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U Anthracite: Anthracite is by far the most valuable type of coal because it contains the highest levels of carbon and the least amount of sulfur and ash; it also provides the most energy on a per unit basis. Because of its high value, anthracite is used for residential and commercial space heating.
Before you invest in companies involved in the coal business, find out which type of coal they produce. This information will help you develop a better understanding of the company’s business and profit margins. You can find this type of information in a company’s annual and quarterly reports.
It’s a coal investment
You can get access to the coal markets by either trading coal futures directly or by investing in coal companies.
The big sandy: Coal futures contract
Like other members of the fossil fuel family, coal has an underlying futures contract that trades on a commodity exchange, in this case the New York Mercantile Exchange (NYMEX). This coal contract provides commercial users (such as coal producers, electric companies, and steel manufacturers) with the opportunity to hedge against market risk and offers speculators a chance to profit from this market risk. (For more on the NYMEX and other commodity exchanges, please turn to Chapter 8.)
The coal futures contract on the NYMEX tracks the price of the Central Appalachian type of coal. Central Appalachian coal, known as CAPP, is a high quality coal with low sulfur and ash contents. The CAPP futures con-tract, sometimes affectionately called “the big sandy” by traders because it is produced in the area between West Virginia and Kentucky where the Ohio River flows, is the premium benchmark for coal prices in the United States.
It trades under the ticker symbol QL and is tradable during all the calendar months of the current year, in addition to all calendar months in the subse-quent three years. Additional information on this futures contract is available on the NYMEX Web site at www.nymex.com/coa_fut_descri.aspx.
While the coal futures contract does offer you exposure to coal, I should warn you that the market for this contract is fairly illiquid, meaning that the trading volume is low. Most of the traders involved in this market represent large commercial interests that transact with each other. While there are a few speculators trading the coal futures markets, they don’t represent a sig-nificant portion of the market. This means that you may not be able to get involved directly in this market without large capital reserves to compete with the commercial interests.
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I encourage you to read Chapter 9 for more on futures contract specifications.
One of the best ways to invest in coal is by investing in a company that mines it. The following three companies are the best in my opinion:
U Peabody Energy (NYSE: BTU): Peabody Energy is the largest coal company with approximately 10 Billion Short Tons of coal reserves. The coal it produces is responsible for generating approximately 10 percent of the electricity in the United States. With 2005 revenues approaching $5 Billion, it is the largest coal company out there today. It is the ExxonMobil of coal companies. I like Peabody Energy because
of its size and because it has mining operations in the United States but also in Australia and Venezuela, two important coal markets.
U Consol Energy (NYSE: CNX): With headquarters in Pittsburgh, Consol Energy has significant operations in the coal mines of Pennsylvania and neighboring coal-rich states of West Virginia and Kentucky. As of 2005, it controlled 4.5 Billion Short Tons of coal reserves, with operations in over 17 mines across the United States. CNX is well positioned to take advantage of the booming domestic coal market.
U Arch Coal (NYSE: ACI): Arch coal is smaller in size than its main com-petitors Peabody and Consol, but I like it because the coal it produces is of very high quality. It operates over 20 mines on the continental United States and controls over 3 Billion Short Tons of reserves. It has operations in the largest coal producing regions in the United States, including in the Appalachian, the Powder River Basin (between the Montana/Wyoming border), and the Western Bituminous region (between the Colorado/Utah border).
If you want to invest in coal companies with a more international exposure to markets in Russia, China, and other coal-rich countries, I recommend you consult the World Coal Institute. Their Web site is www.worldcoal.org.
Investing in Nuclear Power: Going Nuclear without Going Ballistic
When most people think of nuclear power, they tend to think of nuclear weapons and mushroom clouds. However, nuclear power also has an impor-tant civilian role. Civilian and commercial nuclear power is an integral part of the global energy supply chain and is a valuable energy source for residential, commercial, and industrial consumers worldwide. In fact, nuclear power gen-erates over 20 percent of the electricity in the United States. In countries like France, nuclear power generates over 75 percent of electricity!
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The primary use of civilian nuclear power is in generating electricity. Electricity is generated by heating water to very high temperatures to create steam that powers the turbines in a steam turbine. In a nuclear power plant, the
water is heated through a process known as nuclear fission, where atoms are split apart to release large amounts of energy. (This is the opposite of nuclear fusion where atoms are fused together.)
