Doom and gloom articles about coal are not hard to find. Regardless, reports out of Germany show that coal still has a place in the world. RWE is currently building a coal fired power plant which "can add or shed 600MW in 15 minutes." China and India are planning to greatly increase their consumption of coal and these latest technologies will only make coal more attractive. Peabody is a large miner with mines close to the American and Asian markets. Many miners are trading at a discount, but Peabody is better positioned to supply the growth in the Asian markets with their Australian mines.

BTU Return on Assets data by YCharts

Thermal coal

In the long run demand from China and India for coal is set to grow. This is good news for Peabody Energy Corporation (NYSE:BTU) given their assets on both sides of the Pacific. The latest Peabody investor presentation mentions that various types of coal need natural gas prices to be above $2.50/mmBtu to $4.50/mmBtu in order to be competitive. With natural gas prices at $3.50/mmBtu, coal miners are facing short term pressure. Independent analysis of America's fracking boom show that full cycle break even prices are around $7.80/mmBtu to $8.80/mmBtu. Peabody is not Wall Street's favorite pick right now, but the long term picture is more favorable. The company is a global play on coal with a number of mines in the Australian provinces of Queensland and New South Wales. In the United States the company operates a number of mines in the Powder River Basin and the Illinois Basin. As long as natural gas prices stay above $3.50/mmBtu then both of these areas in the U.S. should remain competitive.

Peabody's debt to equity ratio of 1.07 and their profit margin of 7.5% are reasonable. The company currently trades at a P/E ratio close to 9.6 and a price to book ratio of 1.1. Thermal coal has many long term positives and is the company's main market. At these valuations you have the opportunity to buy into a world class coal producer for less than 10 years earnings. Given the strong long term demand from China and slowly increasing natural gas prices, Peabody is a promising investment.

Firms to avoid

Alpha Natural Resources, Inc. (NYSE:ANR) sells a mix of metallurgical and thermal coal. In the first 3 quarters of 2012, 44% of revenue was from metallurgical coal, 46% from eastern steam, and 10% from the Powder River Basin. The company is based in the United States but uses a number of ports along the East coast to export a large portion of their production. Over the coming decade it is expected a number of coal power plants will be shut down in the U.S. Their total debt to equity ratio is .59, but their gross margin of 13.2% is relatively low. Their return on investments of -38.0% shows just how far the company has fallen. Asia is the growth market for thermal and metallurgical coal and Peabody's assets in Australia leave it better positioned than Alpha Natural Resources.