Carbon lump of Christmas stocking fame turns to gold

December 19, 2004|By JAY HANCOCK

MARYLAND is the home of "leading-edge companies," says state economic development czar Aris Melissaratos, and a Dec. 9th stock issue in Anne Arundel County proves him right.

Foundation Coal Holdings Inc., based in Linthicum Heights, raised $519 million in an initial public offering that was so popular the company bumped the selling price from $18 or so to $22 a share. Foundation operates 13 coal mines from West Virginia to Wyoming.

What, you were expecting biotech? Telecom? Get your head out of the 20th century.

One of the hottest investments of the moment is the fuel that propelled Abraham Lincoln's inauguration train - a situation that speaks libraries about the energy markets and the international economy.

Dirty, smoky coal, the fuel of first resort in the 19th century, has become the fuel of last resort in the 21st.

Nuclear energy is captive to regulation and environmentalists. Fuel cells and solar power aren't yet economical. Petroleum has been bid to ionospheric levels thanks to Chinese demand, Middle East uncertainty and U.S. hoarding in the Strategic Petroleum Reserve.

So it's back to the coal fields, where the pit barons show signs of attaining their greatest prosperity since the 1970s.

"We think this is a secular shift that's going to remain in terms of prices" for coal, says Fadi Shadid, an energy analyst with Friedman, Billings, Ramsey Group in Arlington, Va. "In a way, you can say it's different this time. Things are running at capacity."

Prices for some kinds of coal have risen by more than half this year, and $1,000 sunk into the Bloomberg index of U.S. coal stocks in early 2003 would be worth $2,700 today. (Making a lump in your Christmas stocking a good thing.)

The boom is big enough that mines worry about getting enough people to attack the underground seams.

"This is going to be a tremendous problem," says Janet Gellici, executive director of the American Coal Council. "There's a dwindling supply of miners and mining engineers. The industry has been probably unattractive to a lot of folks."

Wilbur Ross, the financier who made a fortune assembling International Steel Group from the remnants of Bethlehem Steel and other bankrupt steel companies, has moved even further down the economic food chain and is now a coal king. Last August a Ross-led group agreed to buy coal miner Horizon Natural Resources out of bankruptcy.

As a further gauge of coal-business buoyancy, consider the quick $570 million made by New York's Blackstone Group and other investors who bought Foundation Coal in July from a German company for $975 million.

Putting down $196 million and borrowing the rest, they paid themselves a cash dividend of about $430 million from the proceeds of the stock offering and still hold shares worth about $400 million, according to documents filed with the Securities and Exchange Commission.

285% return

That's a 285 percent return on their $200 million in less than four months. A Foundation Coal spokeswoman did not return my phone call. The company has been avoiding public comment in the period after the stock sale.

Part of the coal climb, it should be noted, is caused by demand for coking coal from steelmakers, whose prospects have been revived by international growth.

Prices for Western U.S. coal, used mainly to fire electricity plants and not for metallurgy, haven't soared the way prices for Appalachian and Illinois coal have, Shadid says. Eastern coal can often be used for both purposes and so is more desirable.

But coal use by electric utilities is part of the equation, and energy experts expect it to grow, especially if prices of natural gas and oil - utilities' alternatives - stay high.

The Energy Department projects U.S. coal use to increase by half in the next 20 years.

"Power generation companies, if they've got a coal plant they're probably going to run it, because coal is cheaper," says James L. Williams, an energy consultant and proprietor of WTRG Economics.

Easing pollution curbs

He predicts the Bush administration will look favorably on easing environmental rules for coal-fired plants, "and frankly, I think they should. We've got coal, and we've got lots of it."

Could be a recipe for more coal bullishness, but I suspect the easy money has already been made. I'm looking at the next leading-edge investment: whale-oil futures.

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