June 18 2008 - Alpha Natural Resources (ANR-NYSE) doesn't mind going underground. The company produces steam and metallurgical coal at 45 underground mines and 25 surface mines, primarily in central and northern Appalachia. Low-sulfur steam coal, which is used mainly as fuel for electricity generation, accounts for most of Alpha's sales. The company produces about 25 million tons of coal annually, and purchases another 5 million from other mining companies. Most of the purchased coal is blended with coal from Alpha's mines before being sold. It sells about a third of its product internationally. Alpha controls somewhere near 600 million tons of proved and probable coal reserves.

The stock sold for $12.30 a share early last year. It's now almost $100. Can it keep going?

Alpha recently raised capital, close to $440 million of it, selling 4 million shares of stock and issuing $287 million of convertible debt. It immediately paid off $175 million of higher cost borrowing. Now it's got $300 million in cash to buy more coal or anything else it wants.

Earnings, as you might expect, are exploding to the upside. This year analysts think the company will earn $2.20 (up from 43 cents a share last year) and next year, they're using $8.51 (that's the average estimate..the range goes from $3.15 to $12.69). Revenues were $1.878 billion last year. This year, analysts look for $2.29 billion and next year $3.29 billion.

Coal companies, like any commodity producer, like to lock in future rates so they know their product will be sold. When prices are going ever higher, they tend to leave some production unsold to take advantage of spot rates, the rates customers pay when they come to the gate and ask for coal. Most of 2008 production is sold out but 2009 still has about 40% of production uncommitted. That last 40% should be a very profitable lump of coal.

Both steam (thermal) coal and metallugical coal (used in steel) are in strong demand. Electric utilities have low stockpiles and need replenishment while steel producers require ever more coal to meet demand. Normal competition from mines in Australia and South Africa has been diminished due to floods or mining problems. Furthermore the weak dollar makes U.S. produced coal cheaper for other countries to import.

There are estimated to be about 300 small coal mines throughout the Appalachian region. Look for Alpha to take part of its $300 million in cash to buy some of them to add to its coal reserves.

More numbers: Net profit margin is going to 6.1% this year and 11.2% next year. Return on Equity was 7.3% last year but expected to be 18% this year and 29.5% next year. Market Cap is $6 billion with 70.3 million shares outstanding. About 26% of the stock is owned by 3 institutions. There is no dividend. Debt is 51% of capital.

Is all the good news already baked into the stock price? Hard to tell. With a wide range of earnings estimates, even analysts don't have a good grip on the company's future. If the ones at the high end are right, this stock is cheap. If the ones near the bottom are correct, this stock is way overpriced. Doing more research will most likely lead investors to their own conclusions.

Company Web site: www.alphanr.com

- Ted Allrich