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Coal: A "Pile" of Profits
07/08/2005 12:00 am EST
Ken Kam has introduced an exciting new feature toMarketScope, in which members of the m100 (the top stock pickers from over 60,000 monitored portfolios) are asked to provide their latest ideas. Here, m100 member Bruce Pile, asks, "Is coal the fossil fuel of the future?"
"Alternative energy is a technology horse race, and an investor is just betting on the ponies when he plunks down his money on a possible technological breakthrough. So is there a sensible way to invest? We would point to coal as an interim substitute for our foreign oil refined fuels until we figure out the next non-fossil age. We already use coal for most of our electricity. We’ve known how to make coal into high grade diesel and gasoline since 1913 and we have about a 200-year supply of it in America, safe from geopolitical disruption.
"Critics of coal say, 'but it’s expensive.' True, it wouldn’t be the good old days of $1 gas. But government studies done in the aftermath of the 70’s Arab oil shocks concluded that the coal process was a cheaper source of gas at oil over $35. And if converted chemically, it’s an ultra-clean fuel with just the CO2 greenhouse problem we currently have. Considering the alternatives, however, this may become less and less of a horror. Some companies could benefit greatly. Arch Coal (ACI NYSE), is an interesting play. They are the second largest coal producer in the US specializing in 'compliance' coal low in sulfur for electric power plants.
"An even better prospect is a smaller company called Headwaters (HW NYSE), based in South Jordan, Utah. But unlike most small companies in alternative energy, they are not drowning in red ink; they are engulfed in cash flow, profits, and a sharply climbing revenue stream. In 2002, they derived 90% of their revenue from licensing coal-to-ultra-clean-gasoline technologies (they have working relationships with India, China, and the Philippines).
"They are the industry leader, but to diversify from the synfuel, they have built a post-combustion coal business where they use the fly ash from coal burned at electric power plants to make a higher quality, environmentally friendly concrete and other construction materials (about half their revenues now and are benefiting from the housing market). They also do extensive pre-combustion treatment of coal to clean it of its pollutants and are becoming a well-diversified 'green chemistry' energy & construction company. This is the type of company that poses practical solutions to the issues that the world will face in the near future."
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