Coal is the most abundant fossil fuel on earth, and it is a major source of energy. Coal is widely used across the globe to generate electricity. The coal mining process involves extracting coal from the earth. Coal mining is performed using surface-based mining (when coal deposits are available near the surface) or underground mining (when coal deposits are buried deep underground).
The State of World Coal
According to the latest data from the World Coal Association report, China, India, America, Australia, and Indonesia are the top five coal-producing nations in the world.
A 2018 report from the International Energy Agency (IEA) indicates that global coal consumption is on the rise and was up 1% compared to 2017. Despite awareness of global warming due to greenhouse gas emissions, some major economies lack the resources to substitute their coal-based electricity with less carbon-intensive energies. According to the energy consulting company Enerdata, the share of coal in the power mix has almost remained steady for the past 20 years at approximately 40%. However, the Sierra Club reports a 20% drop in newly completed coal plants worldwide (53% in the past three years). It is likely that as the cost of cleaner and renewable energy sources such as wind and solar continue to drop, these energy sources will outpace coal making it a thing of the past.
Top Stocks in the Coal Sector
The sector-specific benchmark index, Stowe Global Coal Index, started the year 2018 at a value of US$1,945 and closed at US$1,486 on December 2018, indicating a decline of around 25% over the year. The index is composed of 25 global companies working in the coal sector. Here’s a look at the top coal mining stocks that fared better than the industry average. The list is composed of coal sector stocks that have a market cap of approximately $1 billion or more and is in descending order of top performing stocks based on the percentage gains realized between December 31, 2017, and December 31, 2018. The market caps are as of April 2019.
1. BHP Group PLC (BBL)
- Market Cap: $126.06 billion
- Performance: 0.72% annual return
2. Arch Coal Inc. (ARCH)
- Market Cap: $1.93 billion
- Performance: (-11%) annual return
3. Warrior Met Coal Inc (HCC)
- Market Cap: $1.69 billion
- Performance: (-11.38%) annual return
4. Consol Energy Inc (CEIX)
- Market Cap: $965.75 million
- Performance: (-15.82%) annual return
5. Teck Resources Ltd. (TECK)
- Market Cap: $13.77 billion
- Performance: (-20.01%) annual return
The NYSE-listed BHP Group is an Anglo-Australia company in the business of discovery, acquisition, development, and marketing of natural resources globally. Along with the exploration and development of oil and gas properties, it also mines several metals like copper, silver, lead, zinc, and iron ores as well as metallurgical and energy coal.
During the fiscal year ended June 30, 2018, its energy coal production declined to 29 million metric tons, which was the lowest in the past 10 years. The production of metallurgical coal stood at around 42.65 million metric tons, which has remained steady over the past five years. The company benefited from a marginal rise in prices, and the strategic move to sell its unconventional shale assets in the United States for $10.5 billion also supported the stock price. The stock received a boost in December when leading investment firms Goldman Sachs, Citigroup, and Societe General reaffirmed a buy rating on the mining giant.
Missouri-based Arch Coal was established in 1969 and is a leading producer of thermal and metallurgical coal from surface and underground mines located across America. It sells coal to the producers of steel, utility, and other industries in the United States and around the globe.
After a dismal second quarter, the stock price recovered during October as the company surpassed street expectations for both earnings and revenue. Backed by strong coal sales during the summers, it achieved the best financial figures for net income and revenue since its emergence from bankruptcy announced in 2016. A dividend announcement also led to a rise in investor confidence. The stock ended the year with multiple upward revisions to its earnings estimates by various brokerage firms.
Warrior Met Coal
Founded in 2015, the Brookwood, Alabama-based Warrior Met Coal is the producer and exporter of metallurgical coal. Its primary client base includes blast furnace steel producers spread across Europe, South America, and Asia. With two underground coal mines located in Alabama, the company is also in the business of extracting and selling natural gas, which is a byproduct of coal production.
Warrior Met Coal had a volatile 2018. The company had a robust first quarter performance when a 30% increase in production helped it achieve an 88% increase in sales compared to the previous year. The stock went into the red in August as the company announced disappointing second-quarter results. The company announced bold capital expenditure plans for growth-focused projects and an increase in production capacity together with an increase in sale price helped the stock price recover strongly during the latter part of the year. Although the stock ended 2018 with net -18% annual returns, it gained around 21% YTD during the first month of 2019.
Established in 1864, Canonsburg, Pennsylvania-based Consol Energy has mining operations in the Northern Appalachian Basin composed of three underground mines. The company produces and exports bituminous thermal and crossover metallurgical coal.
The announcement of better-than-expected first quarter results in May spiked the stock price as the company raised guidance by around 8%. The momentum continued in August as the company beat earnings and further raised the guidance. The stock gave up all the YTD gains achieved during the mid-year after announcing a disappointing set of numbers in November when it missed analysts’ estimates for both earnings and revenue. The company also took a hit because of high-interest expenses.
Incorporated in 2008, Teck Resources is in the business of exploration, acquisition, development, and production of natural resources. The company operates through multiple segments that are focused on steelmaking coal, copper, zinc, and energy. Tech Resources' coal business includes the production of hard coking coal, semi-hard coking coal, semi-soft coking coal, and thermal coal products. The company's primary client base includes integrated steel mills in Asia, Europe, and the Americas.
The high volatility that persisted in Teck Resource stock culminated with close to a 20% decline in annual return during 2018. The company's strategic 21% partnership venture in the $17 billion Fort Hills oil sands project with Suncor Energy (54%) and France’s Total SA (25%) was a questionable move that kept the stock price under pressure. The stock gained partially in September as the company announced interest in exploring a $20-billion Frontier oil-sands mine that’s even bigger than the Fort Hills and surpasses the market cap of the company. Future performance will depend on the outcome of these initiatives and whether Teck can find a partner to harness the maximum from the oil sands projects.
Price Performance of Coal Mining Sector Stocks
Graph Courtesy: Yahoo! Finance
Coal Mining Industry Wrap-up
The price of coal swung from a 52-week low price of around $89 per metric ton to a year-high price of $120 per metric ton indicating highly volatile fossil fuel prices in 2018. Uncertainties in global trade due to tariffs and a slowdown in China and other economies led to dismal performance by coal sector stocks.
Other major coal mining companies suffered during the year. These companies included Cloud Peak Energy Inc. (CLD), whose stock fell by around 94%, and SunCoke Energy Inc. (SXC), whose stock declined by around 30%. The Anglo-Australian giant Rio Tinto PLC (RIO) completed its exit from the coal business with the sale of its Queensland mine in a $4 billion deal. Coal may face declining demand in the future amid rising concern for the harmful impacts on the environment linked to the use of fossil fuels. According to the Sierra Club, the number of coal-fired power plants under development worldwide dropped in 2018 for the third consecutive year.