3 Gems in the Metals & Mining Space: United States Steel Corporation (X), Peabody Energy Corporation (BTU) and More

1) Global diversification and organic Australian growth: Australian assets provide direct access to Pacific Basin markets. 20-30% volume growth is expected in Australia by 2015, and Peabody will be one of the main beneficiaries, given that the company is the largest producer in the PRB. It is important to note that the coal mined from PRB facilities is cheaper as compared to Appalachian coal or coal obtained from the Illinois Basin. The PRB coal is competitive versus the natural gas price at around $3/btu. By this I mean that natural gas will not be a cheaper substitute for the PRB coal if its price crosses the $3/btu mark. The PRB coal is of low quality as compared to coal obtained from Illinois Basin or Appalachian coal. The coal of the Illinois Basin becomes competitive versus the natural gas price in the range of $3.5-$4. Similarly, the Appalachian coal becomes competitive versus the natural gas price at $5. Given that the current gas spot prices are hovering around $3.3/btu mark, the demand for PRB coal is high.

2) Significantly growing leverage to metallurgical coal markets (potential 40-55% increase in met coal/PCI sales by 2015).

3) Compelling Valuation, trading at a 17% discount to historical multiples.

Foolish Bottom Line

The steel sector has already received many bullish comments from the Street. Moreover, players like Peabody are destined to grow given a sharp rebound in natural gas prices and compelling valuations. Talking holistically, these three players look the most attractive in the metals & mining space.

The article 3 Gems in the Metals & Mining Space originally appeared on Fool.com and is written by Masam Abbas.

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