Should you buy these 4 coal mining companies to weather low coal prices?

Cutting costs and expanding production can open up margins and increase revenue.

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News reports of the general slide in the coal industry have been pretty steady over the past year or two. The number of industry jobs lost is up to around 8,000 in Queensland alone.

The outlook is for another three to five years before mining makes a recovery and in the meantime other countries like the US, South Africa and Canada will be adding to the global coal supply.

It has been described by mining organisation experts as a “survival of the fittest”. When things sound that bleak, I like to start looking through the industry to get an idea which companies will make it through and which may struggle.

They may not be immediate “buys”, yet you can see the ones that will come back stronger when the market turns up again.

Both Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) produce coal in Queensland. Rio Tinto’s energy division, which oversees its coal business, only contributes about 10% of total group revenue. Iron ore makes up about half of total revenue, so the recent production expansion program is more than offsetting the decline in coal earnings.

For BHP, the coal composition is about 16% of total revenue. Iron ore is double that and it also has petroleum and copper production. Actually, its metallurgical coal production is up and energy coal is in line with previous results. Thanks to cost savings and higher production, the division’s underlying EBIT was up for the first half of FY2014.

Whitehaven Coal Limited (ASX: WHC), a NSW-based coal producer, has pressed on with its plans to increase production while coal prices are soft. In the first half of FY2014, it produced 48% more and sales volumes climbed from 2.6 million to 4.3 million over the past 12 months ended 31 December 2013.

In FY2013 it had an underlying net loss of about $60 million and its 1H 2014 interim result was an underlying net loss of another $8.9 million. The loss is getting smaller. By the first quarter of calendar year 2015, the company is expecting first coal production at its new Maules Creek mine. As it moves from development to production, capex costs will hopefully decline and free up more earnings.

New Hope Corporation Limited (ASX: NHC) sold about 10% more coal in the first half of FY2014 on the previous corresponding period, yet coal production was down by about 11%. Its interim result was a 67% fall in net profit after tax. This follows a down year in annual profit in FY2013.

Foolish takeaway

The major miners are diversified enough to weather this downturn. The single category producers have to reduce costs substantially and raise production to achieve earnings stability.

As an investor I would sit on the sidelines until coal prices rise enough to create comfortable margins.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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