An opportunity in coal

Posted on May 4, 2006 , filed under Stocks | Print This Post

I’ve found an interesting company that I believe is an undervalued company with good short-term growth prospects. Fording Canadian Coal Trust (FDG) operates as an open-ended mutual fund in Canada. The trust owns a 60% interest in Elk Valley Coal Partnership, which produces and sells seaborne metallurgical coal. The partnership’s primary product is hard coking coal, which is a metallurgical coal that is used primarily for making coke in integrated steel mills. Elk Valley Coal owns interests in six open-pit mines that consist of Fording River, Coal Mountain, Line Creek, Elkview, and Greenhills mines that are located in the Elk Valley region of southeast British Columbia; and Cardinal River mine located in west central Alberta. Fording Canadian Coal Trust also owns 100% interest in NYCO, which engages in wollastonite mining operations in New York State and Mexico, and Tripoli mining operations in Missouri.

Why am I so interested in this company?

This company which has a $5.3 billion market cap pays a juicy 13% dividend.

The pretax earnings yield is 12% and the pretax return on capital is greater than 100%.

These are the two basic criteria for investing in undervalued companies found in The Little Book That Beats The Market. I highly recommend purchasing the book.

I am bullish on steel demand even in light of a softening housing market. Emerging markets like China and India will keep steel prices high in the short-term. The hard coking coal Fording Canadian Coal produces is used in steel production.

I will likely get in at the $34-$35 range.

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3 Comments »

Comment by Blake

2006-05-04 10:20:40

Are you also bullish towards coal in general given it is an alternative to oil energy? I’m curious as to what brought you across this particular company.

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Comment by Andy

2006-05-04 18:41:52

Hi Blake,

I was searching for companies with a high pretax earnings yield and pretax return on capital. FDG was one of my results and I noticed the unusually high dividend suggesting either the dividend should be cut or that the stock appeared to be undervalued. I am bullish toward steel. I haven’t performed enough research to suggest coal investments as an alternative to oil.

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Comment by scott

2006-05-05 10:18:34

Strike looming at Elk Coal Mine Company. 60% owned by FDG.

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