Hi Hugo, thanks for the write up. Even as someone who's been following the coal space for a few years now, I've learnt some new things from your write up. What are your thoughts on thermal? It seems the demand and supply gap is even more favorable for thermal compared to met! What's your view on the best way to play thermal? Have you looked into the aussie names (Yancoal, New Hope)?
I haven’t looked into thermal coal stocks much, as I’ve always preferred metallurgical (met) coal due to the narrative behind it. However, I’d like to learn more about thermal coal.
Growth in development of housing in China has been and gone. The population is now in decline, with <1.2 births per woman, and entire cities built to handle the then-growing population now sit empty. What has been a major growth tailwind to coal consumption in the past is now going becoming a major headwind.
I don't have any broader opinion on the valuation of AMR - just thought you should be aware.
I know, but China is essentially the world’s factory—they produce everything. As global consumption increases, their need for steel (and therefore metallurgical coal) will also rise. The housing market is a significant headwind at the moment, but I believe the worst-case scenario has already been factored into current prices.
You say about AMR, "If prices pick up and management restarts buybacks, it could provide a strong boost for the stock."
This appears to be an odd statement to make.
AMR is known for robust buybacks and has always been considered to be astute when it comes to capital allocation. However, it has paused its buyback program at entirely the wrong time. The best time to repurchase stock is when the share price is significantly discounted to intrinsic value, yet as AMR share price plummets to the lowest its been since July 2023, it stops repurchasing. Instead, it should be backing up the truck!
Is this because it simply doesn't have the cash to repurchase now?
Does this imply that its prior repurchases at higher prices were bad judgement - it should have built a cash reserve at that time to deploy in times like these?
Right now, the company has almost $500 million in cash on its balance sheet, and it should have even more next quarter. However, at current prices, AMR is barely profitable because it produces lower-quality metallurgical coal than HCC. Therefore, I believe it is prudent for AMR to build its cash reserves, given the significant uncertainty regarding short-term coal prices.
They might have been somewhat too aggressive and optimistic with their past buybacks, but in my opinion, the most important point is that, after securing a financial safety net, their primary method of returning value is through buybacks—unlike BTU and HCC.
BTU is interesting. Capital allocation is all about opportunity cost. BTU clearly believe that acquiring low cost assets which they can work over the remainder of their lifespan is more accretive than buybacks. If they are correct, and if they subsequently embark on buybacks when the cash flows in 2 or 3 years from now, then it could be that their shareholder returns will be stronger than their competitors - especially given their current share price. I haven't broken it all down, but it would be worth doing some kind of side by side Monte-Carlo analysis on AMR, BTU and HCC for the next 5 -10 years.
The main problem is that the acquired assets are very sensitive to a market downturn. While they offer significant upside, they also come with increased risk.
Hi Hugo, thanks for the write up. Even as someone who's been following the coal space for a few years now, I've learnt some new things from your write up. What are your thoughts on thermal? It seems the demand and supply gap is even more favorable for thermal compared to met! What's your view on the best way to play thermal? Have you looked into the aussie names (Yancoal, New Hope)?
I haven’t looked into thermal coal stocks much, as I’ve always preferred metallurgical (met) coal due to the narrative behind it. However, I’d like to learn more about thermal coal.
Growth in development of housing in China has been and gone. The population is now in decline, with <1.2 births per woman, and entire cities built to handle the then-growing population now sit empty. What has been a major growth tailwind to coal consumption in the past is now going becoming a major headwind.
I don't have any broader opinion on the valuation of AMR - just thought you should be aware.
I know, but China is essentially the world’s factory—they produce everything. As global consumption increases, their need for steel (and therefore metallurgical coal) will also rise. The housing market is a significant headwind at the moment, but I believe the worst-case scenario has already been factored into current prices.
Thanks for the information by the way.
You say about AMR, "If prices pick up and management restarts buybacks, it could provide a strong boost for the stock."
This appears to be an odd statement to make.
AMR is known for robust buybacks and has always been considered to be astute when it comes to capital allocation. However, it has paused its buyback program at entirely the wrong time. The best time to repurchase stock is when the share price is significantly discounted to intrinsic value, yet as AMR share price plummets to the lowest its been since July 2023, it stops repurchasing. Instead, it should be backing up the truck!
Is this because it simply doesn't have the cash to repurchase now?
Does this imply that its prior repurchases at higher prices were bad judgement - it should have built a cash reserve at that time to deploy in times like these?
What does this tell us about AMR?
Right now, the company has almost $500 million in cash on its balance sheet, and it should have even more next quarter. However, at current prices, AMR is barely profitable because it produces lower-quality metallurgical coal than HCC. Therefore, I believe it is prudent for AMR to build its cash reserves, given the significant uncertainty regarding short-term coal prices.
They might have been somewhat too aggressive and optimistic with their past buybacks, but in my opinion, the most important point is that, after securing a financial safety net, their primary method of returning value is through buybacks—unlike BTU and HCC.
BTU is interesting. Capital allocation is all about opportunity cost. BTU clearly believe that acquiring low cost assets which they can work over the remainder of their lifespan is more accretive than buybacks. If they are correct, and if they subsequently embark on buybacks when the cash flows in 2 or 3 years from now, then it could be that their shareholder returns will be stronger than their competitors - especially given their current share price. I haven't broken it all down, but it would be worth doing some kind of side by side Monte-Carlo analysis on AMR, BTU and HCC for the next 5 -10 years.
The main problem is that the acquired assets are very sensitive to a market downturn. While they offer significant upside, they also come with increased risk.