Companies in the coal mining industry must contend with several factors that affect their financial bottom lines. These factors includes cost inflation, volatility in commodity prices and labor shortages. Worldwide, the demand for coal is increasing, and this is especially true for developing economies. Investors who can stomach these challenges may find the dividends offered to be attractive. In this article, I will analyze five coal producers that are prospering in the midst of tough headwinds such as inflation, labor shortages and high volatility in commodity prices.
Cliffs Natural Resources Inc. (NYSE:CLF): Shares are trading around $69 at the time of writing. That is within the company's 52-week trading range of $47.31 and $102.48. The company's earnings per share are $12.95 and its P/E ratio is 5.3.
With a market capitalization of roughly $9.8 billion, the company's earnings per share were $12.95. It paid a dividend of $1.12, yielding around 1.6%.
Cliffs Natural Resources announced its 2011 fourth-quarter and full-year results on February 15. It reported that it achieved a record $6.8 billion in revenues, which was 45% more than the previous year. Full-year operating income increased to $2.3 billion, which was up 85% from $1.3 billion in 2010. Net income attributed to Cliffs' shareholders was $1.6 billion, or $11.48 per diluted share, up from $1 billion, or $7.49 per diluted share, in the prior year, according to the company.
Despite those highlights, some of the financial news for last year was disappointing. For example, fourth quarter operating income decreased to $370 million from nearly $400 million in the fourth quarter of 2010. The company noted this was driven by a relatively flat sales margin and the $28 million pre-tax goodwill impairment charge related to the coal operations that Cliffs acquired from INR Energy in 2010.
For 2012, Cliffs Natural Resources anticipates generating $1.9 billion of cash flow from its operations. Its gross and operating margins are strong at 42.10% and 38.58%, respectively. The company is a buy.
Arch Coal Inc. (ACI): Shares are trading around $14 at the time of writing. Its 52-week trading range was $13.09 and $36.99. It has a market capitalization of $2.97 billion. Arch Coal is poised to continue its growth and participation in the global coal market after entering into some key acquisitions last year.
This includes signing a long-term agreement with Kinder Morgan Energy Partners LP that will expand coal handling facilities along the Gulf Coast. The goal is for Arch Coal to ship coal at guaranteed minimum volume levels through KMP-owned terminals.
Arch Coal pays a dividend of $0.44, yielding around 3.2%. Its five-year dividend growth rate is 14.34%. Revenues were roughly $4.3 billion last year, and its net income was $142 million. It has a five-year revenue growth rate of 11.38%.
Its gross margin is 11.15% and its operating margin is 23.97%. Those margins are low compared to competing coal producing companies. Still, the agreement with Kinder Morgan is an indicator that the company's future stock performance will continue to improve. Arch Coal is a buy.
Peabody Energy Corp. (BTU): With a market capitalization of $9.6 billion, Peabody Energy is one of the largest coal producing companies in the world. At the time of this writing, its shares were trading around $36. That is within its 52-week trading range of $30.60 and $73.95.
Last year, the company's revenues increased 18% to a record $7.97 billion. The company cites higher average pricing and increased volume sales as the reason. In 2011, sales volumes increased 3% to 250.6 million tons.
Earnings per share are $3.52 and the P/E ratio is 10.15. It pays a dividend of $0.34, which yields .90%.
That dividend payout is in line with many of Peabody Energy's competitors, such as Walter Energy Inc. (WLT) which pays $0.50, yielding .70%. The amount of the company's quarterly dividend payouts has increased over the past five years. In 2008, the company paid a dividend of $0.06. By the last dividend declaration on Jan. 26, 2012, it had increased to $0.085.
The company's financial position has made it well-equipped to complete several key acquisitions. One of those was for Macarthur Coal, which Peabody Energy acquired last year with $1 billion in cash, $1 billion from a five-year term loan and $3.1 billion from the issuance of seven- and 10-year bonds.
Peabody Energy had a net income of $1.2 billion and its revenues were $7.97 billion. Its operating margin was 20.33% and its gross margin was 30.40%. Given they are strong despite the acquisitions, Peabody's financial position is solid and able to cope with fluctuations in coal demand. Peabody Energy is a buy.
Walter Energy Inc.: Shares are trading around $66 at the time of writing, which was close to the company's 52-week low of $53.41. Its 52-week high was $143.76.
As on of the leading producers of coal for the global steel industry, Walter Energy has a market capitalization of $4.15 billion.
The company is still recovering from less than favorable earnings last year. Last summer, around the time that rumors ran rampant that the company may be acquired, Walter Energy's stock shares fell for 12 straight days. The company had refused to speculate as to why the stock price tumbled.
Among those that are reported to be interested in acquiring the company are competitors BHP Billiton (BHP) and Vale S.A. (VALE). In fact, rumors that the company could be purchased for as much as $240 a share boosted its price at times.
Walter Energy pays paid a dividend of $.50, yielding around .70% last year. Its five-year annual dividend growth rate is 27.4%. Over the past five years, the amount of the quarterly cash dividend payouts has increased. On Feb. 15, 2008, the cash dividend payout was $0.05. The payout increased to $0.10 on Aug. 6, 2008. It increased again on May 5, 2010 to $0.125, where it has stayed through Feb. 15, 2012.
The company had revenues of $2.26 billion and a net income of $399 million. It paid a dividend of .50%, yielding $0.70. Earnings per share were $6.13. The P/E ratio was 10.84. Its strong gross and operating margins are in line with many of its competitors'. Its gross margin is 42.43% and the operating margin is 26.58%.
This year the company must contend with having to lower its production levels. The company pointed to several reasons why it is resetting its expected metallurgical coal production in 2012. Reasons include the inherent risks of the mining business and slightly lower expectations from some of the start-up developmental projects.
The new projected growth of 11.5 to 13 million metric tons compares with prior expectations for 2012 of 13 to 14 million metric tons of met coal, according to the company. Walter Energy is a buy for several reasons. They include the demand for its coal and its efforts to make sure its production levels are adequate to keep up with that demand.
CONSOL Energy Inc. (NYSE:CNX): Shares are trading around $37 at the time of writing. Its 52-week trading range is $30.56 and $56.32. CONSOL Energy's market capitalization was $8.3 billion. Earnings per share were $2.76.
In January, the company reported that its net income for the 2011 fourth quarter was $196 million, or $0.85 per diluted share. That was up from $104 million, or $0.46 per diluted share that it reported for the 2010 fourth quarter. Its net income for 2011 was $632 million, or $2.76 per diluted share, compared to $347 million, or $1.60 per diluted share for 2010.
Revenues were almost $6 billion. The company's five-year annual revenue growth rate was 10.49%.
Its five-year annual dividend growth rate is 8.7%. The company paid a dividend of $0.50, which yielded 1.4%. Its dividends have grown consistently over the past five years. The company's quarterly dividends were relatively flat over the last five years. From 2008 through November 2011, they were $0.1. They increased to $.125 Nov. 11, 2011, and that's what the company paid on February 7.
The operating margin was 15.32% and the gross margin was 36.4%. The company's P/E was 13.36.
Looking forward to the demand for coal, the company has decided to postpone some of its efficiency projects, which reduce its coal capital spending.
CONSOL stands to benefit from an expansion project that would grow its underground coal mining complex in Pennsylvania. Also, the company announced that for three consecutive quarters, its coal division has generated more cash from its metallurgical business than from its thermal business, which demonstrates its presence in the growing metallurgical markets. CONSOL is a buy.
About the author:
I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.