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Coal-Burning Convertibles

Posted: Sep 18, 2009 11:51 AM by Aryeh Katz

Tickers in this Article: PCX, ANR, BTU, MEE, ICO

The coal sector has been on fire recently, energizing investors with solid gains over the last couple of months. But is the run over? And if not, which issues are safest? For those who want to participate in coal's potential upside, but don't want the risk of owning coal company common shares, there's another option: convertible coal securities.

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Most of these issues are debentures that trade over the counter and offer investors most of the upside on the common stock plus interest from the bond. Remember: because convertibles can be swapped directly for a specific number of common shares, they will trade in synch with them, albeit in a muted fashion.

Ersatz Common Stock that Pays Interest
Another advantage of the convertibles is that in the event of a sell-off, the yield serves to cushion the convertible from falling precipitously along with the underlying common stock. And the interest literally pays you to wait for a turnaround. Below, we highlight several such issues: coal convertibles with reasonable yields and exposure to further price gains in the sector.

First up is Peabody Energy (NYSE:BTU) whose convertibles recently traded around $80.50, yielding 5.90% annually and 6.15% to maturity (12/15/41). The securities are rated B+ by Standard & Poors.

Peabody Energy has a market cap of $10.6 billion and operates in the U.S., Australia and South America. Last quarter they entered into agreements with a Chinese mining company to jointly develop and operate coal mines in Northwestern China.

International Coal Group's (NYSE:ICO) 9% convertibles, maturing 08/01/12, trade at approximately $91.48 and yield 9.80% annually and 12.50% to maturity. S&P rates it CCC.

Alpha Natural Resources (NYSE:ANR) offers a 2.375% convertible debenture maturing 04/15/15 that is rated BB by Standard & Poors and yields 4.13% to maturity and 2.60% annually. The company recently merged with Foundation Coal Holdings, Inc.

Massey Energy Co.'s (NYSE:MEE) 3.25% convertibles, maturing 08/01/15, yield 4.30% annually and 8.60% to maturity. They're rated BB- by S&P. Massey has plans to rebuild its Bandmill plant in Logan County West Virginia after the facility burned down under unknown circumstances. Company officials report that one million tonnes of coal can still be shipped from the site. Massey's market cap is $2.7 billion.

Patriot Coal Corp (NYSE:PCX) has a 3.25% convertible coming due 05/31/13 that pays 12.54% to maturity and 4.46% yearly.

The Wrap
For income investors who still want to participate in coal's potential upside, a number of good opportunities exist in the coal convertible market. The above named issues are a good place to start stoking your portfolio. (For more, see The Industry Handbook: The Utilities Industry.)

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By Aryeh Katz

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