By Sonal Patel
March 10, 2017 - While investor interest in U.S. coal production is seeing a revival, President Donald Trump can do little to directly help the flailing industry, coal producers and investors said at CERAweek by IHS Market, which is taking place in Houston this week.
After a period of financial calamity that was prompted by the collapse of natural gas prices, and during which, a barrage of coal mining companies filed for bankruptcy and closed mines, between six and 10 coal mining firms may be exploring initial public offerings (IPOs), said panelists at a CERAweek session exploring the coal industry’s financial challenges.
A recent rally in coal prices has also prompted cautious optimism among coal producers and their financial backers. Among coal producers whose stocks have seen buoyant activity are Arch Coal, CONSOL Energy, Ameren Corp., and Pinnacle West Capital Corp.
Optimism in the market is more than sustainable, said Ted O’Brien, senior director of capital markets and marketing for Xcoal Energy and Resources. “As soon as industry realized there was potential to raise money, everyone jumped in.”
Michael Dudas, a partner with an independent equity research firm, agreed but noted that the investor base today was much more cautious compared to the era nearly 15 years ago when coal production investment was at a high. In those days, he said, investors did not know a “coal mine from a Coke bottle.” Today, investors are extremely knowledgeable about coal production and its markets, he said.
Christopher Moravec, president of coal mining firm Blackhawk Mining, remarked that the bulk of interest he has received from investors mostly relates to metallurgical coal. Another panelist, Jim Griffin, an advisor for Griffin Mining Advisors, also advised caution. “As the industry comes out again, they have to be careful,” he said. “Investors will want them to be careful.”
Moravec cautioned that a new wave of interest would require a production ramp up, and that was impeded by factors that didn’t exist six or seven years ago. One is that the labor force has “evaporated,” he said. “Finding labor requires creativity.” The second factor is sourcing equipment. With the lull, equipment makers don’t have key equipment “sitting on the lot” as they used to. Sourcing equipment could take several months to a year.
Moravec was also skeptical about Trump’s promises to revive the coal industry. “I think that Trump’s rhetoric—that he is going to save the coal industry, that he is going to save fossil fuels, return the industry to the way it was five years ago, 10 years ago—I think the reality is: That’s going to be very difficult to do,” he said.
Rolling back regulations governing air emissions and tackling permitting problems will be complex, Moravec said. “There’s new competing factors that have impacted the industry, specifically natural gas—it’s had a huge impact on the competitiveness of the industry,” he added.
The Obama administration’s procedures and processes have achieved their objective of taking swathes—40 GW to 50 GW—of coal-fired generation offline and have prompted an unprecedented contraction in coal production (Figure 1). Trump’s policies may insulate the coal sector from forces unrelated to competitive or technological forces, Moravec said. “It’s a positive for the industry, but I don’t think its going to have a huge impact on growth,” he said.
Dudas agreed, but he projected that Trump’s promised rollback of regulations could have a wider, positive impact on the coal industry’s margins. A regulation rollback could encourage more investment in the U.S. economy, which would necessitate more electricity and steel, and spur the need for more coal.
A surge in natural gas prices, too, may “encourage much more opportunities for the thermal coal industry in the U.S. to generate some margin,” he said.