svet110/iStock via Getty Images

svet110/iStock via Getty Images

The following segment was excerpted from this fund letter.

Arch Resources is a low-cost high-quality metallurgical coal producer for the global steel industry. Coal might be among the most hated products in the world, due to its reputation for being a dirty climate killer. However, steelmaking requires coal, solar panels and wind turbines require steel. Our modern society relies on steel and modernizing countries such as China, India, Indonesia therefore rely on coal.

Data Source: BP Statistical Review of World Energy

Coal is an essential commodity, yet the industry was ‘left for dead’ by Wall Street, ESG-driven investment flows, politics, the public, and everyone else. This will probably continue to pose a wide moat for potential new entrants. Years of constrained supply and underinvestment now meet with global supply-chain issues, increased demand post-lockdowns, and inflationary pressures. In addition, the sanctions against Russia are crippling one of the big six producers, China is shifting away from Australiaand Germany’s governing Green Party suddenly considers more coal. Demand up, supply down → price: moon.

Value investing veteran Bob Robotti argues in “revenge of the old economy” that US producers of physical goods are benefitting from sustained inflation. Inflation driven energy costs in China and Europe increase much faster than in the US. Hence, US energy-intensive industries such as steelmaking are at a relative advantage. A healthy US steel industry will bode well for US met coal producers such as Arch Resources.

ARCH is not only an inflation beneficiary, but also a growth company. Its met coal production is guided to increase more than 20% this year. Leer South, a large brand-new modern coalmine, will reach full capacity only later this year. ARCH wisely used its cash flow and the financial market neglect to reduce basic share count from 25 million in December 2016 to around 15 million as of December 2021.

ARCH trades at around $2.5bn enterprise value and is expected to deliver close to $1.5bn EBITDA in 2022 alone (assuming $200 per ton coal, whereas current prices are above $300). ARCH’s current tax rate is essentially zero.15 Management guided CAPEX at $150m for this year and announced to pay out 50% of free cash as dividends, the remaining 50% might be used for share buybacks16. Thus, at less than 2-times EBITDA, an investment in ARCH today might result in a 25% cash payout and another 25% reduction in the share count this year (assuming such a large buyback would not increase the share price). Handsome.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Additional disclosure: This report is based on the views and opinions of Dr. Johannes Arnold, which are subject to change at any time without notice. The information contained in this report is intended for informational purposes only and is qualified in its entirety by the more detailed information contained in the offering memorandum of Nordstern Capital, LP (the “Offering Memorandum”). This report is not an offer to sell or a solicitation of an offer to purchase any investment product, which can only be made by the Offering Memorandum. An investment in the Partnership involves significant investment considerations and risks which are described in the Offering Memorandum. The material presented herein, which is provided for the exclusive use of the person who has been authorized to receive it, is for your private information and shall not be used by the recipient except in connection with its investment in the Partnership. Nordstern Capital Investors, LLC is soliciting no action based upon it. It is based upon information which we consider reliable, but neither Nordstern Capital Investors, LLC nor any of its managers or employees represents that it is accurate or complete, and it should not be relied upon as such. Performance information presented herein is historic and should not be taken as any indication of future performance. Among other things, growth of assets under management of Nordstern Capital, LP may adversely affect its investment performance. Also, future investments will be made under different economic conditions and may be made in different securities using different investment strategies. The comparison of the Partnership's performance to a single market index is imperfect because the Partnership's portfolio may include the use of margin trading and other leverage and is not as diversified as the Standard and Poor's 500 Index or other indices. Due to the differences between the Partnership's investment strategy and the methodology used to compute most indices, we caution potential investors that no indices are directly comparable to the results of the Partnership. Statements made herein that are not attributed to a third-party source reflect the views, beliefs and opinions of Nordstern Capital Investors, LLC and should not be taken as factual statements. © Nordstern Capital Investors, LLC