Glowing Prospects in the Coal Sector

The largest U.S. exporter of coking coal is Alpha Natural Resources(ANR Quote), with a 22% market share of exports. The $5.6 billion market cap stock trades at an attractive seven times enterprise value to 2009 estimated cash flow. This is a real recovery story, with the average earnings expectations tripling to $6 per share for next year.

Among the largest U.S. coal companies, the $20 billion market cap Peabody Energy(BTU Quote) stands out as a favorite among portfolio managers. Over 50% of its pretax cash flow for 2008 will come from international operations. BTU has 70 million tons in 2009 and 130 million tons in 2010 that will become available at higher market prices.

Rounding out the list of largest five U.S. coal stocks are Consol Energy(CNX Quote), Arch Coal(ACI Quote) and Massey Energy(MEE Quote). They will also benefit from the demand for steam coal from domestic users.

The coming higher coal prices will drive larger public companies to buy into coal companies to ensure they have supplies. Even smaller coal companies with poor earnings records are candidates for bolt-on acquisitions.

Take a look at Patriot Coal(PCX Quote). It posted losses last year, but the stock is up 190% just in the last six months. The acquisitions, new capital raised and higher coking coal prices are making investors salivate over the potential returns.

2) Purchase international coal producers.

A Canadian open-end mutual fund, Fording Canadian Coal Trust(FDG Quote), is seeing rates for coal contracts running at $275 per ton, vs. $93 for 2007. The FDG units are up 30% over the last 30 days. Target prices are being raised to over $100 on FDG.