America's coal miners are profiting -- and looking for investors

Boosted by higher global prices, U.S. coal miners are showing they can make money again. Now, for the hard part -- winning back investors.

Five of America’s largest coal producers -- Alliance Resource Partners, Arch Coal, Cloud Peak Energy, Peabody Energy and Warrior Met Coal -- reported a combined $801 million in third-quarter earnings before interest, taxes, depreciation and amortization. That’s up from $454 million from the year-ago period, company filings show, and Peabody’s highest tally since 2012. And it’s helping management teams carry out shareholder-friendly tactics including stock buybacks and dividends.

“Things are much better than they were a year ago, and much better than they were two, three, four years ago,” said Andrew Cosgrove, an analyst at Bloomberg Intelligence. “All told, the outlook is relatively positive.”

That’s a sharp reversal from recent years, when low coal prices and high debt levels forced many of America’s largest miners into bankruptcy. Now, with those companies back with cleaned-up balance sheets, the industry is enjoying a period of higher seaborne prices for thermal coal, which is burned by power plants, and metallurgical coal, a steelmaking component. The elevated prices are thanks, in part, to China’s increased imports of the fossil fuel this year.

Of course, not everything is rosy. The U.S. thermal coal sector is still sluggish, mired in a longer-term problem -- namely, that U.S. electricity demand is flat and there’s rising competition from cheap natural gas, wind and solar power. Prices will probably stay low for much of 2018, Foresight Energy Chief Executive Officer Robert Moore told analysts. Foresight, along with others, plans to focus more on exporting coal next year.

Another challenge facing miners is pulling in more investors. Hedge funds dominate companies’ shareholder ranks, creating volatility when they trade in and out of positions frequently. Excluding index funds, Peabody only had four or five conventional “long-only” investor funds among its top 20 shareholders recently, while Arch Coal had six or seven, Mark Levin, an analyst at Seaport Global Securities, wrote in a note Tuesday.

“Coal equities have an enormous opportunity,” Levin said. “Coal is under-owned by a group that has significantly more assets/buying power than hedge funds.”

Here’s how miners are looking to please shareholders:

Share buybacks:

- Peabody has repurchased $100 million in shares as part of its $500 million share buyback program. “Management is continuing their laser-like focus on shareholder returns,” Jeremy Sussman of Clarksons Platou Securities Inc., said in note Friday. Buybacks are seen as a way to attract “a longer-term type of investor base.”

- Arch increased its share buyback program by $200 million, to $500 million. So far, Arch has bought back $218 million in shares

Dividends:

- Peabody is targeting a “sustainable dividend program” starting in early 2018

- Arch paid $8.2 million in cash dividends during the third quarter

- Warrior is paying a $600 million special cash dividend this month in addition to its regular cash dividend of 5 cents per share

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