(Idea) Alpha Metallurgical Resources

By: Jon Costello

My previous article discussed Warrior Met Coal (HCC) as the best long-term investment for exposure to metallurgical coal. Warrior is one of the most attractive stocks in the energy sector for long-term holding if purchased at a price below $50 per share. Warrior is a low-cost producer undergoing an expansion that will allow it to generate free cash flow even at today’s depressed coal prices. Its low operating costs and transportation advantages will make it one of the last companies standing amid another coal industry shakeout, should one arrive.

I estimate that Warrior offers more than 20% compound annual returns over the next decade if its stock is purchased in the high $40s and if coal prices average $225 per ton, and management allocates capital effectively on behalf of shareholders. With low-risk compounding returns that are hard to find anywhere else, Warrior’s virtues as a long-term investment are hard to beat.

Still, some investors may prefer a more torqued alternative to Warrior that will be more responsive to a met coal price rally. This is where Alpha Metallurgical Resources (AMR) comes into play.

AMR is one of the highest-cost producers among large publicly listed coal producers in the U.S. As such, its profitability will increase at a more rapid clip than its lower-cost peers as coal prices increase.

Investors who are confident that a coal price recovery is both imminent and sustainable may prefer AMR over Warrior. AMR’s torque means that its shares offer very attractive returns at higher coal prices. If prices average more than $250, AMR’s returns could exceed those of Warrior over a five- or ten-year holding period.