Nightly readings on FDG

Robin has recommended coal stock for the summer based on the rationale of increased demand from utility surge. FDG looks attractive from a glance: high profit margin, high ROI, and high yield, high yoy growth. Revenue and profit exploded in 2004 and 2005 but started to slow in 2006. Recent earnings in the last reporting quarter is not good either. But the response to its recent ER has been very good. So it must not be off from the expectation. And the president just said "Fording to increase shipping to make up for Q1 delay. "

Searching from IBD archive rendered two interesting articles.

First one is published on 3/1/2004, when the stock was traded at 10.

"Fording Canadian Coal Trust is the No. 2 player in the coking coal industry. Coking coal forms the substance known as coke. Mix coke with iron ore and limestone in a blast furnace, and you've got steel. ....Higher demand has led to higher prices, and heady gains for Fording's bottom line and its stock. "Coking coal had been in oversupply in global markets for a couple of decades, until about 2000, 2001," said Mark Gow, Fording's director of investor relations. "Then the supply side adjusted and markets became reasonably well balanced."Now, China's creating demand by becoming a net importer of coking coal," he said.

Article no. 2: 5/5/2005, when the stock was traded at 24.

"...Fording mines mostly metallurgical coal that goes into steel-producing blast furnaces. In the steel business, the big market is Asia-Pacific. Fording sells 45% of its production to Asian markets. While only 8% of its exports go to China, the country is the main factor in the worldwide run-up in demand. That demand has seen the world price of coal more than double since 2004. Metallurgical coal went from $56 to $57 a metric ton in 2004 to $120 to $125 today. Analyst sees coal prices falling to $95 a ton in 2006 and $70 in 2007. .... The company hedges on currency to offset the problem. Fording forged a five-year deal with Canadian Pacific Railway. The deal took effect in April 2004, removes uncertainty regarding rates and provides sufficient rail capacity to handle expansion plans at the Elk Valley Mines. Fording pays hefty sums for that security. Rail rates for 2004 were 20% higher than the prior year. Rates for 2005 and 2006 will be 60% higher than 2003, while rates for 2007 and 2008 will be tied to the price of coal. While transportation is always a concern, there are no bottlenecks right now. "

So what is my take on this stock on 05/07/2007?

Based on report released by DOE on March 23, 2007 for Q4, 2006, average price of U.S. Metallurgical Coal Exports is about 92 to Asia, 95 to Europe. So the price decreased but still not too bad.

1. Steel industry is performing very strong recently and positioned to do so for the rest of the year due to global economy growth. (Iron & Steel index up 25.67% vs 6.42% of S&P 500 YTD). The demand seems strong in year 2007. FDG is up 26.7% YTD. It correlates well with iron and steel industry.

2. Less volatile than smaller miners. No 2 player in coke coal industry. Higher profit margin and higher ROI.

3. Good management team (Hedge currency. Contract rail rates).

4. Chart support.

FDG seems to be at the upper side of the trend line at current price of 26.2. I will definitely be a buyer of FDG anywhere in 24-25 for 2-4 months holding.