Read below on COE....Highlighted in yellow !!!! The Moneyballer: The market hates coal, but there’s opportunity in the pits
When the market is dining on fear, smart players get their wallets out and look for opportunity. And right now, if fear was mineable, I’d be looking to put out a 43-101 on the stuff.
Many of you have seen the movie Moneyball, or read the best-selling book of the same name. But contrary to what people who stopped reading at the dust jacket might think, Moneyball isn’t about baseball teams buying players who’ll take a lot of walks. It’s about watching for stupidity in the market, avoiding high cost conventional wisdom, and discovering underappreciated gems where nobody is looking.
In baseball, Moneyball came to the fore when the Oakland A’s realised you could spend $15m a year on a .300 hitter, but a .280 hitter might only cost you $4m a year, with the statistical difference between the two being marginal in an in-game situation.
The difference might be negligible if that .280 hitter takes a lot more walks than the other guy, because the idea of baseball is to get on base – how you get there doesn’t matter.
Base hit? You get a base. Four balls? You get a base. Take a pitch to the nose? Take your base.
Moneyball happens off the field too. When the A’s manager asked for a big raise after taking the team deep in the playoffs a few years back, the team told him to take a walk, reasoning that there were a lot more talented guys who wanted to manage a baseball team than vacancies for them to apply for. Why overpay when it was a buyers’ market? Said manager ended up reluctantly taking a one year extension.
Moneyball is about knowing when your commodity is cheap, and when the market is looking in the wrong places for the next big thing. It’s about looking for value where others see detriment. It’s about looking for companies at the bottom of their charts that are soon to go long.
Some industries just can’t buy a moment in the sun right now, and one would be right to be careful in getting into those industries. But that’s not to say you should steer clear. In fact, there’s something to be said for finding value in places nobody is looking anymore.
Take Warren Buffett and his penchant for ‘dead industries’. The Oracle of Omaha has been buying up newspapers and railroads, two industries so closely related to olden times that you’d expect to find them on a thrift store monopoly board rather than the portfolio of one of the great wealth builders of modern times. But his thinking is, these creaking behemoths aren’t going to disappear. They may merge, shrink, streamline, even lose money for a while, but eventually they will find their level and resume growing.
Nobody wants steel, and they haven’t for some time. About a year ago, Ticker Trax columnist Danny Deadlock began talking about Empire Industries (TSX:V.EIL, Stock Forum), a stock written off by most because, at one point, it had gone long on steel production and taken a faceplant in doing so. The company duly recalibrated, saw more value in the fabrication of steel products, and revenues began to fly. The stock moved from $0.075 when Deadlock first started talking about them, to $0.195 six months later, once they started signing theme park ride supply deals. The stock has admittedly drifted since but remains a revenue grower and delivered doubles to smart investors that rode the rise.
Nobody wants silver, but Trevali Mining (TSX:T.TV, Stock Forum) has driven their share price up 35% since June, and nearly 100% since late last year, based on their ongoing and prolific work bringing home not just silver production, but more recently lead and zinc as well, feeding a growing demand for the latter. As the market has become more familiar with Trevali’s multi-pronged approach, and its record of ramping up processing, production and new opportunities, and as the company has transitioned into a genuine zinc miner, T.TV has shoved past its ailing competitors and forged a strong base for the future.
But can you make a winner in any industry? Can you make a good deal out of coal, for example? I mean, the market for the dirty black has tanked, coal mining companies are falling like, well, coal miners, and the general population holds coal in about as high esteem as they do Monsanto.
I think you can.
Here’s the thing: Coal is still in demand, just not the sort you remove a West Virginia mountaintop to get at. High grade thermal coal is a thing, and the supply of high grade coal isn’t nearly as vast as the lower end stuff, but the demand is high for it.
What’s the deal with high grade thermal coal? Well, it’s the kind of coal that the US Environmental Protection Agency has less of a problem with because it causes less harmful vapor when used and contains a smaller percentage of other chemicals that have to be scrubbed out of the ensuing airborne waste.
