Precious Positioning

Long-Term Technical Outlook for Gold & Silver at Daily Gold.

Gold’s performance in stock bear markets:  Zeal.

China and India account for half of world wide gold demand:  Frank Holmes.  So could “China’s problems be gold’s problems” at The Atlantic?

Re-monetization of gold speculation:  Does China Plan a Gold-backed Renminbi? at Gold Silver Worlds.

Franco-Nevada’s $1 billion precious metal stream financing with Inment leaves me underwhelmed.  I know it’s a good deal.  However, when it’s looked at as FNV blowing out their entire cash hoard or as consuming all the company’s free cash flow for the next three years, my favorite precious metal play may be dead money relative to the sector over this time.  FNV management acknowledged this deal does not the have the optionality upside typical for them.  Perhaps operating mining company stocks may receive some valuation catch up.  Maybe the play is to trade in FNV for Silver Wheaton and wait for their share prices to converge…

…Silver breakout looks at Nifty Chart Patterns.  SLV breaking out:  Kimble Charting Solutions.  Gold finds itself near the end of a flag:  Kimble Charting Solutions.

Enjoy this Rick Rule interview over your lunch:  King World News.

Coal Relationships

The super-cycle is still soft as BHP warns of job cuts in coal as China cools in Mining Weekly.  However, mine curtailments and capex cuts are the fertile ground of bull markets.  Peabody Energy says it is continuing to evaluate spending in 2012, 2013, so says the Fly on the Wall.

India to get coal from Kentucky at UPI.  Seems like a pretty big deal.

Germany: world’s largest coal-fired power plant inaugurated at AGI.  The developed world still needs coal too.  In the wake of Japan’s Fukushima disaster nuclear is being pushed aside, but the generation capacity needs to be replaced.  Bloomberg

The severity of the natural gas over supply:  “By our estimates, low gas prices allowed natural gas generation to pick up nearly 6 Bcf/d of incremental year-over-year (y/y) demand at the expense of coal (through May).”  Raymond James on coal switching.

Natural gas continues cutting into coal demand at Fuel Fix.

Institutions have coal on their radar, FWIW:  “Fidelity, Wellington, and Blackrock significantly decreased their positions while D.E. Shaw, a well known quantitative hedge fund, and other well known hedge funds increased their holdings of Alpha Natural Resources and other coal companies like Peabody Energy and Arch Coal.  This actually makes me a bit nervous because same thing happened with Patriot Coal before it went bankrupt (DE Shaw and these hedge funds might be shorting these coal companies) but I doubt these companies are at risk of bankruptcy any time soon.”  Pension Pulse

Coking coal prices are down from a peak last year, but still at high levels.  Thus Alpha Natural (ANR) reporting second operating losses is quite disturbing:  “Alpha is down because it needs coking coal prices to rebound by 2013 to maintain free cash flow break even.”  Peter Epstein wrote that as a Alpha bull.  With coking coal pricing tumbling recently, I find the statement particularly damning for Alpha in light of their debt load.

“CLD at resistance at 18 with a break higher looking at 20” chart by Greg Harmon.

Coal Crux

Coal shares down on lower steel coal price talk at ReutersISA readers already know coking coal is not the play right now.  “Coal used to make steel is set to drop to the lowest price in two years” at Bloomberg.  Walter Energy Shares Surge on Takeover Rumors are back (Benzinga) and I am not interested.

The coal super-cycle is not the play just yet either.  “Top coal producer and consumer China cut coal output targets at the top three producing regions by as much as 7% from a year ago to ease a supply glut caused by a slowdown in economic growth, which has also weakened global prices.”  Mining Weekly.  However, for China to industrialize they will need to continually import prodigious amounts of coal (Reuters).

Instead, yesterday’s coal share weakness was a function of natural gas being lower.  The natural gas contango is bearish (HAI) too, counter intuitive to those new to commodity markets.

The crux of ISA‘s patience in waiting to be involved with the coal stocks:  “Although the number of active drilling rigs has dropped sharply this year in response to falling dry-gas prices, production has continued to grow because of gas supply associated with more lucrative oil and liquids development, and because existing gas wells have not depleted as quickly as expected…”  AOL.

Further cause for patience:  “Announced production cuts in the U.S. through June of about 60 million tons is not nearly enough to balance supply and demand for thermal coal. Additional cuts will certainly be coming.”  Peter Epstein

The PBS video version of coal vs natural gas in Colorado (PBS).  I continue to giggle over Obama and Romney courting coal workers:  Fuel Fix.

