Shameless Cloning: Why I Decided to Make Investments in Coal Companies
Mohnish Pabrai, a renowned value investor that I have been following for years, openly attributes some of his investment successes to a strategy he terms “shameless cloning.” He is the author of an excellent investment book called The Dhandho Investor, which I highly recommend. Pabrai’s approach involves meticulously emulating the investment philosophies, strategies, and mental models of shrewd investors and even copying their stock purchases. His commitment to this method is evident in his own words: “I’m a shameless copycat… I have no original ideas.”
For instance, he emphasizes the importance of focusing on long-term investments, understanding the intrinsic or “true” value of businesses, and maintaining a concentrated portfolio—all principles championed by Warren Buffett and Charlie Munger. In essence, Mohnish Pabrai’s “shameless cloning” is a testament to the power of learning from the best.
While this sounds like an easy way to make money, in practice, I would caution against doing this without conducting your own in-depth fundamental research. Even the best investors get stocks wrong, and copying someone without doing research, in my view, is a form of speculation.
Here is a great website I have used for years to track what some of my favorite investors have been buying and selling: Dataroma.
How Mohnish Pabrai Shamelessly Cloned David Einhorn of Greenlight Capital
On recent podcasts, Mohnish Pabrai shared the story of how he got involved in coal stocks. He saw a post on X that led him to look up the 13F statement of David Einhorn, CEO of Greenlight Capital. A 13F statement is a quarterly report that large investors are required to file with the SEC (Securities and Exchange Commission) indicating what securities they hold.
Pabrai discovered that Einhorn’s second-largest investment was in the coal producer CONSOL Energy, a company that has since merged with Arch Resources to form a new entity called Core Natural Resources, Inc.
Pabrai was perplexed as to why Einhorn would be so heavily invested in a coal company at a time when the rest of the world has been running away from these investments. Pabrai decided to visit many of these companies and tour their mines while continuing to dive into the industry and its dynamics.
Why I Shamelessly Cloned Mohnish Pabrai and David Einhorn and Bought Coal Stocks
Despite global efforts to transition towards cleaner energy sources, coal continues to play a significant role in certain emerging markets across the globe. Despite the belief that coal consumption had peaked in 2013, it has surpassed prior year levels three years in a row. Indonesia, the world's largest coal exporter, is shipping more coal than any nation in history due to robust demand from countries like China, India, and the Philippines. The International Energy Agency now projects that coal use will continue to rise through at least 2027, reaching nearly 9 billion tons.
We have this interesting global dynamic when it comes to coal demand. The United Kingdom just shut down its last existing coal plant. On the other hand, Glencore, a major player in the coal industry, has decided to retain its coal business after observing a shift in Environmental, Social, and Governance (ESG) investment perspectives. Over 95% of its shareholders voted in favor of maintaining coal operations. This indicates a reversal from the massive ESG push we have seen from investors over the past decade.
Furthermore, the following countries still desire the dirty sedimentary rock to meet their ever-growing energy needs:
Vietnam: Powers manufacturing facilities as the country seeks to maintain its position as an alternative to Chinese manufacturing.
Indonesia: Powers the nickel industry (which, ironically, is used in the production of electric vehicles).
India: Used to generate cement amidst an infrastructure push.
Philippines, Bangladesh, Pakistan: Used for electricity generation and steel and cement production.
Even China, which is viewed as one of the leaders in green energy, relies on coal to power its factories and to maintain its position as the “world’s factory floor.” For developing nations, particularly in Asia, oil and natural gas have a tough time competing with coal as coal is a cheap, reliable, and plentiful source of energy. Coal generates electricity no matter what the weather is. Solar, wind, and hydropower, on the other hand, do not. China had severe droughts from 2022 to 2023, and their hydropower generation plummeted, making coal a direct beneficiary.
In his September 2024 investor call, Mohnish Pabrai talked about what made thermal-coal producer Consol Energy (now Core Natural Resources) such an interesting business. They forward sell nearly 100% of their next 12 months' sales. In layman's terms, this means they lock in sales at present-day prices for the following 12 months and are not subject to the fluctuations that may arise over that time frame. They also have floors in their contracts and sell forward 50% of year two output, and 25% of year three output. They are the lowest-cost producer with high-quality thermal coal.
Today, many thermal coal companies have little to no debt and are net cash positive (meaning they have more cash than they owe in debt and could effectively pay it off tomorrow). This is an unusual period, as these companies tend to be highly leveraged, or carry a lot of debt, but many of these companies benefitted from higher prices after Russia invaded Ukraine in 2022.
Even if you look at the metallurgical coal producers who mine and supply coking coal that can be converted into “coke,” a key ingredient in steel production, coal prices are unfavorable currently and they are struggling to meet their cash costs. However, their balance sheets are so strong currently that they can withstand these low prices for quite some time.
Two metallurgical coal companies that Mohnish Pabrai and I still own and hold as of 12/31/24 are:
Warrior Met Coal (NYSE: HCC): Based in Alabama, Warrior Met Coal is a leading producer of metallurgical coal, primarily exporting to Europe, South America, and Asia. The company operates two major mines and is developing the Blue Creek project, expected to commence operations in 2026. This project aims to significantly boost production capacity and reduce operating costs, potentially enhancing profitability.
Alpha Metallurgical Resources (NYSE: AMR): Alpha Metallurgical Resources is another key player in the metallurgical coal sector, supplying coal for steelmaking processes. Formerly Contura Energy (January 2021), it is a leading coal supplier with underground and surface coal mining complexes across Northern and Central Appalachia. Contura owns large coal basins in Pennsylvania, Virginia, and West Virginia, which supply both metallurgical coal to produce steel and thermal coal to generate power.
In my opinion, there appears to be a significant mismatch between the market prices of these stocks and the true underlying value of these businesses in the near-term, even though the long-term future for coal looks bleak. Some companies in the thermal and metallurgical coal industries appear priced by the market as if they are going out of business in the next few years, trading at single digit multiples of normalized earnings. I struggle to see how these companies are going out of business any time in the near-term given the current global energy demand dynamics we are witnessing in the midst of the artificial intelligence (AI) boom.
Here’s what Bayan’s Chief Financial Officer Alastair McLeod recently said on the matter:
“We’re doubling our capacity. We believe there is 30 years or maybe 40 years of coal still going forward. Other people may not believe it.”
Conclusion
Investing in the coal sector presents a complex picture and is not for the faint of heart. While certain regions and segments, particularly metallurgical coal for steel production, continue to offer profitable opportunities, the broader industry faces challenges from environmental policies and the global shift towards sustainable energy. Companies like Warrior Met Coal demonstrate that with strategic initiatives and strong financial management, there is potential for growth and returns in specific niches of the coal market. However, investors must carefully consider the dynamic interplay of market demand, regulatory landscapes, and corporate strategies when evaluating the viability of coal-related investments.
What are your thoughts on the coal industry and the concept of shameless cloning?
Sources:
The Wall Street Journal: The Billionaire Mining Magnate Who Bet Coal Had a Future—And Won Big
Pabrai Wagons Fund September 2024 Investor Call
Disclaimer: The information provided in this blog post reflects my personal opinions and does not represent the views or opinions of my employer. This content is for informational purposes only and should not be considered as investment advice. Readers are encouraged to conduct their own research and consult with a financial advisor before making any investment decisions. Additionally, I disclose that I hold positions in Warrior Met Coal, Alpha Metallurgical Resources, and Core Natural Resources.