Alpha Natural Resources (NYSE:ANR) is set to ride the industrialization of the developing world over the next decade, and the increased world demand for coal as the economy recovers.
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Alpha Natural Resources is one of the largest domestic coal producers, supplying the needs of United States markets, and exporting to world markets as well. The company went public in 2005 through an initial public offering and produces both metallurgical and steam coal.
Metallurgical coal is used in the process of making steel, and Alpha Natural Resources produced approximately 12 million tons in 2010. The company estimates that it will export 8.4 million tons of this production in 2010, with the majority going to Europe.
Other producers of metallurgical coal include Walter Energy (NYSE:WLT), which has 150 million tons of reserves. Another domestic producer is Patriot Coal Corporation (NYSE:PCX), which just added extra capacity at the company's Black Oak mine. BHP Billiton (NYSE:BHP) is the world leader, and is estimated to produce more than 40 million tons in 2010.
Alpha Natural Resources has operations in the Western and Eastern parts of the United States. The company's western coal operations consist of properties in Wyoming, where it has 709 million tons of reserves and produced 50.1 million tons. In the Eastern area, the company has mines spread all over Appalachia. Reserves here totaled 1.58 billion tons, and the company produced 36 million tons in 2009. The company also has some small reserves in the Illinois Basin.
Alpha Natural Resources articulated its strategy over the next decade during a recent analyst meeting. The company is seeking to become a low-cost producer of coal, with high-quality, long-lived assets that can be sold to both a domestic base of customers and an export market. Alpha Natural Resources believes that this will make the company successful in the long term. Alpha Natural Resources is also open to an acquisition, if the company finds a partner that fits its criteria. This includes a company that operates in a stable political climate, with exposure to both steam and metallurgical coal and is positioned geographically and logistically to serve high growth markets. The company also has a successful track record of previous acquisitions, with the most recent being the merger with Foundation Coal in 2009.
Alpha Natural Resources has sufficient financial capacity to handle an acquisition. The company has a long-term debt to equity ratio of 28%, but its large holdings of cash and marketable securities brings its net debt levels down to only $159 million as of June 30, 2010.
The Bottom Line
Alpha Natural Resources estimates that the majority of growth in demand for coal over the next generation will be from Asia and other areas of the developing world. This will be led by the growth of electricity generation and steel capacity. The company is looking for a compound annual growth rate in the mid-single digits over the next 15 years. (For more stock analysis, see Best Dividend Stocks.)
Alpha Natural Resources is ready to profit from higher demand for coal if the assumed trajectory of rapid growth from the developed world is realized.
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