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BHP Billiton Limited (ADR) (BHP), Peabody Energy Corporation (BTU), Arch Coal Inc (ACI): For Coal Miners, Is India the New China?

India isn’t just a blip in the coal market. It is projected to import more coal than China in the coming years. Given Obama’s recent announcement of tighter restrictions on coal power plants, U.S. coal miners may find their solace in India. China has been the growth story for sellers of raw materials, but the nation is slowing down. Still, there are a few smart companies that have not let themselves become completely dependent on the Middle Kingdom.

BHP Billiton Limited (ADR) (NYSE:BHP)

Is India’s Demand Dependable?

Richard Morse and Gang He wrote a paper at Stanford University showing that India’s shortfall in coal production is structural. This is in stark contrast to China’s coal production, where temporary pricing differentials within China’s market are one of the main drivers of its imports. Also, the Chinese government’s push to clean up the environment and increase safety has led to a number of mine closures.

China has significant coal resources. It uses coal imports as a stop gap measure while it cleans up its industry and expands its rail network. India is simply a more stable market for coal imports than China.

Where to Invest?

BHP (NYSE:BHP) Total Return Price data by YCharts

BHP Billiton Limited (ADR) (NYSE:BHP) is a diversified miner with interests in many resources, including coal. Lately its thermal coal operations have been struggling due to a number of mishaps in its mines. It recently canceled a $3 billion coking coal mine in Queensland, Australia. It also canceled its plans to expand the Olympic Dam copper and uranium mine. The company’s operations are close to China, and the prospect of a slowing Chinese economy has forced the company to cut back.

BHP Billiton Limited (ADR) (NYSE:BHP) isn’t the best way to play India’s growing coal demand. This company is so massive that it is better seen as a bet on the world’s raw resource usage. The firm operates a number of facilities in Australia, and the nation’s tight labor market has put pressure on the firm’s margins. Even though its 21.5% profit margin may fall in the coming years, its total debt to equity ratio of 0.53 and yield of around 4% make it an interesting dividend play.

U.S. Coal Miners

Peabody Energy Corporation (NYSE:BTU) and Arch Coal Inc (NYSE:ACI) are two similar, but very different U.S. coal miners. Arch Coal operates a number of metallurgical and thermal coal mines throughout the U.S. It is in damage control mode and trying to bring its costs under control as soon as possible. It recently sold a number of assets in Utah to help increase its liquidity. Given the lack of growth in the domestic U.S. coal market, it is with good reason that Wall Street expects the company post earnings per share (EPS) of $-0.71 in 2014.

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