly
recession resistant,” Steven Leer, chief executive officer of
Arch, said in a Nov. 19 interview. “People will still be turning
on their lights. Electricity demand rarely goes down.”
Profits at Peabody and Arch, both based in St. Louis, will
rise next year as less lucrative contracts get replaced with ones
signed at this year’s higher prices, analysts forecast. Lower
costs for diesel, steel and explosives will help reduce mining
expenses, Leer, 56, said.
More Demand
Increased demand from utilities and analyst forecasts for 22
percent profit growth at Bumi attracted U.S. buyout firm TPG and
San Miguel Corp., the Philippines’ biggest food and drinks
company, to vie for a stake in the company, Asia’s biggest
thermal coal exporter. PT Bakrie & Brothers, which agreed to sell
its 35 percent stake to North Star Equity Partners, expects TPG’s
Indonesian affiliate to decide on the purchase by Nov. 28.
Change in ownership will attract investors because Bumi’s
stock is undervalued, said Bryan Collings, who manages $250
million at Hexam Capital’s Global Emerging Markets Fund in
London. Bumi is the only Southeast Asian stock he owns.
“If you are looking to buy the stock, it’s a wonderful
environment,” said Collings. “Energy hasn’t gone out of fashion
and it’s still the core business for Bumi.”
Coal and nuclear plants are the cheapest to operate and more
difficult to start up or shut down than natural gas generators.
That’s why coal is used to produce half of U.S. electricity and
78 percent of China’s.
India’s government expects imports to double to 40 million
tons by 2012 as Asia’s third-largest economy increases coal-based
generation capacity by 72 percent. Japanese utilities plan to add
11 percent more coal-fired capacity by 2010, and Indonesia 40
percent by 2011.
Coal Power
China intends to increase coal power by 2010, while the U.S.
Energy Department forecasts the world’s biggest economy will
boost use of the fuel 24 percent by 2030.
Still, a deepening global economic downturn may drive coal
shares lower and curb energy demand.
The 32 percent gain in the Reuters/Jefferies CRB Index to an
unprecedented 473.97 on July 3, was followed by a 51 percent
decline in the measure. The gauge is set for its worst annual
performance on record.
Spot coal prices at Australia’s Newcastle port, an Asian
benchmark, dropped 56 percent from a record $192.5 a ton in the
week ended July 4. Prices at South Africa’s Richards Bay declined
18 percent this year to $78.15 a ton.
South African prices may average $70 a ton in the next three
months and return above $90 within 18 months, Manqoba Madinane, a
Johannesburg-based analyst with Standard Bank Group Ltd., said in
a Nov. 18 interview.
Falling Prices
Coal prices “will continue to fall” as economic activity
deteriorates “very rapidly,” Francisco Blanch, a London-based
Merrill Lynch & Co. analyst, said in a Nov. 14 report.
“While there is uncertainty in today’s economy, any easing
of demand growth is likely to be offset by diminished coal
supply,” Peabody President Richard Navarre said on an Oct. 16
earnings conference call. “Tight supply will be further
compounded by the global credit freeze because a significant
amount of planned production expansions and new mines will be at
risk around the world.”
Arch plans to cut output next year at some of its higher-
cost mines in the western U.S. In the east, producers Consol and
Massey Energy Co. say they’ve been curtailed by increased mine
safety inspections and more difficult reserves to tap.
Indonesian Production
Production in Indonesia, the world’s biggest exporter of
power-station coal, will slow as the global credit crisis hampers
expansion plans, Fitch Ratings said in Nov. 21 report without
giving figures. The Indonesian Coal Mining Association on Aug. 21
forecast a 15 percent increase in output to 270 million metric
tons in 2009.
Bumi will remain profitable even at lower coal prices
because its production costs are among the lowest in the world,
said Peter Ball, a director at the Jakarta-based company.
Bumi expects to sell coal at an average $77 a ton this year
and at least at that level in 2009, he said. It cost Bumi $33.10
to produce a ton of coal in the first half, according to
regulatory filings. That compares with $75 to $80 a ton in
Russia, where coal costs are the highest in the world, according
to Ball.
“It’s clear that we’ll keep on making a lot of money no
matter what,” Ball said.
