International Coal Group (ICO – NYSE)

Dear Bottarelli Research Member,

Over the last week, many analysts have started offering the exact viewpoint that Bryan and I have been saying for the last three months. That being, the bottom is now in, and we should see upward momentum for the rest of the year.

As more and more investors come to this conclusion, it’s critical that we continue to execute our plan of picking up the top growth sectors in our small-cap ledger. So this week, we’ll take advantage of a stock that’s not only undervalued, but they’re also in a market sector poised for continued strength over the next 2-3 years. That sector is coal mining, and the company I’m bringing you today is the leading producer of coal in northern and central Appalachia.

They operate 12 active mining complexes, 11 of which are located in northern and central Appalachia and one in central Illinois. I have been watching and waiting for the trigger point on this little small-cap coal gem, and now that their earnings have been released – and their expectations for the rest of the year have been established – it’s time for us to move in.

What I really like about this company is the fact that much of their coal is sold “un-hedged,” and this gives them the freedom to take advantage of higher coal costs both here and abroad. Not only that, but most all of their mining operations and reserves are strategically located to serve customers throughout the eastern United States, meaning they are very close to power generation plants, steel mills, and other business that use their coal. Therefore, their shipping is done by train, barge, or truck – keeping their costs to a minimum.

The real kicker is that they’ve just completed a major overhaul in one of their mines in Beckly, West Virginia – and they plan to ramp it up to full capacity as quickly as possible. On top of that, this company also controls 501 million tons of non- reserve coal deposits (which are classified as reserves in the future). Yes, you read that right. 501 million tons of coal are not yet factored into this company’s stock valuation, and this is music to my ears. You see, they’re purposely not including this huge amount of coal to ensure that they’re not spending large amounts of money to bring these reserves into market until the timing is right.

While coal prices remain high – and move even higher – we can expect further news in the months ahead about what they have in the ground. I happen to live not too far away from Beckly, WV, and I’m making plans to take a visit and give you an “over-the-shoulder” report in the weeks ahead. As soon as I make the site visit, you’ll be the very first to hear all about it. But in the mean time, let’s get positioned in this promising small-cap company now. The stock is International Coal Group (ICO – NYSE), andlet’s establish a new position under $8.50. I’m earmarking at least a 50% move before the year’s end, and that’s probably too conservative!

NOTE: I’ve asked Bryan to re-establish a new level of protection to our small-cap portfolio via a new DIA put hedge, so he’ll be addressing this new protective hedge in the beginning of his commentary below.

UPDATES

Huaneng Power International (HNP – NYSE): What a turnaround! The leading power provider in China got off to a rocky start when we entered shares for $31.55 on April 11^th. After dropping to $26.00 on April 22^nd, we held our ground and said “buy the dip!” And true to form, HNP has aggressively bounced back, with shares now trading for $35.50. If you bought this dip, then congrats on a nicely-timed entry. And if not, then you’re still looking good! I expect smooth sailing from here on out. If shares continue their accent back to those old highs, HNP will be one of the top small-cap positions in our ledger. Hold.

Graham (GHM – AMEX): We already locked in a 78% gain on half of this rapidly-growing vacuum pump maker, and since taking these profits, the shares have split 5 for 4. Right now, the stock is once again back up to $60.00, which is the split-adjusted price of $72.00. This offers us a nice opportunity to lock in another 75% gain on the remaining half of our position. Let’s go ahead and lock in these profits now! Sell.

Gran Tierra Energy (GTE – AMEX): Another new 52-week high!I continue to love this emerging oil explorer, and the stock has already handed us a 29.83% gain from our March 17^th entry point. The chart continues to look stronger than ever, so maintain GTE for more gains. Hold.

E-House China Holdings (EJ – NYSE): The #1 real estate brokerage firm in China continues to inch its way higher – but truth be told – I expected shares to be trading a lot higher than they are right now. I’m going to remain patient with EJ, but I’d like to see shares establish some momentum and move above the $25.00 level very soon. Hold.

Interoil (IOC – AMEX): Our Papua New Guinea energy play announced big news this week, as a new discovery at their Elk-4 location looks to significantly augment the total gas found at this discovery well. As you can see, shares experienced a massive upside move on this news, and I would expect more upside in the weeks and months ahead. Exciting things are starting to take shape in IOC, so hold for more gains. Hold.