They may hate coal, but they do need it (Manhattan).  Remember though, we are looking to play a US thermal coal cycle as US coal plants are old (EIA).  The misleading title The US has now installed enough wind turbines to power all California’s homes is still impressive knowing US residential electricity generation market share is 35%.  Mining.  Whether that is nameplate or actual generation I do not know…

Coal earnings season takeaways:  Doyle Trading.

NRP will be an Independent Stock Analysis favorite conservative and income coal play.  But shares look to trade with an overhang as Coal operator Chris Cline seeks to unload big stake in Natural Resource Partners at SNL.

“ANR a mixed signals bearish dark cloud signal is not good, could breakout upside” at StocktwitsArch Coal is Just the Best of a Bad Group at Dragonfly Capital.  I do not like either name.

Coal readers are encouraged to visit the Independent Stock Analysis home page.

Commodities and China

“We are, however, waiting to see the response of the governments in Asia regarding any type of stimulus to spur growth.”  Nick Carter, NRP President on the metallurgical coal markets right in their earnings release.

“Coal used to make steel is set to drop to the lowest price in two years”  Bloomberg

First signs of coking coal, iron ore rebound emerge at Mining.  If so, Teck Resources (TCK) would be a favorite (chart).  China’s Scary Slowdown May Have Limits at Business Week, yet July data has been coming in weak.

Decreased demand hits China’s rare earth producers at China Times.  Even the Chinese “hopes that the government can stimulate domestic demand to offset the weak demand for rare earth minerals from overseas markets.”

China Seen Delaying New Stimulus:  “Hope Fades for More Spurs to Growth as Beijing Waits for Effects of Its Moves”  WSJ

China’s literally ground-breaking copper inventories at FT Alphaville.  Yet, “China’s copper consumption is expected to grow to 10 million mt by 2020, up 36% from 2011” at Platts.  Supply will not meet this projected demand with $3 handle copper.  The dynamics of the next decade will be fascinating.

Copper: The Essential Metal at Visual CapitalistCopper: Supply and Demand at Visual Capitalist.

Dr. Copper’s Head & Shoulders at Ritholtz.

Big Picture

Amid the European mess and weak emerging markets, the US has seen The Housing Recovery Strengthen at esoltas.  Both Home Prices and Rents Rise at CNBC.  Auto manufacturing and sales are a strong tailwind at the Detroit News.

The good news continues as The US private economy is growing as the government economy slows at Value Plays.  Further, US Intermodal Volume Hit Record in July at JOC.  This is not the data of recession.

“…we now estimate an upward revision to about 2.5% for Q2 from an original government report of 1.5%.” (First Trust)  Diametrically opposed is David Rosenberg: The Coming Negative Export Shock giving pause at Pragmatic Capitalism.

Further concern:  “China’s export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening…” from Bloomberg.  “China’s crude steel output may fall for the first time in 31 years this year…” in the WSJ.  The world’s largest miners continue to trim capex a billion dollars at a time:  Globe and Mail.

“Real Wages Much Lower Than They Were Four Decades Ago” at Ritholtz.  The unemployment rate for 18 to 19 year olds is 22.2%.  FED

“Stockpiles of the biggest crops will decline for a third year…” at BloombergU.S. Corn-Crop Estimate Cut as Midwest Drought Hurts Yields by BloombergGrain markets may be on verge of final blow-off top by Peter Brandt.

The CRB Index Has Another Date With Resistance at All Star Charts.  Miners to reflate?  Marketwatch

Ten stocks which have payed an uninterrupted dividend more than 110 years and increased their dividend for at least the last 10 years:  Dividend Growth Stocks.

Our current place in the secular bear which began in 2000:  Zeal.  Perhaps the market price low occurred in March of 2009, with the valuation low still years ahead.

No wonder the stock market is such a tough place!  Go Comics

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Coal Thesis

In spite of the current depressed conditions, coal is here to stay (excellent read by Robert Bryce).  The thesis here at Independent Stock Analysis consists of a booming US thermal market when natural gas production finally declines meaningfully, perhaps later this year.  This cycle could be stronger for longer based on significant mine closures and coal with natural gas producers starved for capital.

ISA does not expect coking coal or emerging markets to contribute to the rebound until deep into the cycle.  Stock selection will be vital.  The winners and losers may not be the usual suspects and will not be identified if these fundamentals are ignored.

