Going against the grainIn Chu's opinion, those looking at that "fear curve" to make investment decisions today will definitely be left sitting on the sidelines. "Very few people are brave enough to be able to look at that and say 'I have a different view,'" he admitted. However, he referenced the opinions of several others at the conference, suggesting that the outlook for coal might not be so bad after all. According to Chu, some say that the global demand for coal is still growing, and that "while China is taking a short pause, there is hope that India may be reawakening." What's more, the banker believes that the current oversupply of coal is slowly but surely being "worked through" the system, with temporarily idled mines shutting permanently and previous investment in additional capacity having stopped "roughly three years ago." Company success Chu said the collective wisdom of the market might suggest that "the time to invest is not now; [in fact] it's two years from now." However, he was able to come up with three examples of those who have succeeded in bucking that trend. "I'll give you another perspective," he said. "It might help illustrate why this might be the time to invest in coal." First, Chu cited the success of Bob Murray of privately held Murray Energy. He purchased five longwall coal mines in West Virginia from Consol Energy (NYSE:CNX) in late 2013. The market wasn't friendly, and Consol was searching for a buyer for months without any luck. However, when Murray heard the mines were available, he decided on the purchase "within 10 minutes," then negotiated, executed and completed the transaction within two months. "He financed the cash component with all debt, and this transaction doubled the size of his company," Chu said, also noting that since the closing, debt holders who supported the move are "enjoying a 20-percent return on their investment."
Next, the banker pointed to the recent acquisition of PBS Coals by Corsa Coal (TSXV:CSO). Corby Robertson, who owns a majority interest in Corsa, has normally stayed away from operating coal companies, but when he heard that Russia's Severstal (MCX:CHMF) was selling its US met coal operations, the entrepreneur acted quickly.The transaction was secured within months and announced in July. Certainly, the buy was a good move for the company — shares of Corsa gained 27 percent the day of the announcement, and Chu pointed out that between the announcement and closing of the acquisition, "the collective improvement in the share price of Corsa was in excess of the purchase price of the target that [Corby] had acquired." Lastly, he pointed to Keith Alessi, CEO of Westmoreland Coal (NASDAQ:WLB), who announced the acquisition of Sherrit International's (TSX:S) coal properties on Christmas Eve of 2013. That was definitely "not the best of times to think about making investments in coal," said Chu, but Alessi is known for "being an out-of-box thinker," and his creativity and persistence were rewarded in this case. Going against weak market conditions, Westmoreland made huge gains the day of the announcement. "I think it was about 50 percent," Chu recalled, noting that the company's share price has since doubled and tripled. The takeaway To be sure, the investment banker admitted, those examples are anomalies; however, he stressed that "[n]either Bob, nor Corby nor Keith were gripped by the fear curve." Of course, investing is an exhaustive process, and most wise investors conduct careful due diligence rather than buying stocks on a lark. However, trusting one's own research rather than following general trends can sometimes be the key to a great investment. It's that entrepreneurial spirit that Chu believes will carry coal forward, and the banker finished by stating that he hopes to have more similar stories to share in the next six months.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article. Going Against the Fear Curve: Dan Chu on the Coal Market from Coal Investing News