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The decision whether or not to buy shares in the secondary market will make little difference to existing coal companies (who are largely cash flow positive and

by hodder 7y ago

The decision whether or not to buy shares in the secondary market will make little difference to existing coal companies (who are largely cash flow positive and trade at near 25% earnings yields). Regulations are what matter. All that secondary investors can do is increase WACC via lowered demand for marginal primary debt/equity issuances. If you want to phase out coal, focus on government regulation instead of secondary investments. It can (and often does) make sense to invest in industries in terminal decline as price paid for an asset’s cash flow is the primary determinant if returns for the investor. You can buy coal stocks for 25%+ earnings yields. Even if those plants are phased out in 6 or 7 years, one can make solid returns. Indeed I have invested in cigarette shares in the past while wishing the government would do more to stop smokers. The fact that I hold the equity doesn’t change demand for cigarettes, and only in aggregate does the investor appetite effect WACC. Someone must always hold existing shares. For every buyer there is a seller and vice versa. Lastly I should mention that metallurgical coal as opposed to thermal coal is a necessary “evil” to smelt steel. I’ve used this recent hate for coal investments(and weakness in NG) to take positions at high earnings yields in ARCH and HCC.

eigenvalue 7y ago
That's not strictly right. If the pool of potential buyers for these coal stock shares dries up, the price of the shares will be much lower than it otherwise would be. This makes in increasingly less attractive for these companies to raise capital for new mines or mine expansions. It even makes merging less attractive. It also makes recruiting and retaining skilled executives harder. All of this surely impacts these companies in the longer term (say 5-10 years from now)-- they are likely to be a lot smaller and to employ fewer people.
- hodder 7y ago
  So... that is exactly what I said. How is it wrong? I specifically said the only impact is on WACC and cost of capital of marginal debt of primary issuances... which are minimal considering these companies are for the most part cash flow positive and have no need to issue equity (in fact they are buying it back). The cost of debt has slightly more of an impact but still minimal.
  - eigenvalue 7y ago
    What’s wrong is that you dismissed this as not having a real impact on these companies. This will have a very large impact that will only grow over time.
    - hodder 7y ago
      Given the publicly traded coal companies are cash flow positive they have little reason to tap the equity markets for capital. These are mature companies in the decline phase. For the most part they do not need incremental primary equity offerings. This isn’t like say, Tesla, which burns huge amounts of cash but has tons of things to invest in for future returns and is therefore heavily reliant on the demand for the shares. The coal companies are milking the cash flow in the decline phase for dividends and buybacks. Therefore the decision/demand for the existing shares in the secondary market has little bearing on the company. So no - it doesn’t make a big difference. Indeed, most are buying back shares in huge amounts. The debt side of the equation makes a larger impact as the companies roll the debt and most lever the FCF to the equity. The aggregate demand for the bonds will have an impact on profitability... still not much of a difference.
akira2501 7y ago
> Lastly I should mention that metallurgical coal as opposed to thermal coal is a necessary “evil” to smelt steel. It's worth pointing out that only about 7% of coal is used for metallurgical purposes.
ogre_codes 7y ago
> It can (and often does) make sense to invest in industries in terminal decline as price paid for an asset’s cash flow is the primary determinant if returns for the investor. You can buy coal stocks for 25%+ earnings yields. Even if those plants are phased out in 6 or 7 years, one can make solid returns. For Blackrock, those 25% yields you talk about don't exist. If Blackrock were to retain a significant investment in those companies, share prices would be higher and yield lower. What makes sense for a small investor often doesn't make sense for large corporate investors. That said, investments like what you describe have their own risks. At this point it largely depends on contracts and how quickly alternative power sources can ramp up. You are the second person to mention tobacco, and I think it's a poor comparison. People are literally addicted to tobacco which guarantees long term demand. Even if that demand is decreasing over time, it's predictable and not severe. Coal does not share those characteristics.
flgb 7y ago
> Lastly I should mention that metallurgical coal as opposed to thermal coal is a necessary “evil” to smelt steel. Hydrogen can be used to smelt steel, and hydrogen can be produced from renewable energy. https://www.cleanenergywire.org/news/thyssenkrupp-tests-use-hydrogen-steel-production-bring-down-emissions https://www.cleanenergywire.org/news/thyssenkrupp-tests-use-...
- christophilus 7y ago
  That is really cool. Looks like they’re targeting 2050 to be 100% hydrogen based. That leaves 30 years of metallurgical coal consumption for one of the world’s most progressive steel companies. I’m long HCC for this reason.