Beacon Power (BCON- NASDAQ): Our alternative energy play on the patented Flywheel technology has been recovering from it’s recent dip. As we get closer to peak demand for electricity this summer, we should get a very good glimpse at how well their technology works. Since this is the only technology of its kind with the blessing from the DOE, I think we’ll be happy that we own this stock, especially as summer rolls around and A/C units across the country kick on. Hold.

PowerShares DB Agriculture (DBA – AMEX): Our commodity play has pulled back on dollar rebound concerns, but I don’t think this will last long. Worldwide food consumption is quickly approaching an alarming stage, and I’m sure you’ve heard this mentioned at length on every major news program. Use these dips to add to your position. Buy on dips.

China Finance Online (JRJC – NASDAQ): This is the company we call “The Goldman Sachs of the Far East,” and I urge you to own some of this stock. When it comes to investing in Chinese stocks, this company dominates the research and analytical market. They also provide securities brokerage services for stocks listed on the Hong Kong Stock Exchange. Shares move quite fast, so when you catch an upside run, JRJC hands you large returns lightning quick! Hold for more upside.

Fushi Copperweld (FSIN – NASDAQ): The leading global manufacturer of bimetallic wire (which is used in a variety of telecommunication, utility, automotive, and electrical products) is quietly inching its way back. They have now completed the first phase of expansion to their Dalian facility in China – and this is a major step diversifying their sales. I fully expect strong numbers in their next earnings report, so I would encourage you to maintain your position. Hold.

Accuray Incorporated (ARAY – NASDAQ): This week, the maker of the Cyberknife system (which is one of the leading cancer tumor treatment technologies in the world) reported very positive earnings. For the nine months ended March 29^th, total revenue came in at $159.4 million, good for a 65% increase over the same period last year. Net income was $5.2 million compared to a loss of $6.1 million last year, and this represents a major turnaround. Folks the evidence is right here in front of us. Cyberknife is changing the way cancer treatments are preformed, and as the baby-boomer generation grows older, this technology will only receive increased demand. I know it’s not easy to talk about, but as investors, we must always be looking for new life-changing technology. This certainly falls into that category, and that’s why I strongly feel that ARAY is a company you must have in your portfolio. I urge you to pick it up while it’s still extremely cheap. Buy.

On that note, have a good week, and remember to give thanks for the abundance in your life.

Sincerely,

The Top Small-Cap Coal Producer:
Now on Sale for Under $8.50 Per Share

Before getting into ICO, let’s begin this week by adding a protective put position on the Dow Diamonds (DIA – AMEX).

As you can see from the chart below, the Dow made a strong move above its 200-day moving average this morning, but we’ll probably see a pullback and a re-test of this critical support level going into next week. Therefore, it makes sense to enter into another put position to protect our small-cap ledger. So, the first order of business today is entering the DIA June 125 Puts (DAW RU). Closing today’s trading between $1.47 and $1.50 per contract, let’s add these puts to our small-cap portfolio first thing on Monday, and then we’ll be protected against any market downside pressure.

PROTECTIVE PLAY: Buy the DIA June 125 Puts (DAW RU) at market, good for the day. Plan to lock in profits on these puts next week if they trade at or above $2.00.

After establishing this new level of small-cap portfolio protection, let’s dive into today’s newest small-cap pick on International Coal Group (ICO – NYSE).

We’ll begin by outlining the strong investing thesis for coal…

As you probably know, coal is primarily used as a solid fuel to produce electricity through combustion. When used for electricity generation, coal is pulverized and then burned in a furnace, which converts water to steam. This steam is used to spin turbines, which turn generators, and ultimately create electricity.

Truth be told, the environmental effects of coal are not good. Coal burning releases carbon dioxide and methane, both of which are greenhouse gases. But as much as everyone agrees that we need to find cleaner methods of power generation, we must continue to meet our unrelenting need for energy on a global scale. Until a broad-based global solution is discovered, our energy needs will continue to paint a bullish picture for coal producers for quite some time.

Consider these statistics…

• World annual coal consumption stands at 6.2 billion tons. 75% of this consumption is used for the production of electricity.
• Of the 6.2 billion tons of annual global consumption, China accounts for 2.38 billion tons and India accounts for 447.3 million tons. In fact, 83.2% of China’s electricity currently comes from coal, and this demand from India and China will only grow larger.
• Here in the Unites States, we consume about 1.053 billion tons of coal each year, and 90% of it is used for electricity generation.

