Sixteen Tons

A Brief Guide To the Coal Industry

"You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store"
- "Sixteen Tons" by Tennessee Ernie Ford

One of the industries that consistently pops up in my daily scan for attractive high yield bonds is the coal mining industry.  The coal industry has a number of peculiarities which investors should be aware of if they wish to dabble in these bonds, some of which offer double digit yields (Patriot Coal and James River Coal show up regularly in my daily screens with low teens yields).  Although I will have nothing to do with the industry due to personal ethical concerns, I have spent some time following the industry and will attempt to offer a brief guide to the basic economics of the industry, supply and demand drivers, and how to differentiate among the public issuers in the industry that investors might be looking at.

Slim Pickings

Junk Bond Market Is Looking Pretty Picked Over

Every day I do essentially the same screen on the bond market.  I search for all junk rated bonds that are at least B3/B- rated across all maturities (junk rarely goes out more than 10 years) with a lot size of 10 bonds ($10,000 face amount).  I then sort the search results by yield to maturity, highest to lowest.  I am then presented with a list of the highest yielding bonds I can buy online through Schwab and can scroll down through the offerings until the yields drop below my minimum requirement (10%).  When I see a name I have not seen before, I usually do some preliminary due diligence and if the bond looks promising I will do more digging and possibly purchase some of the bonds.  Most things I look at do not meet my credit quality standards, but in most market environments I end up buying a bond here and a bond there.  However, lately the pickings have been extremely thin to non-existant.  It is becoming clear that the junk bond market is becoming less attractive and may be approaching the point where prudent investors do not buy bonds.