Afternoon Guys,
I fully agree with Madamswer and likewise am investing based on the same logic.
This from Harris Kupperman ... other's get that there are going to be severe supply constraints (and higher commodity prices) down the track due to this ESG movement.
I have listened to a number of US coal company CC's over the last week (e.g. CEIX, ARLP, ARCH) ... they get it. The business model is now about repaying debt, buying back shares and rewarding shareholders. Some companies even stated that their goal was to maximize shareholder returns until coal was inevitably removed from the energy mix.
Requirements for me to invest:
1. In production and fully permitted for LOM
2. FCF positive and low on the cost curve
3. Ability (and willingness) to pay down debt when it falls due and "fortify" the balance sheet
4. Long life mine (R&R) with all development capex completed
5. Ideally low opex and some ESG 'edge' over peers (e.g. clean coal)
6. A Management team that is shareholder friendly and embraces the "harvesting" business model
7. Ideally a supportive cornerstone shareholder (or limited index or passive fund shareholders) to fend off activists
8. Ideally export sales into EM or Asia, ex-China (growth market for thermal and met coal without CCP BS)
IMO, this is not necessarily about large, quick capital gains from share price moves, but instead investing in the "new tobacco" companies that will run lean, generate large and growing FCF and then shovel that out to shareholders at an increasing rate, potentially putting their busineses into run-off mode (although 15-20 years of run-off is well beyond my investment time line).
Based on current entry prices, these depleting businesses will throw off multiples of the entry price over their remaining lives provided aligned management strategy, especially if the sector as a whole depletes supply and demand follows the IEA et al forward path leading prices structurally higher as posited by Wood McKenzie.
(I think their forecast is too low).
Cheers
John
(20min delay)