As you can see, coal plays an integral part in supplying the world’s electricity needs. And of the three fossil fuels, coal has the most widely distributed reserves. It’s mined in over 100 countries on all continents (except Antarctica).

According to recent estimates, the United States Energy Information Administration estimates world coal reserves to be around 998 billion tons. At the current production rate, this is enough coal to last the entire planet 164 years (assuming current consumption rates).

Because of this non-stop demand, the price of coal has gone up from $30 per ton in 2000 to $130 per ton in 2008. (If you care to trade coal futures, they’re available on the Intercontinental Exchange.)

Looking at production trends, the British Geological Survey reports that China is the top producer of coal followed by the United States and India. With these three powerful countries driving demand, coal will be a much-needed commodity for years tocome. And that’s the thing. The largest coal reserves in the world are found here in the United States, followed by Russia, China, India, and South Africa. This means we have the world’s largest deposits of coal right here in our own backyard. That’s why a small-cap company like International Coal (ICO – NYSE) looks so appealing.

Founded in 2004 and based in Scott Depot, West Virginia, International Coal is a coal producer operating in northern and central Appalachia. They produce, process, and sell steam coal from 12 regional mining complexes, 13 active underground mines, 13 active surface mines, and nine preparation plants throughout West Virginia, Kentucky, Maryland, and Illinois.

In total, they control approximately 316 million tons of metallurgical quality coal reserves and 649 million tons of steam coal reserves. Since metallurgic coking coal is used as a reducing agent in smelting iron ore, it’s an essential element in the manufacturing of steel. With the entire steel sector on fire, this paints a bullish picture for any companies (like ICO) that support the steel sector.

Not only that, but you can also argue that International Coal is an indirect play on increasing natural gas prices as well. You see, as natural gas rallies, this places increased pressure on coal-fired electrical generating plants to maintain their electrical output. So aside from the bullish thesis on coal, we also have indirect bullish catalysts from steel and natural gas as well!

As noted in the coal statistics above, coal will be in demand for years to come. And when it comes to applying this demand to ICO, the growth story is quite clear. ICO has increased their metallurgical production from 100,000 tons in 2006 to 2 million tons in 2008. And forecasts show that by 2010, the company will produce 2.6 million tons.

Not only that, but of ICO’s total coal reserves, they own 69% (equating to 666 million tons) versus the 31% (or 298 million tons) of their reserves that are leased. The median ownership among competing coal companies is less than 30%, making ICO’s 69% ownership one of the largest among their entire coal peer group.

Here is a quick bullet-point review of ICO’s highlights:

• Well-positioned in 3 of the 4 largest U.S. coal producing regions.
• Substantial holdings of metallurgical coal, and rapidly growing production.
• 100% union-free workforce, which avoids the risk of any work stoppages.
• One of the strongest ownership positions (69%) among coal peer group.
• Three bullish triggers in coal, steel, and natural gas fueling demand.

Plus, when you consider that International consumers (such as India, China, and Russia) are having massive coal shortages, this forces sharp increases in imports – and this overseas demand only increases ICO’s future revenues.

Now, from a share price perspective, ICO has lagged the overall coal sector since its initial public offering two years ago – simply because they were always considered a small-cap emerging coal operation. This put them off the radar of most commodity investors. But now that they’re positioned to rapidly increase their production, their share price could begin a run into the high teens and $20s.

In fact, Goldman Sachs just raised its rating on the U.S. coal sector – citing strength in steel as the catalyst. And in their client note, they specifically mentioned International Coal Group. Furthermore, Friedman Billings Ramsey just estimated that weather problems in South Africa and China could cause net coal exports to rise 300% for the 2008/2009 shipping period – and this is awfully bullish for U.S.-based coal miners.

In short, exports are expected to continue booming for coal, and this makes a very strong investment case for a company like ICO. With shares up 48% over the last 52-weeks (compared to a loss of -6.4% for the S&P 500), you can see that ICO has exhibited remarkable strength in the midst of a weak market environment. As a continuation of this momentum, I expect shares to break past their April 22^nd high of $9.49 and move into the mid-teens and perhaps the low $20s by the end of the year. Therefore, let’s establish a new position in shares of ICO now!

PLAY: Buy shares of International Coal Group (ICO – NYSE) at or under $8.50, good for the week.

Sincerely,