CLEAN UP THE COAL

A clean-up trade in Coal just like the title says

Peabody (BTU US) is a coal miner. I won’t go into the details of it as there’s a niche corner of Twitter of deep value non-ESG degenerates that has done extremely well over the last few years.

I’ll keep it simple and with rough numbers: BTU has $3bn mkt cap, $1bn net cash and makes $1bn EBITDA. It prints money.

But it has also lagged its peer group. By quite a bit. It’s the last orphan line in that chart below.

There are fundamental reasons (more thermal coal exposure than met coal exposure), there are corporate governance reasons (people generally are frustrated with management), there are flow reasons (peers doing big buybacks eg AMR).

Snd then there’s the “Elliott” reason …

Elliott is the top shareholder with a 10% stake and has been dribbling their stock over the last few months. Frankly, I don’t know why they are selling but they manage 10s of $billions and this is a $300m investment for them that made money. Maybe they don’t want coal to tarnish their ESG-compliant book.

I’ve been buying bit by bit of this stock over the last couple of months, just waiting for Elliott to finish selling so that BTU can catch up to its peers. But it’s been slow. Elliott even sold calls with expiry Jan 19th and the stock was below strike until today so they would have to do it all over again for February.

But lo and behold, a Bloomberg headline appeared today like Deus ex Machina:

*PEABODY WILL REPLACE E.L.F. BEAUTY IN S&P SMALLCAP 600

So on 23rd of January, BTU will join the S&P600. It isn’t exactly the S&P 500 but it will do.

The news propelled the stock above Elliott’s 1/19 short call strikes, so Elliott will get exercised on that portion. If the mafs is too tough, let's just say they had 13m shares before and they’ll have 12m after the option expiry. (there’s also another reason that all the coal stocks were up a lot today: BHP downgraded their production guidance for met coal, which means there could be 2% less met coal in the seaborne market. But let’s leave that for CoalTwit and we stay focused on the event).

In summary, the Index event can act as a liquidity event for Elliott and whoever else doesn’t like 2x EBITDA stocks, and then maybe the stock can get a chance to actually do something, for once :/

Disclaimer:

This isn’t financial advice.

This is the trading blog of a shrub.

By now you should know: Don’t be Stupid.

Like, seriously … Don’t be stupid …