Low U.S. injections reflect already high natural gas storage inventories (EIA), but this is based upon price.  Time is needed for natural gas production supplied to turn lower.  Coal inventories remain high too.

When natural gas production falls, coal demand will return.  And when this occurs the cycle could be robust.  Coal producers have idled mines, many which will not return because of regulation.  Other mines will not be quickly reopened, having seen equipment sent to other mines to save the cash strapped companies capex spending.  “U.S. year-to-date coal production totaled 601.8 mmst, 5.5 percent lower than the comparable year-to-date coal production in 2011” EIA.

Coal is harassed by greens and governments in the rich OECD countries (Coal Zoom), which is why we giggle at Obama, Romney battle for pro-coal mantle (The Hill).  Yet emerging nations are not about to stop building coal plants (Platts).

India is currently low on coal, as “Coal India agreed on Tuesday to pay penalties for failing to provide sufficient supplies to new Indian power projects…” (First Post).  Though China’s current inventory level is high, long term they will still be largest source of growth (Nasdaq).

“Between 2000 and 2010, the global consumption of coal increased by around 2.3-billion tons, or 50%, and is expected to expand by another 25%, or 1.7-billion tons, in the next decade.”  Mining Weekly

Long term, even Africa may be bullish for Coal.  Engineering News.  Simply said, they are short of energy (Trefis).

With “A significant decline in China’s second-half steel output is a foregone conclusion,” Xue Heping,” do not expect coking coal to save certain names in the sector.  (WSJ, sub required)

Though the coal sector was the market star yesterday (Street Insider), a thorny shoulder season could be in ahead.  Powder River Basin coal should rebound first followed by the Illinois Basin.  Appalachia will recover last and see its market share shrink (EIA).  The Coking coal trough is still in the distance.

Click here for the Independent Stock Analyst ongoing coal commentary.

Click here for the ISA homepage.

Coal Exports

Alpha Natural (ANR) reported results and had their conference call.  Let’s just say they’re in trouble.  Much of the industry rationalization in this down cycle is going to come at their expense as the strong eat the weak.  I’ll have more to say on ANR soon.  Stock charts of ACI and CLD.  The essay Consol Energy: Solid Yet Underwhelming was written by me, JJ Butler.

Our interest in the US coal market is based on a cyclical upswing from depressed levels driven by natural gas, inside a structurally difficult US coal market.  But the world is in a secular supercycle experiencing a soft patch (Bloomberg).

The soft patch is real with much coal commentary at the end of this piece at Reuters.  In China, “Prices can only start to rebound when the hydro power season ends in around September. Since Chinese power plants usually start their winter restocking in around October, that could be a crucial turning point for coal.”

In India, “Steam (thermal) coal imports are projected to climb to 80-85 million tonnes (mt) this financial year, a jump of 60 per cent over the 50 mt in 2011-12 as power producers, chiefly NTPC, seek to overcome domestic supply woes.”  Business Standard  The world’s largest coal company is state run Coal India which is unable to produce its quotas (Fox).

But markets work.  “Rio Tinto Coal Australia said Wednesday it would close earlier than expected its Blair Athol mine for export thermal coal in Queensland’s Bowen Basin coal field, partially blaming falling international thermal coal prices.”  Platts

Australian coal is becoming high cost, while strong US players are looking ahead, such as Peabody and Kinder (Marketwatch).

The industry is serious about shipping PBR coal to Asia.  “Business groups backing Pacific Northwest coal export proposals on Thursday lauded a new report that claims increased U.S. coal exports could bring between $2 billion and $6 billion per year to the U.S. economy.”  The world improvers will try to stop it (Seattle Times), but the trump card will be jobs.

The greens will not escape reality, as even in Europe “Twenty-three new coal-fired power plants are being built across Germany, with the capacity to generate 24,000 megawatts.”  SBO

Westerners do not grasp the enormity of the infrastructure needed in developing nations.  This WSJ piece has a nice slide show from the current flooding in the Philippines.  My Filipino friends have posted better pictures on facebook:

Coal Shakedown

“China’s benchmark price for power-station coal fell for a 12th week to the lowest level since 2009 as electricity demand slowed and hydropower output increased.”  Business Week

“An Environmental Protection Agency mercury and air toxics rule, released in December, will lead to a reduction of 4.7 gigawatts in coal-fired generation, the agency estimated. FBR Capital Markets & Co. in New York estimated the drop might more than 10 times that much.” and “Coal may regain its lead later this year following a rebound in gas prices, said Brandon Blossman, director of coal and power research at Tudor, Pickering, Holt & Co. in Houston.”  Fuel Fix

Remember, underground coal mining is dangerous work as 6 died in Mexico last week.  Houston Chronicle.  Also, get accustomed to headlines like this:  Alliant closing Cassville coal plant at JS Online.