The crew at CanAm Coal Corp. (TSX:V.COE, Stock Forum) have recently been busy in the small end of the coal space, acquiring assets in exchange for equity, including the four-decade old, four-mine operating Birmingham Coal & Coke Inc., the third oldest coal mining company in Alabama. It also holds two projects that are at the permitting stage.
CanAm is a total Moneyball play in that the general sector hate-on for coal, and a debt overhang, have this one at just $0.03 and an $8.2m market cap, despite the fact that they bring in $60 to $70m in revenue per year, and 75% of their production haul is sold out through the end of 2016.
In other times, management could have sat back and let the coal from their initial operations sell happily, taking a nice wage home and seeing their children every afternoon at 5pm. Instead, they saw value around them as the coal business took ill, with legacy operations falling over under the weight of lower market demand, a scarcity of financing availability, and general Chicken Little fear.
CanAm has used the only thing it had – shares in the company itself – as a means of growing larger, and now it’s using the only thing it has – locked down coal sales – as a means of quickly cleaning up the balance sheet.
And just like that, it’s a player.
The only overhang on CanAm is the debt accrued from those deals, a large chunk of which it recently turned into equity. That blew out the share structure enough that the threat of a rollback always looms, and the stock price fell accordingly. But hey, it’s gone from $0.02 to $0.03 recently, so someone’s picked up a nice 50% profit. Should it head back to where it should be – the $0.08 range, it’s a nice jump from here.
Remember, this was an $0.08 stock just over six months ago, before it grew in size by a large factor, and before it cleared a chunk of its debt. The company shifted head offices to Alabama, to be closer to its core business, which will save $500k, and changes to the corporate structure have taken its debt-to-equity, on a proforma basis, from 76:1 to 6:1 inside a year. Delays to the permitting of one of their new mines have hurt the bottom line in 2014, but those delays should end soon and there’s no shortage of need for their resource.
Now, none of that is “OMG! I MUST BUY!” stuff, admittedly. “Company cuts wrists, manages to stem the bleeding” is not a great headline.
But this is a company that went into hock in order to grow, and has worked hard to unhock itself by doing the right things – locking down sales, making sure there’s future expansion potential, cleaning up the operation and the balance sheet, and taking advantage of those competitors that have fallen around them.
That rapid cleanup is a smart move, considering the sector landscape. If another nearby high grade thermal supplier is crushed underfoot by the general stampede away from coal, and many have been in the last few years, CanAm, by virtue of cleaning up its overhang significantly, would be in a position to go do some more vulturing.
Sector malaise aside, CanAm’s sales contracts involve large SE United States power plants that will be burning coal for a long time, and have spent large amounts of cash upgrading their plants to use ‘clean coal’ (such being the preferred term of industry marketing thinkers), and that’s what CanAm produces.
The coal industry is shrinking, there’s no denying it. But that’s because the coal industry has long been an analogue business, bulldozing the sides off mountains to get at low grade, pollutant heavy power plant fuels. The growth side of the coal business is in the stuff that doesn’t get you fined and doesn’t leave surrounding areas looking like someone sneezed in the coffee jar.
To think of this as just another coal company would be to miss what’s really happening here. They’re looking for opportunity and will move fast if something new emerges, spending as little as they can to make deals happen. If they can raise a little play money, they could start monstering their competitors very quickly and, if I were a betting man, I’d suggest they’ll seriously consider any low cost energy production/services deal that looks like it has revenue out the other end.
Management tells me they’re actively poring through geo data looking for something the market has missed and, if they find it, they’ll move fast.
The risk is they find nothing and have to continue streamlining and cost-cutting to keep their powder dry. But there’s a base there now. Something to build from. My prediction: Nobody is going home early at CanAm right now.
--Chris Parry
https://www.twitter.com/ChrisParry
FULL DISCLOSURE: Canam Coal Corp. is a Stockhouse Publishing client