Six Ways to Invest in the Coming Coal Boom

Consol is a supplier of high-sulfur coal, and that isn't as much of a disadvantage as you might think. With new scrubbers to reduce emissions coming on line in 2006, demand -- and prices -- for high-sulfur coal will pick up.

Having already made the fixed investment in pollution-control equipment, the utilities can only reap the advantage in variable transportation costs by sourcing coal from nearby, high-sulfur deposits. Consol's production is overweighted to high-sulfur Northern Appalachian coal, and the company will benefit disproportionately from increases in the price of that type of coal. A reasonable target price for December 2006 is $91 a share.

Peabody Energy gets the best of the low- and high-sulfur worlds. The company's Powder River Basin coal is low in sulfur even for coal from that region, producing about 70% of the sodium dioxide as average Powder River Basin coal. That will get Peabody Energy premium prices in any recovery in Powder River Basin pricing.

The company's higher-sulfur Illinois Basin coal is close to a likely concentration of new power plants that will go into construction in the next decade. In addition, the area is a hotbed of coal-to-liquid activity. (This technology converts coal into diesel fuel.) That should also increase demand for Peabody's coal from the Illinois Basin. A reasonable target price for December 2006 is $99 a share.

Generating Returns

I think you'll find even better pickings among the shares of the companies that make the steam turbines that will go into coal-burning power plants. (It certainly doesn't hurt, as Bear Stearns notes, that these companies are looking at exploding demand for all types of power plants in Asia and the need to replace about 40% of existing thermal power generation equipment over the next five to 10 years.)

My favorite in this sector is not General Electric: The company is a big producer of natural-gas-fired turbines, so while it's picking up sales of coal-fired turbines, it will also be losing sales of gas-fired equipment.

The stock is cheap after its recent earnings disappointment, and I'd certainly reconsider my position if the company wins out in its bid with Hitachi(HIT Quote) to buy Westinghouse, a major producer of nuclear power plants. The company is bidding against Toshiba and Mitsubishi Heavy Industries to buy Westinghouse from current owner British Nuclear Fuels. The winner will quickly become the leader in the race to build nuclear power plants in China. China has said it plans to build 320 nuclear power plants by 2020.