BlastInvest
Blast Investor Real-time Plus           by Henry Lu

Trade Alert:  JRCC - Potential Rocket Powered by Coal

06/08/2005

Today's Model Portfolio Transaction
 
    Sell 9000 shares of ADGO at $1.16
    Buy 700 shares of JRCC at $34.38

Future Delayed Sale Announcement

I also intend to sell all shares of NRG after June 17 this month, possibly on June 18, 2005. NRG was purchased on June 17, 2004 for BIRTP model portfolio. To obtain 1 year long term capital gain tax benefit, I will wait for 10 more days for the selling.

Both the proceeds of NRG and ADGO sale will be re-invested into JRCC position. Both NRG and ADGO stock prices are cheap. I usually do not like to sell cheap stocks. However, JRCC is much better value stock with much higher potential so that I issue this trade exchange to re-deploy the cash from ADGO/NRG to JRCC.

James River Coal (Ticker JRCC) is Eastern Kentucky based coal mining company. JRCC stock price over past 1 year did not perform well. Part of the reason is the poor current earning under poor coal price. There was also large share offering and selling from one big institution investor, which triggered a severe selloff recently. This creates a buying opportunity and I believe now is the right time at right price to invest into this stock.

JRCC is rated as "extremely favorable" in Hot List risk/reward rating. Below is the rational for this new pick.

JRCC - Potential Rocket Powered by Coal

Coal has bad name. Very few people like coal. It is dirty, it creates pollution, it smells. Worst of all, many old coal employees also caught job-related health problem unfortunately: black lung, which triggered US government black lung regulation many years ago.

Coal sector got my interest since I invested into NRG one year ago. NRG is coal consumer while JRCC is coal producer. One  year ago when I studied NRG and coal sector, I decided not to invest into coal mining stocks, but to invest into electric power  stock NRG instead.

Electricity power plants are main consumer of coal in USA. When coal price is cheap, coal consumers benefits from cheap coal while coal producers have been suffering with poor earnings and poor fundamentals.

Now dynamics between coal and electricity market is changing. Coal commodity price has quietly started a long term bull market since summer of 2004.  When coal commodity price starts to run, all coal producers will shine and coal producer stocks will out-perform coal consumers.



Prediction on Coal Commodity and JRCC

This bull run of coal commodity will likely to last 5 to 10 years. For that matter, JRCC stock price for the next 5-10 years potentially can rise like a rocket, reaching as high as $340 a share in 5 - 10 years. This is potentially a 10-bagger stock.



JRCC just Emerged out of Bankruptcy

Last 20 years was tough for coal mining companies. Lots of companies including James River went into bankruptcy due to the 20 years of dropping price of coal.  The coal price dropped below mining cost for many years.  Lots of coal mines were shut down and supply taken out of market. Therefore, coal supply was 70 million  tons short of demand accumulatively in USA over past 5 years.

Coal price rallied briefly in 2001 and that got many dying small coal mine owners excited. But the coal price quickly dropped below cost again in 2001 and many coal mine owners gave up.

James River Coal was not exception.  It went into bankruptcy and emerged from bankruptcy in 2004.

JRCC Produces High Quality Low Sulphur Coal

Coal price is regional. JRCC produces a type of high priced and high quality low sulphur coal named: Central Appalachian Coal (CAPP). CAPP coal producer like JRCC tends to have higher cost of mining while their coal sells at premium price as well.

Burning coal will emit harmful gas: Sulphur dioxide or SO2.  SO2 is restricted by US law.  The environmental regulations in USA is getting tougher and tougher.

In my opinion at least in the next 5 years, the low-sulphur high-priced coal CAPP should maintain or widen their premium over high-sulphur low-priced coal.

JRCC Valuation is Similar to its Peers

A reasonable fairly-priced coal stock would trade at 8-10 times Enterprise Value/EBITDA valuation.  Below is the valuation comparison of JRCC to its peers Alpha Natural Resource (Ticker ANR) and Arch Coal (Ticker ACI).

Ticker
 Market Cap ($ billion)
 Enterprise Value/EBITDA
 Enterprise Value/Sale
JRCC
 0.502
 12
 1.65
ANR
 1.48
 16
 1.29
ACI
 3.14
 10.7
 1.82

By comparing above table and by looking at last year's earning and last quarter's earning, JRCC is fairly valued, not too cheap, nor too expensive either. Looking deeper into JRCC and its peers earning statement, I can argue that JRCC is slightly cheaper than its peers.

JRCC Worth $60 - $68 on Next Year's Earning

JRCC's cost of mining coal is $35 per ton. This cost is mainly of labor salary, services, equipment, power etc operation cost.
JRCC makes money by the spread between coal price and its cost. Below is financial modeling of JRCC based on JRCC reported 2006 production outlook:

Fixed General Administrative and Sales Cost (G & A): $20 million per year.
Operating cost of coal:  $35 per ton
Coal Production :  10 million ton a year
JRCC EBITDA =  Coal Production  *  (coal price - $35 cost)  -  $20 million G&A cost
Fair Value of Enterprise Value = 8 -10 times EBITDA

Coal Price ($ per ton)
 40
 48
 60
 80
 100
EBITDA ($million)
 30
 110
 250
 450
 650
Fair Stock Price per share
 $12.2
 $68
 $130
 $238
 $340


JRCC has been selling almost all of its coal at fixed price of $40 per ton in 2004 under its long term contract. Its 2005 coal has already been contracted out at around $40 - $42 price as well. Therefore, earning in 2005 will not be that  great either.
 
