NACCO (NC): The Stock Geoff Put 50% of His Portfolio Into
On October 2nd, Hamilton Beach Brands (HBB) was spun-off from NACCO Industries (NC). That morning I put about 50% of my portfolio into NACCO at an average cost per share of $32.50. Since that purchase was announced, several members of Focused Compounding have sent in emails asking for a write-up that explains why I made this purchase.
Unfortunately, there just isn’t much to say about my NACCO purchase. So, this write-up will be both brief and boring.
I bought NACCO, because the stock’s price after the Hamilton Beach spin-off seemed low relative to the earning power of the coal business.
All Value Comes from the Unconsolidated Mines
After the Hamilton Beach spin-off, the earning power of NACCO comes entirely from its “unconsolidated mines”. NACCO – through NACoal – owns 100% of the equity in these mines and receives 100% of the cash dividends they pay out (which is almost always equal to 100% of reported earnings). However, the liabilities of these mines are non-recourse to NACoal (and thus NACCO). Each mine’s customer (the power plant) is really supplying all the capital to operate the mine. This is why NACCO doesn’t consolidate the mines on its financial statements (because it isn’t the one risking its capital – the utility that owns the power plant is taking the risk).
You can see the financial statements for the unconsolidated mines here.
(It is very important that you click the above link and read through it carefully).
There Are Risks
NACCO also owns one consolidated mine (MLMC) which could potentially destroy value. And at the parent company level – so NACCO rather than NACoal – the company has legacy coal mining liabilities (“Bellaire”) and losses related to general corporate overhead.
NACCO’s customers are almost all “mine-mouth” coal power plants. They sit on top of coal deposits that NACCO mines and delivers to the plants to be used as fuel.
Coal power plants throughout the U.S. have been closing. The power plants NACCO supplies could close at any moment. And it would only take one such closure to seriously dent NACCO’s earning power.
NACCO’s largest customer accounts for probably 35% of the company’s earning power. NACCO’s two largest customers account for probably 50% of earning power. And NACCO’s three largest customers account for probably 65% of earning power.
NACCO’s Business Model
NACCO sells coal to its customers under long-term (most contracts expire in 13-28 years) supply agreements. The agreements are “cost-plus” and indexed to inflation.
Each Share of NACCO is Backed by 5 tons of Annual Coal Production
As you can see in this investor presentation, NACCO delivered 35.5 million tons of coal over the last twelve months. The company has 6.84 million shares outstanding, so each share of NACCO is now backed by 5.19 tons (35.5 million / 6.84 million = 5.19) of coal sold under a cost-plus contract indexed to inflation. I paid an average of $32.50 a share for my stake in …
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