Friday, October 31, 2014

Still Bullish On Gold & Coal, Alpha Natural Resources ANR Seabridge Gold SA Undervalued Radar Stocks Commodities

Alpha Natural Resources nyse:ANR - I made the mistake of not recommending this stock in my last post.  ANR is up 15% since October 11th.  Though the company's balance sheet still needs some tweaking, it's already showing signs of improvement (good quick ratio (short term equity to debt ratio), quarterly earnings losses not as bad as they used to be, metallurgical coal market is picking up / ANR is the leading producer of this type).

A third of company revenue comes from outside the US where demand will continue to be strong (doesn't have to deal with the Environmental Protection Agency EPA).

On reserves alone, the company's valuation is in the billions.  In 2011 after acquiring Massey Coal, the company was worth more than $10 billion - it is now a measly $434 million.  So what went wrong ?  the debt it absorbed when it acquired Massey was substantial and just after making the deal the company was faced with a series of write-downs which took away its profitability and damaged its reputation.  Some of that stems from an overall decline in the coal price, but not all of it ;

Rumors of an Obama war on coal have been rampant but have yet to come to fruition - in some states coal is just too important to simply phase out.  ANR is a major producer of thermal coal (used in electricity generation) and it relies heavily on sales of this in states like Kentucky - Obama recently mandated a 30% cut in carbon emissions by fuel burning power plants by 2030.  The easiest way for the states to accomplish this is to completely overhaul the way power plants generate electricity in states like Kentucky where thermal coal is the number one source of electricity.

However, given that public opinion is against it (full implementation will cost a quarter of a million jobs) and that democrats have a strong interest in winning Kentucky, it seems unlikely that those radical changes will be implemented anytime soon.  Add to that the higher costs associated with using natural gas (9c per kWh) and renewables (23c per kWh vs 4c for coal) to make electricity and you have a lot of reasons to invest in undervalued coal stocks like ANR.

The Gold Price Fell 5.4% In September Then Another 4.6% In October = Down US $126 In Just 61 Days !  

It's not just equities and the dollar that are pressuring the price of gold.

gold: not as popular among hedge funds

Total holdings by gold exchange traded funds (ETP) is now at the lowest level since 2009.
SPDR Gold Trust GLD is the largest physically backed gold ETF (two-fifths of industry holdings) - SPDR net holdings are at their lowest level since 2008.

It doesn't matter whether it's for jewellery or bullion, gold demand worldwide has been down for the better part of this year.
In the first and second quarters it was probably the price that turned consumers off (remained in a tight range between $1250 and $1310 after hitting $1385 in late March 2014), and with currencies such as the Indian Rupee and Canadian Dollar nearing four year lows against the greenback, the price may have just been too high.  In Q1 demand fell -26%, Q2 -16%.

A Reason To Be Bullish - India

The Indian festival of Diwali is a big reason India is the world's largest market for gold (#2 in 2013 but #1 in 2Q2014).  Last year, demand for gold during Diwali was down -33%, but this year jewelry sales are up +20% !

2014 Diwali : the price for 10 grams of gold averaged 27.5th rupees which is 15% less than in the previous year (32.5th).

Gold Price In US Dollars                                        
sept 2013 1392.25 -> 1326.50  -4.7%         sept 2014 1286.50 -> 1216.50 -5.4%
oct   2013 1290.75 -> 1324.00 +2.6%         oct  2014 1216.50 -> 1160.40 -4.6%

I'm Still Bullish

Though recent trends point to a bear market I remain somewhat bullish, at least for the long run.  US dollar, though up has been unsteady.  It appears to be stronger versus the key reserve currencies yuan, yen, Canadian $, Australian $, Euro, but I don't consider the current level to be sustainable.
US economic growth forecasts remain subdued, the effects of a strong dollar can wreak havoc on exports of US products since prices get more expensive in other currencies (why China has long maintained a low yuan policy).  Also, less exports tip the US trade imbalance even more in China's favor - this will stunt jobs growth as companies would rather pay employees in a cheaper currency. With QE3 down to only $15 billion a month from a high of $85 billion a year ago, any growth the US experienced earlier this year could disappear just as quickly as it appeared (less stimulus / harder for small businesses to borrow).