Dear Daily Crux reader,
When it comes to small stocks with huge potential upside, Frank Curzio is one of the best analysts we know. As editor of Penny Stock Specialist, Frank focuses almost exclusively on small-cap stocks trading under $10. In the past few years he's racked up one of the most impressive track records in the business.
Frank is willing to explore smaller stocks in almost any sector, and it's led him to big gains in areas as diverse as precious metals, technology, agriculture, and retail.
Frank recently became bullish on one of the most hated commodities in the world. Readers have already been rewarded with 100% gains, and Frank's earned himself a new nickname around the office…
To learn more – including how you can profit from this burgeoning trend – read on…
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com –––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview
Forget gold, this hated commodity
is a must-own today The Daily Crux: Frank, you've recently become known as the "Coal King" around our office. You've been super-bullish on coal – Chinese coal especially – for several months now, and it looks like the market is finally waking up to the story. Can you talk about why you've been so bullish?
Frank Curzio: Sure. Let me start with a few statistics.
Coal provides more than 70% of China's energy needs. It's also used to generate roughly 80% percent of the country's electricity. According to the Energy Information Administration, it will be at least 20 years before coal's share of electricity generation in China falls below even 75%. So when you consider those stats, you can see coal is going to be around, not for years, but for decades. There's enormous demand for the stuff, and it's only going to increase for the foreseeable future.
So despite coal being a dirty fuel, and it being attacked by environmentalists, it's going absolutely nowhere. There's a dire need for it and it's one of the world's cheapest fuels. It's abundant, and the demand for the stuff is absolutely enormous.
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China is already the largest consumer of coal in the world. I expect demand to remain strong in the U.S. as well, but this isn't a U.S. story. It's primarily a China story.
I recently spent two weeks in China doing research, and it's unbelievable the construction that's taking place. When most people visit China they go to areas like Shanghai and Beijing, but my team and I were able to visit places like Xi'an and Shenzhen in Southern and inland China, and those places are just beginning their growth trends.
You're starting to see a massive push inland, because wages are being raised in the bigger cities in the east. It's similar to what you've seen in the U.S. and Europe, where rising wages have sent companies overseas to China and other countries where wage costs are less expensive. Only in this case, instead of sending jobs overseas, they're simply moving them inland to get cheaper labor.
So instead of jobs leaving, they're staying in China, which is great for the economy. That's why you continue to see enormous growth taking place, which means more demand for electricity, and more demand for coal.
You're beginning to see many of the large manufacturing companies all over the world starting to open up new plants inland to take advantage of the demand there. That's really going to fuel coal as well.
So the bullish case for coal is huge.
Crux: You've recommended Chinese coal companies specifically as the best way to invest in this trend. Why is that?
Curzio: Well, what piqued my interest in Chinese coal in particular was when I learned about the province of Shanxi. It's probably an unfamiliar name to most people. When people talk about China, they usually talk about Hong Kong, Beijing, Shanghai, and Macau.
Shanxi is home to 260 billion metric tons of coal. To put that into perspective, that's about one-third of China's total coal deposits. That's enough to supply the entire world for about 30 years. Because of its central location, coal produced in this province is easily sent by rail to all the major cities. Industry insiders actually call it the "king of coal."
But Shanxi is also known for something else. It accounts for the largest number of deaths in the coal industry. The average number of deaths occurring in China's coal industry is about 4,500 a year over the past decade. That compares to just 18 deaths from coal mining incidents in the U.S. last year. You heard that correctly… 4,500 a year in China, 18 in the U.S. That's how bad it is.
These unregulated mines are owned by millionaires, and they account for about 80% of the country's 16,000 mines. These owners pay off safety inspectors, who basically give the mines a clean bill of health. That explains the terrible safety record in Shanxi.
But that's changing now. The Chinese government put its foot down. They're taking steps to "consolidate" these thousands of mines into larger companies. With fewer companies operating mines, it's easier for the government to regulate the industry.
So it's chosen several companies to buy up many of these small mines for about 20 to 30 cents on the dollar. Not surprisingly, these companies are called "consolidators."
I recommended one of these consolidators in my Penny Stock Specialist newsletter a few months back. It's called Puda Coal (PUDA). I originally recommended it around $8, and it's jumped up over $16 now.
Puda is a coal washing company. They buy the coal, wash it, and sell it to the companies that use coal to lower emissions.
It's a pretty good business, and Puda is making a lot of money from it. But now it's been chosen as a consolidator. So it's actually going to be a coal mining company on top of the coal washing business. Why is that important?
The coal washing business has margins of about 20%. But in coal mining, the margins are around 50% to 60%. So it's buying mines for 30 cents on the dollar, and it's margin's are about to triple.
Crux: Is Puda still a buy today?
Curzio: Well, when I recommended the stock at $8, none of this news was really factored into the stock. Now at $16, I think there's still some upside, but a lot of that short-term benefit is factored in.
Over the longer-term, the sky's the limit. The stock should continue to benefit from increased Chinese demand. But I'd definitely wait for a pullback before thinking about buying this one.
Crux: Are there any other stocks you like in this area?
Curzio: I think there are still plenty of opportunities. There's a lot of other little companies – consolidators – like Puda that are worth a look.
One of them is L&L Energy (LLEN). That's a small-cap that's around $11. It's moved higher but still trading well below its recent high of $14. You still have plenty of room there.
Another small company I like today is called SinoCoking. SCOK is the symbol. They're a consolidator as well. It's traded as high as $53 this year, but it's trading under $10 right now. Another one worth a look is Yanzhou Coal Mining (YZC). That's the conservative play in the space. It has over $1 billion in cash and a market-cap over $13 billion.
I think these consolidators are going to do very well. They're a great way to play coal and China.
Crux: Any parting thoughts?
Curzio: If you're investing in commodities, I think you've got to be invested in coal. Sure you want to own some gold and silver, but I think you want own a big position in coal too. The upside is even more significant in my opinion... and the China coal story is a great way to play it.
Of course, there are a lot of great ideas out there. The key is to buy great ideas at the right price. So don't feel like to you have to chase these stocks. You're going to see fluctuations. It's virtually guaranteed. It's just the way the market is, especially in China.
It's not a reflection of growth slowing down, which is not happening at all as far as I can see. But you're going to see fluctuations in stock prices, which will give you the chance to buy a lot of these stocks on a pull back. And sometimes when they pull back, they'll pull back 15% or 20% on no news, because they're very volatile.
So be patient here. Again, I wouldn't tell you to buy Puda at $16, but I think L&L is a great play here, and SinoCoking is a good play here too.
Crux: Thanks for talking with us, Frank.
Curzio: Thanks for having me. Take care.
Editor's Note: Coal isn't the only sector Frank is super-bullish on. He thinks three areas in particular should do extremely well over the next year… and he's found several penny stocks with huge upside to take advantage. To take check out his full portfolio of under-$10 stocks, click here. |
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