Tuesday, January 15, 2013

Coal Producer Feels the Chill

Recently my firm Crystal Equity Research began a new weblog to which we post a listing of the “most searched” small-cap stocks.  We review the search activity on five different on-line financial platforms and compose a list of those companies under $2 billion in market cap that have a stock price of at least $1.00.  James River Coal (JRCC:  Nasdaq) has shown up several days in a row and I thought it worthwhile to take a closer look.  Of course, this is why we think the “most searched” list is a good tool.

James River operates a string of six coal mines in the Central Appalachian region in the states of Kentucky and West Virginia.  It also runs a metallurgical coal mine in Indiana.  The company produced 10.3 million tons of coal in the year 2011.

Shares of James River Coal (JRC) reached an all-time low of $1.68 in July 2012.  The stock has recovered a bit since, but at the current price of $3.15 is still nowhere near its historic high price near $60.00 per share set in mid-2008.

As one of the principal culprits in global warming, coal is out of favor.  Extreme weather conditions have brought the reality of environmental degradation and climate change literally to our doorsteps.  Instead of protesting tough regulations for toxic emissions, utilities with coal-fired power plants in their network are touting their efforts to shutter the older smoke-belching plants for new, efficient co-generation plants that require less coal.

JRC has had a spotty profit record anyway.  Despite a strong record of increasing sales, it has reported a net profit in only three out of the last ten years.  The company does manage to generate cash from operations, but over the last five years that cash flow has fallen short of capital investments.  The inability to maintain the company’s plant and asset base with internally generated cash is one of the reasons JRC has taken on new debt. 

Long-term debt has tripled over the last five years and now it is carrying more debt than most in its sector.  This might be tolerable if the company’s profit situation was more reliable.  Profitability was improved until recently.  The gross profit margin was 17% in the year 2011, which compared quite favorably to a profit margin of 9.1% four years earlier.  However, coal prices fell off in recent quarters, sending the profit margin back to the 7.5% level in the most recently reported twelve months. 

Management is a bit concerned about the debt also and took advantage of favorable conditions to retire $61.4 million in debt in the fall of 2012.  We estimate there is now approximately $148 million in unrestricted cash on the balance sheet, which offers a bit of comfort against the $546.1 million in debt we estimate is still outstanding.

A chill wind is blowing across James River Coal and the company’s stock is has suffered the consequences.  I do not expect coal demand to disappear entirely.  However, the utility industry appears to have embraced the regulatory call for environmental responsibility.  That means coal orders will never be what they once were for coal producers like James River.  So the contrarians who want to pick up a stock at a bargain should decide if JRCC shares are in recovering mode or if the recent rise off the historic lows is just a temporary bounce.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


1 comment:


James river corp is a very risky play the company has been losing hugh amounts of money. The fact that the stock has declined from 60to 3 tells a lot about their financial situation. Coal mining is a very commodity based business the demand and supply for coal can increase or decrease in a dramatic way in a short time. Im sure most companies in this business hedge their coal using futures. Theirs still many stocks trading below five dollars that are of far better quality.