Coal producers are losing money.
Coal is probably the most hated fuel in the U.S. today... It's dirty and old-fashioned. Combine this with the cheap abundance of natural gas, and U.S. coal demand has collapsed over the past few years.
You see, natural gas is a direct competitor with coal as a fuel for electric power. And natural gas is cheap at less than $5 per thousand cubic feet today. This has spurred a massive switch from coal to natural gas. As demand for coal dropped, so did its price.
It now costs more to produce coal than it's worth in the market. And this creates an opportunity for smart investors...
According to Bloomberg, the 28 primary coal producers around the world
that report coal production are selling their coal for an average of around $76 per ton. The average operating profit of these miners is -$2.82 per ton.
So on average, these companies are operating at a loss. Coal producers need prices to hit around $80 per ton for them to make money.
If prices don't head higher, most coal producers will have to close some of their mines or face bankruptcy. Take coal producer Arch Coal Inc.
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), for example.
Arch supplies the coal used to produce more than 5% of the electricity in the U.S. It has a market cap of $700 million. The company has posted an operating loss for the past six quarters. In the most recent quarter, its EBITDA (earnings before interest, taxes, depreciation, and amortization) was $12 million. This isn't enough to pay all the company's expenses like interest and taxes.
Think about that for a second. At current coal prices, Arch can't generate enough money to pay its bills. We've seen coal companies in a similar situation – like Patriot Coal and James River Coal – go bankrupt in recent years.
So Arch – and producers like it – will have to cut expenses to earn enough money to pay its bills. It will do so by closing unprofitable mines.
This is exactly what contrarian investors like to see.
You see, natural resources like coal are tremendously cyclical. That means their prices move in waves. They go through big booms and busts. The best time to invest in natural resources is when everyone hates them and they're at "no-brainer" prices.
After the market leaves a natural resource for dead, things often get better. Production from Arch – and producers like it – will soon drop. But eventually demand will pick up... causing prices to boom.
And as I've told you before, coal is still a critical piece of the world's energy supply
. The International Energy Agency (IEA) forecasts coal will still provide more of the world's energy supply in 2035 than any other source. As coal demand holds steady and even increases, prices will boom.
That's why I like owning the beaten-down coal sector today.
But this isn't just a trend in coal. Commodities like uranium, platinum, palladium, and water are all in the same situation today. Each is as vital to our way of life as coal... And master resource investor Rick Rule says they're all too cheap today.
Rick is the founder of Sprott Global Resource Investments. He has spent decades in the resource markets, making himself and his clients many millions of dollars in the process. He has also financed several of the most important resource companies in the world. He's a brilliant investor, and a walking encyclopedia of business knowledge.
Rick believes we're about to see a massive rally in several commodities' prices. And investors who get in early could make a fortune.
If you want to learn the commodities set to boom and the best ways to profit, I recommend attending the Sprott Vancouver Natural Resource Symposium
from July 22 to July 25.
Rick and I, along with a select group of resource experts, will share our top commodity investment ideas at the symposium. Some of Rick's favorite junior resource companies will also be in attendance. Many of these stocks will benefit from the dramatic increase in commodity prices.
I personally know the value of this kind of conference.
At a natural resource investing conference in late 2008, I attended one of the greatest resource talks of my life. It was on developer Northern Dynasty. The company had a giant copper and gold project in Alaska expected to be worth billions... But because commodities were in a bear market, the stock was cheap. It was a "no-brainer" investment and my S&A Resource Report
subscribers made 322% on the trade.
In the fall of 2009, I attended the New Orleans Investment Conference. While I was there, I found three precious-metals miners – ATAC Resources Ltd.
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), Rainy River Resources Ltd.
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), and AuEx Ventures – that had excellent projects and were cheap. Phase 1
subscribers who took my advice to buy made 598%, 210%, and 198% on those investments, respectively, when precious metals rebounded.
Timing is everything in natural-resource investing. And commodities like coal, platinum, and uranium are at "no-brainer" prices.
That's why I'm attending this conference. I'll be looking for the next great natural resource investments. I suggest you do the same.