Tinkler Says He’ll Stick to A$5.3 Billion Whitehaven Offer as the coal company takeover drama continues in Australia at Bloomberg.

‘Fire sale’ in coal stocks at Stock Advisors.  You know I think he is too early and that he has picked the wrong stocks.

“I believe that the marketplace when coal prices drop, there’s a shakedown of marginal players and marginal assets. That will continue to go and I think that’s a natural process. We’ve seen this in the cycles before. But it also emphasizes the quality of low-cost assets that have flexibility.”  Consol’s CEO and Chairman in their latest conference call.

Natural Resource Partners (NRP) reports after the close tonight.  The stock is barely off new lows made on Friday.  ANR and JRCC report and have their conference calls Wednesday and Thursday.

Waiting on NG for Coal

Listening to the coal company management teams on their conference calls broach’s the surreal.  The observer is left to figure out by himself the industry is depressed.  Hope springs eternal with happy talk.

Three things have kept natural gas production from falling: 1) Associated gas produced from oil wells, 2) Gas behind the pipe backlog, and 3) Drilling productivity gains.  The stubbornly high natural gas production levels are good for the coal rebound.  Extra time will help draw down the heavy coal inventory, fueling the potential recovery.

Meanwhile, when a modest rebound does occur in natty, producers will not be able to take advantage.  Natural gas producer balance sheets are stretched.  Bringing the rigs back will require capital up front.  Further, the NGL drilling craze looks to slow.  Dry gas drilling has collapsed.  Haynesville Play

A look at natural gas by Hard Assets Investor.

In spite of being a bit propagandish, The Global Outlook for Coal is a good read at Coal News.  But current markets are quite soft, so do not get to excited as Indonesia miners cut 2012 thermal coal output forecast at Reuters.

“Between 2000 and 2010, the global consumption of coal increased by around 2.3-million tons, or 50%, and is expected to expand by another 25%, or 1.7-million tons, in the next decade.”  Mining Weekly  I am suggesting the investment winners will be the low cost producers who use the down cycles to take market share from high cost and leveraged players.  The biggest winners will be peasants who learn what it is like to enjoy lemonade with an ice cube and become able to read by light at night.

“Not enough coal is being dug up by the state monopolist, Coal India.”  (Economist)  “India’s peak electricity demand exceeds supply by nearly 10 percent” so they suffer regular rolling brownouts.  Bloomberg.  Water problems means India will have to import coal:  Gigoam.

Thermal Map

“Investors need to think about ‘normalized’ earnings power”  Peter Epstein

Walter Energy (WLT) reported results.  But WLT is a met coal name and just another derivative on China.  Our energy is focused on the depressed US thermal coal market.

US year to date coal production is down 5.5% from 2011.  EIA

Coal industry wins challenge to EPA water standards at Fuel Fix.

Illinois coal plant owner weighs Chapter 11Chicago Tribune.  One short TV clip is not analysis, but the surprisingly small coal sector receives consideration:  CNBC.  CLD at Stockcharts.

India’s Blackout Shed Light on Coal Demand at the WSJ.

“European spot prices have surged $5.65/mt since workers from Colombian private railway company Fenoco walked out…”  Platts

“Hey JJ Butler, what’s the deal with the Great Northern and Nextel stock certificates?”  Answer:  “All good capitalists know all about James J. Hill, and a decade ago Nextel was a big score of mine.  You know, like what we are looking for in the coal names.  If the coal trade works out I’ll buy the laminated U.S. Coal Activity Map as homage.  But be patient.”

When the natural gas inventory number came out at 10:30 this morning, natty took a 6% hit.  While the coal stocks may bottom before the fundamentals, gas production remains stubbornly high.  In spite of every management team talking green shoots, shoulder season could be treacherous.  Just maybe this will coincide with policy makers turning on the spigots.

International Oil

Oil Rises a Second Day as U.S. Inventories Decline, ECB Meets at Bloomberg.

Blackout Highlights India’s Diesel Dependence at the WSJ.

“NLG Bloodbath…rippling across the oil and gas industry” at Bloomberg.