by hodder 7y ago

eigenvalue 7y ago

That's not strictly right. If the pool of potential buyers for these coal stock shares dries up, the price of the shares will be much lower than it otherwise would be. This makes in increasingly less attractive for these companies to raise capital for new mines or mine expansions. It even makes merging less attractive. It also makes recruiting and retaining skilled executives harder. All of this surely impacts these companies in the longer term (say 5-10 years from now)-- they are likely to be a lot smaller and to employ fewer people.

hodder 7y ago
So... that is exactly what I said. How is it wrong? I specifically said the only impact is on WACC and cost of capital of marginal debt of primary issuances... which are minimal considering these companies are for the most part cash flow positive and have no need to issue equity (in fact they are buying it back). The cost of debt has slightly more of an impact but still minimal.
- eigenvalue 7y ago
  What’s wrong is that you dismissed this as not having a real impact on these companies. This will have a very large impact that will only grow over time.
  - hodder 7y ago
    Given the publicly traded coal companies are cash flow positive they have little reason to tap the equity markets for capital. These are mature companies in the decline phase. For the most part they do not need incremental primary equity offerings. This isn’t like say, Tesla, which burns huge amounts of cash but has tons of things to invest in for future returns and is therefore heavily reliant on the demand for the shares. The coal companies are milking the cash flow in the decline phase for dividends and buybacks. Therefore the decision/demand for the existing shares in the secondary market has little bearing on the company. So no - it doesn’t make a big difference. Indeed, most are buying back shares in huge amounts. The debt side of the equation makes a larger impact as the companies roll the debt and most lever the FCF to the equity. The aggregate demand for the bonds will have an impact on profitability... still not much of a difference.

akira2501 7y ago

> Lastly I should mention that metallurgical coal as opposed to thermal coal is a necessary “evil” to smelt steel. It's worth pointing out that only about 7% of coal is used for metallurgical purposes.

ogre_codes 7y ago

> It can (and often does) make sense to invest in industries in terminal decline as price paid for an asset’s cash flow is the primary determinant if returns for the investor. You can buy coal stocks for 25%+ earnings yields. Even if those plants are phased out in 6 or 7 years, one can make solid returns. For Blackrock, those 25% yields you talk about don't exist. If Blackrock were to retain a significant investment in those companies, share prices would be higher and yield lower. What makes sense for a small investor often doesn't make sense for large corporate investors. That said, investments like what you describe have their own risks. At this point it largely depends on contracts and how quickly alternative power sources can ramp up. You are the second person to mention tobacco, and I think it's a poor comparison. People are literally addicted to tobacco which guarantees long term demand. Even if that demand is decreasing over time, it's predictable and not severe. Coal does not share those characteristics.

flgb 7y ago

> Lastly I should mention that metallurgical coal as opposed to thermal coal is a necessary “evil” to smelt steel. Hydrogen can be used to smelt steel, and hydrogen can be produced from renewable energy. https://www.cleanenergywire.org/news/thyssenkrupp-tests-use-hydrogen-steel-production-bring-down-emissions https://www.cleanenergywire.org/news/thyssenkrupp-tests-use-...

christophilus 7y ago
That is really cool. Looks like they’re targeting 2050 to be 100% hydrogen based. That leaves 30 years of metallurgical coal consumption for one of the world’s most progressive steel companies. I’m long HCC for this reason.