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Investing in Distressed Coal Assets

A New Trade on THIS Coal Stock

Written by Brian Hicks
Posted October 16, 2014

I’m a pretty conservative investor, always looking for a big upside while trying to limit downside risk. I guess this is why I find global deep-value plays so fascinating.

These stocks are trading way down from their highs and oftentimes below book or break-up value, prompting us to ask how much worse it could really get.

On the other hand, if you can find catalysts to unlock the value, or if the company becomes a buyout target, the upside gains can be extraordinary.

This is why I’ve been tracking Walter Coal (NYSE: WLT), as it is down 90.4% so far this year.

The Case for Coal

Walter Coal, known in the industry as Walt Coal, represents an industry that is both beaten down and ignored.

Coal provides 43% of both America’s and the world's electricity. It is not going away — though the current Environmental Protection Agency would probably like it to.

Walter Coal specializes in metallurgical coal that is primarily sold to steel mills and used in the integrated steel mill process. The company sells to high-growth steel markets in Asia, South America, and Europe and also produces thermal coal, anthracite, and metallurgical coke and coalbed methane gas.

It employs approximately 3,500 employees and contractors with operations in the United States, Canada, and the United Kingdom.

The company and industry face the challenges of oversupply, as well as concerns over global manufacturing and industrial growth, which has caused coal prices to drop to $115/ton.

The big issue is demand in Asia and Europe. In particular, any uptick in Chinese industrial activity and imports of coal will help Walter’s stock prospects enormously.

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The key question is this: Are we coming off a bottom of the coal cycle, and if we are, is the upside in WLT significant?

In addition, Inside Coal reports that Walter may be in talks about a potential sale of Western Coal assets, according to Bloomberg.

This is significant since proceeds could be used to reduce debt — a key concern of analysts. The company has recently refinanced some debt, and while this has lowered risk, it remains significant.

This is why I always try to have a 15% to 20% stop-loss in place. However, I think a more likely scenario would be the entry of an investor in “distressed assets,” such as Oaktree.

Shares of Walter Coal did temporarily bounce last week after it was reported that the coal company might be a takeover target of BHP Billiton or Rio Tinto.

Walter Coal is an aggressive trading recommendation with near-term prices closely tied to upcoming earnings and earnings outlook.

Until next time,

Carl Delfeld for Wealth Daily

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