Core Natural Resources (NYSE:CNR) is a large thermal and metallurgical coal mining company that was created in January through a merger between Arch Resources and CONSOL Energy. The merger took place at an interesting time in the coal industry’s history, as demand for coal is proving stronger than many expected in the face of newer, greener technologies. Is coal demand a reason to buy CNR, or is this newly-established company still too unproven for investors to jump into?
What’s Changing About Coal Demand?
Coal demand has been falling in demand for years so what could possibly spur a demand now? After all, even China, the world’s largest user of coal, has adopted a plan to achieve carbon neutrality by 2060.
Even so, global coal demand reached a record high of 8.8 billion metric tons last year, driven primarily by high demand in Asia. With the demand for electricity rising all over the world, coal remains an important part of the global energy mix that is still seeing significant use despite its reputation as a dirtier fuel than alternatives like natural gas or renewable energy sources. Even in the US, the Trump administration has pushed for greater support for the coal industry. While this effort may not prove successful due to the ready availability of natural gas in the American market, it does underline the fact that coal usage isn’t receding as it was once expected to.
It’s unclear quite how long coal’s demand will remain elevated because the expectation originally was for a peak in 2024 but it’s largely now forecasted to persist until 2027. A handful of analysts expect coal won’t even reach its peak until the turn of the decade.
Cumulatively, these trends could be very positive for CNR. Not only can it continue to sell coal into a high-demand market, but that market will also likely remain strong for several more years to come. Additionally, CNR has the advantage of being a low-cost coal producer. The business makes significant use of longwall mining, a highly efficient coal-mining technique that results in substantial cost reductions compared to other extraction methods.
CNR Balance Sheet Is Cash Rich
CNR’s ability to produce coal at attractive prices was on display in its Q1 earnings report. For the quarter, the cash cost to produce a ton of thermal coal was $42.78, compared to revenue of $63.18 per ton. Across the various types of coal it sells, CNR expects to move between 75.5 and 81.0 million tons of coal this year.
It’s worth noting that CNR lost $1.38 per share in Q1. Most of this loss, however, can be attributed to merger-related expenses that don’t impact the business on an ongoing basis. Of the net loss of $69.3 million that CNR reported, management attributed $49.2 million to costs resulting from the merger that created the business. A further $11.7 million of the loss stemmed from the extinguishment of debt.
CNR also has a strong balance sheet, with $388.5 million in total cash and cash equivalents and total liquidity of $858.3 million. This, in conjunction with healthy cash flows, gives CNR significant ability to invest and to weather potential market challenges.
How Is CNR’s Valuation Looking?
To date, CNR hasn’t produced positive returns for its shareholders since the merger was finalized in January. The practical upshot of this for investors is the fact that the stock could be in an attractive value range. CNR shares currently trade for 15.8 times earnings, 1.0 times sales and book value and 30.1 times operating cash flow. Although the P/E ratio is still above the sector average of 11.6, CNR’s valuation as a whole appears fairly reasonable.
Analysts are also expecting strong forward returns from CNR. The consensus price target of $99.40 is more than 30 percent above the most recent price of $76.64, implying a rate of return that could handily outpace the market as a whole over the coming 12 months.
Is CNR a Buy Now?
There’s quite a lot to like about CNR at the moment, including its low-cost production and its strong balance sheet. With demand likely to rise for at least a few more years, the short-term opportunity for CNR could be significant. The stock also seems to be trading at a fairly attractive valuation that could leave it a decent amount of room for upward movement.
A final factor for investors to consider is its new repurchase program. In Q1, Core repurchased nearly 3 percent of its outstanding shares for $101.3 million. Management also plans to return approximately 75 percent of free cash flows to shareholders through a combination of buybacks and dividends going forward. This could make CNR an attractive stock to own if the business keeps buying its own shares consistently.
With all of this said, it’s still likely important to acknowledge that CNR and other coal companies could be facing major problems over very long periods of time. While metallurgical coal will likely remain in demand, thermal coal is apt to peak at some point in the next decade and then begin a long, slow drawdown process as the world’s energy mix moves to cleaner fuels. As such, a substantial part of CNR’s coal portfolio will likely diminish over the next few decades.
Even so, CNR could be a good stock to own for many years to come. With management firmly committed to returning cash to its shareholders and the market for coal likely to remain healthy through the rest of the decade, CNR shares may have stronger tailwinds than headwinds acting on them at the moment. Though shareholders will need to keep a close eye on demand trends and changes in the market, CNR could be worth owning as coal approaches its peak usage.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.