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TheStreet Open House

Coal Producers To Ride Demand Growth

NEW YORK ( TheStreet) -- Coal prices are expected to heat up during 2010 on the back of strong demand growth in China, India and Indonesia. Moreover, supply constraints may steepen as several mines in Australia and South Africa experience transport problems and clogging coal infrastructure.

We anticipate stocks of U.S. coal producers will recover from their recent selloffs and generate gains during 2010 as fundamentals of the industry remain strong. The selloff of coal stocks related to the European debt crisis and China economic growth during the past month are overdone.

James River Coal (JRCC) and Walter Energy (WLT), our coal stock-picks , likely will witness a strong rebound in their stock prices, which have declined 9.4% and 11% over the past month.

James River and Walter Energy are trading at attractive enterprise value to earnings before interest taxes and depreciation multiples of 4.1 and 3.0 respectively, over Peabody Energy's (BTU) 6.2, Consol Energy's (CNX) 4.6, and Alpha Natural Resources' (ANR) 4.2.

China will continue to lead global coal demand and overall imports are likely to surge to new highs, surpassing Japan as the world's largest coal buyer. China's net coal imports during the first four months reached 50 million tons, or an annualized 154 million tons. In 2009, China imported 125.8 million tons of coal.

China's domestic production has ramped up to reach 1.01 billion tons during the first four months of 2010, up 27.7% from the prior year. The country's largest power producer, Huaneng Power International (HNP), produced 40% more electricity during the first quarter of 2010, relative to 2009.

Although India is the world's third largest producer of coal, domestic supplies and transportation networks are yet to keep pace with the high demand growth. India will continue to rely on imports to plug the supply-demand gap as the new power projects are largely coal-based. For instance, Tata Power, a Tata group company, is looking for a strategic stake in the Indonesian or South African coal mines for its upcoming thermal power project in India. The project requires 6 million to 8 million tons of coal to fuel the 2x800MW plant and management targets to acquire a stake that will assure 8 million to 9 million tons of coal supply.

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