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Chanos has had a spectacular run of good calls over the last two years. He is shorting iron ore, PC companies such as Hewlett-Packard (HPQ) and shorting alternative energy companies like First Solar (FSLR).
At the Grant's conference in April, Chanos mentioned that coal companies are among his favorite shorts. In particular, he singled out Consol Energy (CNX).
Let's revisit his thesis and see if Consol Energy is still worth shorting.
First of all, Chanos said that the rapid expansion of shale gas production capacity has led to record low prices for natural gas. Despite a recent bounce, natural gas prices are still depressed. This is creating a lot of competition for coal as power producers can easily switch from coal to natural gas. Furthermore, there is a lot of production coming on stream in the near future. The cash operating costs of production are extremely low (less than $1.50/mmBtu in some cases).
CNX is highly leveraged to the price of coal. Thermal coal accounted for 61% of 1Q12 gross profit.
The company recently guided estimates down due to the low price of coal and a myriad of other issues.
"Last month, Pittsburgh-based Consol said it would temporarily idle its Buchanan mine in southwestern Virginia, one of its biggest mines, due to weak global demand for steel, which has sent metallurgical coal prices down sharply. Consol also idled part of its Amonate Mining Complex in southern West Virginia."
The company idled production but anticipates ramping up production in the 4th quarter. This could create losses and headaches for investors.
Consol produced 11.6 million tons during the third quarter, lower than the 14 million to 14.5 million tons it had expected. However, for the fourth quarter Consol expects to produce between 13.4 million and 13.8 million tons. The company is planning to restart Buchanan production in the week of Nov. 5.
When Chanos mentioned shorting shares of Consol, it was trading at $34 per share. The price plunged to $26 in June but has since rebounded to $36. Speculators can short shares at a price that is higher than Chanos' original recommendation.
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