However, only half of 2006 production has been contracted out at fixed price of $40 per ton. The other half is still open, which JRCC can sell at current price of around $57 per ton. Therefore, based on my estimate, next year's JRCC coal average selling price will be around $48 per ton. By looking up my above valuation table, JRCC will be worth around $68 next year. If I refine the financial model a little bit to conservative side, the fair value of JRCC stock comes down to $60 per share based on 2006 estimate.

JRCC 2007 coal production is unhedged and uncontracted. This is very unique as well because most other coal producers are under much longer-term existing contract at low fixed coal price. With current coal price significantly higher, a coal producer with shorter term existing contract is at advantage.

The coal price since summer of 2004 has been flat at around $60 per ton.  If the coal price can stay around $60,  JRCC stock price can trade at triple digit in 2 - 3 years.

Coal Commodity Bull Market For Next 10 Years


I am confident that coal price bull run will last for next 5 to 10 years.

In my eGazette article titled Struggling Stocks, Booming Commodities, I already discussed that oil tends to have 15 - 20 years of bull and bear market cycle.  The same reason for high oil price is also true for high coal price as well: booming Chinese economy, shortage of oil, devaluation of US dollar, etc.

The current high price of coal is not that high at all in historical basis. At $60 per ton CAPP coal, coal price is still roughly at same price of 1980. Adjusted for inflation, 1980's peak coal price would translate into $100 per ton CAPP coal. Many past bull run of coal price did hit or break past cycle peak so that it is possible for CAPP coal price to break $100 per ton price. Therefore, JRCC potentially can break $300 target in next 5 - 10 years.

Graph 1 - Long Term Cycle of Coal Commodity Price
Source: Peabody Energy Investor Presentation.

Conclusion

My plan for BIRTP model portfolio is to invest into JRCC for the long run. Short term stock price or coal price is unpredictable. Over the long run, I believe the coal commodity bull market is under way and it can last for next 5 to 10 years.



Blast Investor Model Portfolio Update

(as of 06/08/2005)

Model Portfolio - Performance


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
Portfolio 12/31/04 value
 $141,981.00
2004 SP&500 Performance 8.78%
2004 Portfolio Performance 59.53%
2005 SP&500 YTD Performance -0.94%
2005 Portfolio YTD Performance
 17.04%


Model Portfolio - Open Positions
Symbol Last Shrs Value Paid Gain
CEI 18.65 1,500 $27,975.00 16.63 $3,010.00 +12.06%
CHK 21.09 1,100 $23,199.00 13.90 $7,899.00 +51.63%
EXX-A 1.58 6,500 $10,270.00 1.638462 -$400.00 -3.75%
GKIS 21.49 1,500 $32,235.00 15.68 $8,705.00 +37.00%
JRCC 34.35 700 $24,045.00 34.38 -$31.00 -0.13%
LIBHA.PK 4.72 1,200 $5,664.00 5.10 -$466.00 -7.60%
NRG 35.01 335 $11,728.35 23.05 $3,996.60 +51.69%
SOHU 20.71 700 $14,497.00 24.882857 -$2,941.00 -16.87%
USG 46.60 950 $44,270.00 18.425789 $26,745.50 +152.62%
WLL 35.00 600 $21,000.00 22.683333 $7,370.00 +54.07%
$$CASH -48,702.3 -$48,702.30 - - -
11 symbols Total(USD):
$166,181.05




Model Portfolio Transactions
Date [Descending] Type Symbol Shares Price Comm Amount Notes
Jun 8, 2005 Buy JRCC 700 34.38 10.00 24,076.00
-
Jun 8, 2005 Sell ADGO.OB 9,000 1.16 10.00 10,430.00 + 48.51%
Feb 28, 2005 Buy GKIS 1,500 15.68 10.00 23,530.00
-
Feb 28, 2005 Sell NTES 150 41.88 10.00 6,272.00 +14.22%
Feb 25, 2005 Buy CEI 500 16.39 10.00 8,205.00
-
Feb 25, 2005 Sell NRG 335 38.42 10.00 12,860.70 +66.57%
Jan 31, 2005 Buy CEI 1,000 16.75 10.00 16,760.00
-
Nov 24, 2004 Sell HRB 350 47.35 10.00 16,562.50 - 12.31%
Nov 4, 2004 Sell NTES 100 46.50 10.00 4,640.00 + 27.05%
Oct 19, 2004 Buy EXX-A 1,500 1.60 10.00 2,410.00
-
Oct 6, 2004 Buy EXX-A 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-


Date [Descending] Type Symbol Shares Price Comm Amount Notes
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-
Dec 31, 2003 Buy LIBHA.PK 1,200 5.10 10.00 6,130.00
-
Dec 31, 2003 Buy ADGO.OB 22,000 0.78 10.00 17,170.00
-
Dec 31, 2003 Buy HCA 500 42.00 10.00 21,010.00
-
Dec 31, 2003 Buy WRP 700 18.30 10.00 12,820.00
-
Dec 31, 2003 Cash In -
-
-
-
 89,000.00 Inception