Devon JV’s some Permian acreage.  Remember, time value is a key componet in these deals.  Rigzone

“Anadarko also set a record with a weekly net production rate of 32,300 boe/d in the quarter. Gross processed production is approaching 100,000 boe/d.”  Eagle Ford Shale

Mississippi lime play sprawls northward into Nebraska at the Oil & Gas Journal.

Nexen bid part of China’s plan to become resources powerhouse at US NewsChina’s Energy Grab Is About Know-How, Not Resources at Business Week.  Never mind Nexen is a Canadian company with only 10% of its assets in the U.S. and most of its properties flung throughout the rest of the world, U.S. senator urges Washington to use China’s bid for Nexen as leverage at Globe and Mail.  Perhaps Keystone pipeline politics plays into this too.

The last 50 S&P points were based on European promises.  This morning they show their cards.

Coal Industrialization

Coal plant retirements in 2012 look to be 9,000 megawatts against 318,000 megawatts of capacity, a bit less than 3% of the total. More than 1,000 megawatts of the new plant total is coal-fired.  John Hanger

Meanwhile, “Dale Earnhardt Jr. will be touting coal in a newly released commercial by American Coalition for Clean Coal Electricity.”  Fuel Fix  Heat Sends U.S. Nuclear Power Production to 9-Year Low at Business Week.  “Several nuclear plants…were shut down”  Mcall

Coal investors continue to zone in on the rightsizing of the US coal market.  Yesterday Cloud Peak Energy (CLD) reported solid results, especially considering the industry trough (results and conference call transcript).  Cloud has large free cash flow which they are keen on reinvesting into long term export projects.  Look for ISA to have more to say on Cloud in the future.

Perhaps the super-cycle theme still lives.  “China has quietly increased its budget for railway investment this year by 16%”  WSJ

China’s lower manufacturing reading masks ‘notable rebound’ at Mining.

India Blackout Shows Urgent Need For Infrastructure Spending Boost at IB Times.

Copper and Freeport McMoRan: Bear Flag or Base?  ChessNwine

As I continue to consider the industry participants, many ideas are becoming clear.  Importantly, the low cost producers are eating the high cost, over indebted players’ lunch.  Stay tuned and be patient as we wait on natural gas.

More Coal

Continue to watch natural gas.  “US Lower 48 production at 72.39 Bcf/d essentially unchanged in May from 72.38 Bcf/d output in April”  (EIA).  The worm will turn, but have much patience.

In the hot 2010 summer about 12% of total U.S. electricity consumption was used for cooling.  EIA

Projected retirements of coal-fired power plants at the EIAFuel used in electricity generation is projected to shift over the next 25 years also at the EIA.

U.S. coal exports put in context:  Investor Village.

European coal gets a lift on the Colombian rail strike:  Platts.  Meanwhile, China Thermal Coal at Lowest Price Since 2009; Demand Drops at Bloomberg.

NYMEX Coal Futures Near-Month Contract Final Settlement Price 2012 at the EIA.

Peabody Energy (BTU) is not the way to play a resurgent U.S. coal market.  I wrote Peabody Energy’s Australian Headwinds at SA.

Arch Coal chart at Trading View.  I believe the spark to Arch’s huge two day rally was the vague “company may sell off some assets” suggestion.  Trib Town

Commodities & Bonds

India’s power grid failed for the second day in a row, this time for more than half the country (BBC News).  Is there much doubt about emerging market infrastructure development, as $80-trillion urban boost for mining projected at Mining Weekly.  I lived in a third world mega city for six months; these pictures do not scratch the surface (BBC).

The dynamics become more interesting with mining projects are being delayed, as China slowdown hurts BHP at Bangkok Post.  Iron ore prices continue to be hit (FT Alphaville).  “A peak may be in sight for commodity prices” from the Economist.

Crop damage sending agricultural commodity prices to new highs by Sober Look.  Poor policy has 40% of the corn crop turned into ethanol.  NY Times

Are Interest Rates at a Key Inflection Point?  All Star Charts

“Unilever…sold $550 million worth of 5-year notes with a coupon of just 0.85 percent…Texas Instrument has broken a record for the lowest coupon on 3-year debt at just 0.45 percent…”  Business Insider.  Teck Resources sold 30 year paper at 5.4%.

Doug Kass presentation:  “my favorite short of the next decade is the U.S. bond market” at Business Insider.  The distortions continue with Defensive stocks becoming overvalued at Sober Look.

Interesting macro idea of the day:  “In order to avoid a debt spiral, a country must reach nominal GDP growth at least in line with average financing rates.”  Ritholtz