Thank you for highlighting these 3 properties. I agree with you that coal is here to stay and that investors should consider coal miners or royalty companies. Also you’re spot on about the fact coal companies have very strong balance sheets — in aggregate they are net cash positive!
I have two nitpicks:
> India, China and other massive population centers are ready to join the developed world and the main barrier between their current way of life and the life they aspire to live is access to energy.
I’m not sure their lack of economic development is primarily due to lack of affordable energy. After all, both China and India have access to large quantities of coal, although India’s coal is of pretty poor quality.
Michael Pettis, relying on Albert Hirschman, would argue that the “institutional development” of a country matters a lot to its economic development — “the set of formal and informal institutions (political, legal, financial, tax, social, and educational) that govern economic behavior.” See eg https://carnegieendowment.org/chinafinancialmarkets/82362. Hopefully India and other countries will develop strong institutions supporting their economic growth for decades, but if they are unable to do so, their economic growth and demand for seaborne coal would suffer.
> The collective goals of humanity are driving toward increased, not decreased, power consumption
I tend to agree that over time we’ll use more and more energy, despite efficiency gains. We always find new ways to use more energy. Having said that, in the short-medium term, the adoption of EVs could slow down that growth, because ICE vehicles waste so much energy. Hannah Ritchie had a good post about this: https://open.substack.com/pub/hannahritchie/p/inefficiency-ice.
Tian Wen! Always great to hear from you and we always enjoy your comments. Keep them coming!
Yes, perhaps we were to dogmatic in saying the main barrier for China and India is energy. Given the complexity of the world it's nearly impossible to say what is the main reason for anything. Great inject!
Granted EVs may slow growth of energy consumption. It's hard to say (reference point above) but we tend to fade the importance and impact of EVs given how hyped they currently are and how subsidized they are. A good combination for failing to meet expectations in the future.
Good point about subsidies. What would actual demand be if they weren’t so heavily subsidized? Somewhat related: Bloomberg had a good article about 3 US offshore wind farms that are getting canceled because they’re not economical. If green subsidies ever decrease meaningfully, many might be surprised how there is actually little demand for some technologies.
I was pretty bullish coal to start the year off, especially Warrior Met Coal (HCC), but have been feeling lately that the conviction is wearing a little thin. Good food for thought here, thanks!
Sure--for domestic stocks on the metallurgic side (where my greatest investment interest is) the resumption of buying Australian coal by China after the multi-year unofficial ban was the first bit of drag. A warmer winter is also likely to be demand destructive for thermal coal, especially in Europe. I also believed that a re-rating of these stocks was likely, but for many while price has risen, valuations have stayed relatively flat (in the case of HCC it's especially clear). I don't think the market will ever assign a premium to coal, but after the rise in price and subsequent flatness in valuation, it makes me feel like the time to wind down the trade may be near. Cheers!
Great post SB!
Thank you for highlighting these 3 properties. I agree with you that coal is here to stay and that investors should consider coal miners or royalty companies. Also you’re spot on about the fact coal companies have very strong balance sheets — in aggregate they are net cash positive!
I have two nitpicks:
> India, China and other massive population centers are ready to join the developed world and the main barrier between their current way of life and the life they aspire to live is access to energy.
I’m not sure their lack of economic development is primarily due to lack of affordable energy. After all, both China and India have access to large quantities of coal, although India’s coal is of pretty poor quality.
Michael Pettis, relying on Albert Hirschman, would argue that the “institutional development” of a country matters a lot to its economic development — “the set of formal and informal institutions (political, legal, financial, tax, social, and educational) that govern economic behavior.” See eg https://carnegieendowment.org/chinafinancialmarkets/82362. Hopefully India and other countries will develop strong institutions supporting their economic growth for decades, but if they are unable to do so, their economic growth and demand for seaborne coal would suffer.
> The collective goals of humanity are driving toward increased, not decreased, power consumption
I tend to agree that over time we’ll use more and more energy, despite efficiency gains. We always find new ways to use more energy. Having said that, in the short-medium term, the adoption of EVs could slow down that growth, because ICE vehicles waste so much energy. Hannah Ritchie had a good post about this: https://open.substack.com/pub/hannahritchie/p/inefficiency-ice.
Tian Wen! Always great to hear from you and we always enjoy your comments. Keep them coming!
Yes, perhaps we were to dogmatic in saying the main barrier for China and India is energy. Given the complexity of the world it's nearly impossible to say what is the main reason for anything. Great inject!
Granted EVs may slow growth of energy consumption. It's hard to say (reference point above) but we tend to fade the importance and impact of EVs given how hyped they currently are and how subsidized they are. A good combination for failing to meet expectations in the future.
Good point about subsidies. What would actual demand be if they weren’t so heavily subsidized? Somewhat related: Bloomberg had a good article about 3 US offshore wind farms that are getting canceled because they’re not economical. If green subsidies ever decrease meaningfully, many might be surprised how there is actually little demand for some technologies.
Coal is a great area of focus for commodity investors and I wasn’t aware there were royalty companies in this space. Thanks for sharing!
BF, thanks for reading! Also, we enjoy your content. Keep it up.
Sadly it took us a while to realize there was a coal royalty company as well. Would have been nice to have found the company in 2020. :)
Especially when the KOL ETF stopped trading in late 2020. The question is what is the next sector to show the same potential.
This is an excellent post. Appreciate the work you've done on this topic. Keep it going!
That, sir, is a huge compliment given how much we respect you and your work. Thank you.
Great explanation of everything! So clearly put even a 10 yo could see the opportunity! Any updated thoughts on last Q results? Looked great imho!
Rafael, thank you for your encouraging comment.
Yes, solid results from NRP this quarter. We found management clarifying the timing of warrants particularly helpful.
I was pretty bullish coal to start the year off, especially Warrior Met Coal (HCC), but have been feeling lately that the conviction is wearing a little thin. Good food for thought here, thanks!
This is great comment. Could you share a couple bullet points on what reduced your conviction?
Sure--for domestic stocks on the metallurgic side (where my greatest investment interest is) the resumption of buying Australian coal by China after the multi-year unofficial ban was the first bit of drag. A warmer winter is also likely to be demand destructive for thermal coal, especially in Europe. I also believed that a re-rating of these stocks was likely, but for many while price has risen, valuations have stayed relatively flat (in the case of HCC it's especially clear). I don't think the market will ever assign a premium to coal, but after the rise in price and subsequent flatness in valuation, it makes me feel like the time to wind down the trade may be near. Cheers!