Calm Before the Storm
Inside the Quiet Disappearance of Alpha Metallurgical Resources — Part Two
“When you short a stock, your maximum upside is a double … and the maximum loss possibility is infinite.”
— Mohnish Pabrai
Last time I was sitting in the cafeteria alone with my coffee while my German colleagues turned their backs on me because I told them I invest in coal.
This time I didn’t even try. I went to a café alone. With a pen and paper. Ordered a coffee, took the corner seat by the window, and started writing down everything that is happening with Alpha.
The waitress asked me if I was okay. I said yes. I lied. I recently had to explain to my wife that I put everything we own into a coal stock that went through bankruptcy a few years ago. She took it well. She only cried twice. 🙂
But jokes aside.
I sat down and started writing. First I wrote the risks. Every way I could lose my money. Then I kept writing. Every filing. Every transaction. How much Courtis bought. How much Gorzynski bought. How much Pabrai added. How many shares are even left to buy. How many are shorted. Then the macro. The Strait of Hormuz. Australia running out of diesel. Then I wrote down what has been happening inside the company lately. Cash flow potential in the coming years.
But let’s not get ahead of ourselves. Every good investment starts with the risks first. So let’s read this paper together, in the same order I wrote it.
The risks I see are three. Some new technology replaces metallurgical coal in steelmaking. A very long recession and stagflation that destroys demand for steel. And a black swan. Something nobody can predict.
Let’s go through each one.
And if you missed my first piece on Alpha, please read that one first.
Three Technologies That Are Supposed to Kill Met Coal
There are three methods that theoretically replace metallurgical coal in steel production. Every single one of them looks great on a PowerPoint presentation. None of them look great in reality.
Flash ironmaking.
This is a new process from China. You take iron ore powder, blast it through an extremely hot reactor, and the whole thing supposedly finishes in 3 to 6 seconds. Instead of hours in a traditional blast furnace.
Sounds amazing. The problem is that it only works in a lab. Scaling it is brutal. When everything has to happen in a few seconds, even a tiny mistake ruins the product. The particles stick to the reactor walls and clog everything up. And even if you solve all of that, you still need to rebuild the entire steel mill around it. New equipment. New infrastructure. Billions in capital spending. Nobody is doing that.
DRI with green hydrogen.
Direct Reduced Iron. Sounds beautiful. But for DRI to be globally adopted, electricity and hydrogen need to be practically free. Not cheap. Free. Because if you think this is a real risk, then you have to believe that people in sub-Saharan Africa and Southeast Asia will soon be making steel with green hydrogen. So far, the world is at about 0.3% of the required buildout for green steel. Zero point three percent. Just so we know where we are starting from. Here we are talking about at least 20 years. Maybe 30.
EAF, or Electric Arc Furnace.
This is essentially a giant microwave where you put in recycled iron and make “new” steel with electricity. The problem is that you are not actually making new iron. You are recycling old iron. If you want to build India, or rebuild Ukraine, or if you pause for even a moment to consider that Western countries still want economic growth, you need new iron.
Small anecdote. Last year I received a job offer from Swiss Steel. They work on EAF technology. Green steel. The future of the industry. I read their financials before the interview and asked them, very politely, whether bankruptcy was part of the five year plan. Everyone in the room laughed. I was not joking. The stock has since been delisted and the company is on the edge of collapse. Turns out I was the only person in that room who could read a balance sheet. 🙂
As for recession and stagflation, Alpha is one of the lowest cost met coal producers in the industry. No debt. A swing producer that can cut production and wait. If high cost producers go bankrupt around them, that is not a big risk for Alpha.
And as for a black swan, well, I can’t help you there. Nobody can. 🙂
That was how I lose money. Then I flipped the page.
What I found on the other side is the reason I bought more shares the next morning. It is also the reason Courtis has spent $41 million. The reason Gorzynski has never sold a single share. The reason Pabrai holds 27% of his entire portfolio in a coal company that lost money last year.
These people are not guessing. They did the same math I did.
I want to show you that math.
