2 Plays on Ole King Coal

12/29/2011 9:00 am EST

Focus: STOCKS

Richard Young

Editor, Young's Intelligence Report

As the world's economies start to come on line again, there will be an upsurge in coal demand both domestically and globally, writes Richard Young of Intelligence Report.

The long-term prospects for the US coal industry look increasingly attractive.

Coal is, of course, an essential commodity in the US, where it accounts for half of all electricity generation, but coal is also an essential commodity in Asia. According to the 2011 BP Statistical Review of World Energy, the Asia-Pacific region consumed more than two-thirds of the world's coal last year.

Much of Asia's coal demand comes from China. China consumes almost half of the world's annual coal output—more than the Americas, Europe, the Middle East, and Africa combined. Since 2002, Chinese coal demand has more than doubled while coal demand in industrialized economies has flatlined.

On the surface, China's large and rising share of the coal market does not appear to create an opportunity for US coal companies. According to the BP statistical review, China is coal self-sufficient. In 2010, the country produced 1.8 billion tonnes of coal and consumed about 1.7 billion tonnes (both on an oil equivalent basis).

But in reality, China must import coal to meet domestic demand, because much of its own reserves are lower-quality coal. What's more, China's 48% share of global production is not commensurate with the country's 13% share of global reserves.

At current production rates, China will deplete its remaining reserves in 35 years—83 years before the world runs out of coal. With limited domestic supplies of higher-quality coal and rising demand, China is likely to become increasingly dependent on imported coal.

The US should be a big winner here. With 28% of the world's known reserves, or 241 years worth of domestic demand, the US is the Saudi Arabia of coal.

My favored coal plays for you are two high-yielding coal master limited partnerships, Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP). I am adding both stocks to my Common Stock Monster Master List. I have followed and advised both ARLP and NRP in the past.

Alliance Resource Partners is the fourth-largest coal producer in the eastern United States and the tenth-largest in the nation. As of year-end 2010, the company owned almost 700 million tons of coal or 24 years of reserves at current production rates.

Alliance was the coal industry's first publicly traded master limited partnership. Since the IPO, the stock has delivered investors a compounded annual return of 28%. Alliance shares yield 5.2%.

Whereas Alliance Resource Partners owns and mines coal, Natural Resource Partners is in the coal royalty business. Coal miners pay Natural Resource Partners a fee to mine coal from the company's properties.

NRP owns, manages, and leases 2.3 billion tons of proven and probable coal reserves in three major coal production regions of the US. The coal royalty business is a more conservative way to gain exposure to coal than investing in coal miners.

Related Reading:

6 Dividend Payers Set to Roar
What to Buy (and Sell) in 2012
The Biggest Threat to Long-Term Bulls

Related Articles on STOCKS