Nuclear power currently accounts for about 5 percent of total global energy consumption (see Figure 13-2), and it is expected to remain at these stable levels until 2030. But if the price of fossil fuels (oil, natural gas, and coal) dra-matically enough to start affecting demand (creating what is called demand destruction), nuclear may play an important role in picking up the slack.
One way you can profit from increased interest in nuclear power is by invest-ing in uranium, the most widely used fuel in nuclear power plants. You may be surprised to find out that there has been a bull market in uranium from 2000 to 2006, and this shows no sign of slowing. However, you’re not likely to hear about this opportunity from your local financial media because uranium is a pretty obscure investment area. But sometimes as an investor, you need to be able to think creatively and look at opportunities that other investors haven’t considered. Investing in uranium to benefit from the increased demand in nuclear power is not a well-known or well-advertised investment play, but it is lucrative nevertheless. Take a look in Figure 13-5 at the spot price of ura-nium from 1994 to 2005.
Figure 13-5: $15.00 Spot price
of uranium $10.00 from 1994
to 2005. $5.00
Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
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Because uranium isn’t a widely tradable commodity, the best way to profit from this trend is to invest in companies that specialize in the mining, pro-cessing, and distribution of uranium for civilian nuclear purposes. Here are a few companies I like in this sector:
U Cameco Corporation (NYSE: CCJ): Cameco is the marquee name in the uranium mining space. The company operates four uranium mines in the United States and Canada. The company mines uranium and is also involved in refining and converting the uranium into fuel that’s sold to nuclear power plants to generate electricity.
U UEX Corporation (Toronto: UEX): UEX is a Canadian-based mining com-pany that specializes in the exploration and mining of uranium in the Athabasca basin. The Athabasca basin in Canada is an important region in global uranium mining that accounts for about 30 percent of total world production. The company is currently still in exploration phases, but it could become a real money-maker if it comes across large deposits of uranium. The company trades on the Toronto Stock Exchange.
U Strathmore Corporation (Toronto: STM): While UEX is involved in the exploration of uranium ore, Strathmore — another Canadian company — specializes in the mining of uranium. The company, which trades on the Toronto Stock Exchange, operates in the Athabasca region in Canada as well as in the United States.
For more information on nuclear power, the Energy Information Administration (EIA) has an excellent Web site with all sorts of practical information on this industry at www.eia.doe.gov/fuelnuclear.html.
The Ux Consulting Company is a great resource for everything regarding uranium and nuclear power. Their Web site is located at www.uxc.com.
You’ve Been Zapped! Trading Electricity
Benjamin Franklin may not have imagined what his kite experiment would mean for the world, but his experimentation paved the way for develop-ments in electricity, which is now a necessity of modern life. It is also a trad-able commodity. In this section, I show you how to make money investing in electricity.
Have you ever wondered how that electricity that allows you to watch TV, use your air conditioner, or power your computer comes from? Before I show
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you how to profit from this electrifying resource, I want to take a quick moment to show you how it is generated.
Getting electricity to residential, commercial, and industrial consumers is a lengthy process. The electricity is first created in a generator at a power plant and is then sent through transmission lines at very high voltages to a
substation near the consumers. The substation is equipped with a generator that transforms the high voltage electricity into low voltage form, which is then sent to consumers via distribution lines. So how can you profit from it? It’s quite simple.
Most of the electricity in the United States is generated through steam turbines. The water used to generate steam is heated to very high temperatures using tra-ditional energy sources such as coal, natural gas, and nuclear power, as well as other renewable sources (such as wind and solar). Look at Figure 13-6 for a breakdown of how electricity was generated in the United States in 2004.
Figure 13-6: U.S. pro-duction of electricity by energy source.
Natural Gas 17.9%
Other Renewables 2.3%
Electricity is measured in watts where one kilowatt is equal to 1000 watts and a megawatt equals 1 million watts. In the power industry, watts are expressed in terms of hours of operation where 1 kilowatt hour (1 kWh) is 1000 watts working for a period of 1 hour. Your electricity bill is measured in kWh and 1 kWh is the equivalent of 3412 Btu. To put it in perspective, the United States consumed a grand total of 3669 Billion kWh of electricity in 2003.
As you can see from Figure 13-6, investing in coal, as well as nuclear power, is one way to invest in electricity. But there are also several ways you can
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