The Cheapest Energy Stock
on Earth?
by Graham Summers
August 14, 2006
It’s not an oil stock... and it's not natural gas.
It’s coal.
From 1995-2003, coal prices didn't do much of anything. The only thing increasing coal producers' bottom lines was increased production. And the only way to increase production was to spend money digging more mines or through acquisitions.
A small coal company in Virginia, James River Coal (JRCC) chose the latter method. Between 1988 and 1999, the company acquired the rights to five mining complexes. The growth was great... but the underlying business was rotten. James River locked 80% of their coal production into below market, fixed rate contracts.
Due to the lost revenue and huge debt load used to finance the acquisitions, James River couldn't make the numbers work, and by May 2003, the company was filing for bankruptcy.
Having fired management and hired a number of turnaround specialists, James River was back on the Nasdaq at the beginning of 2005. The turnaround and the reserves (224 million tons worth $3.3 billion even at extremely conservative estimates) drew the attention of legendary hedge fund manager Phillip Falcone.
Falcone loaded up on $33 million worth of James River’s stock, roughly 5% of the shares outstanding. And sure enough, James River’s stock did… nothing, nada, zip. The company managed to increase its average coal prices, but continued to operate at a loss for the entirety of 2005. James River was possibly the only energy stock on the entire planet that was losing money during this time.
Fed up with the poor results, Falcone began to sell his stake in early 2006. Soon after, Pirate Capital, another investing firm with a 14% stake in the company, began lobbying for new company directors. Throughout this managerial fiasco James River’s share price tanked from $50 to $15... close to where it trades today.
One of Warren Buffett’s most famous pieces of financial advice was that investors should “invest in a business an idiot could run, because one day this will be true.” James River is precisely such a company. Coal mining is one of the oldest industries in the world, and yet James River’s management can’t seem to get the stuff out of the ground.
With Central Appalachian coal (where James River’s reserves are) trading at $64, the company’s 262 million tons of proven and probable coal reserves are worth over $16 billion. That’s more than 62 times its current market cap. The only coal company cheaper based on price to reserves is Massey, which recently closed one mine and is letting four others idle:
Name |
Symbol |
Market Cap |
Reserves (tons) |
Price to Reserves |
Consol |
CNX |
$7 billion |
1.4 billion |
1/12 |
Peabody |
BTU |
$12 billion |
9.8 billion |
1/52 |
James River |
JRCC |
$256 million |
262 million |
1/65 |
Massey |
MEE |
$2 billion |
2.3 billion |
1/70 |
|
Either one of two things is going to happen:
1. James River is bought out by a larger company
2. Management eventually stages a successful rebound
It’s just a matter of time... bargains like this don't last for long.
Good investing,
Graham |
