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Making Money Off the Middle Kingdom

Walter Energy is the play on China’s insatiable appetite for coal, Cramer told viewers on Wednesday.

But not just any coal. Walter digs for the metallurgical kind, also called met or cooking coal, which is used to make steel. And the Chinese can’t seem to get enough of the stuff. To quote from Joy Global’s recent conference call: The country’s steel industry has “simply outgrown the ability of China to fill its own demand.”

In fact, the Middle Kingdom has gone from a net exporter of met coal to a net importer. In 2008, China imported 7 million tons of the commodity. By 2009, that number had jumped to 35 million tons.

And the US is a key vendor. Met coal miners are expected to ship 7 million tons to China in 2010, which is a significant jump up from the sub-1 million they sold the country last year. This growing shift in where the supply goes, Cramer said, should mean that US customers in Europe and Brazil will have to pay high prices going forward.

So there’s a bull market in coking coal, and that’s where Walter Energy comes in. Ninety percent of the company’s operating income comes from metallurgical sales, with the last 10% coming from the thermal coal that is burned for energy. Cramer said Walter has some of the highest-quality met in the US, and volume growth this year should reach 34%. Also, Walter enjoys better margins than its American peers and tends to receive premium prices for its product as well.

And there’s a catalyst coming: Benchmark met-coal contracting season is almost here, and about 60% of Walter Energy’s 2010 production hasn’t yet been priced. Cramer expects the company, which is pretty much the only pure-play met coal producer in the US, to fetch a good amount of money as a result.

Walter holds just $11 million of debt on its balance sheet but has $165 million in cash. And the company should generate $1.04 billion in cumulative free cash flow over the next three years. Oddly, though, the stock trades at just 9.3 times 2011 earnings, a discount to lesser group cohorts Alpha Natural Resources and Massey.

Still, WLT is just three points from its high. But Cramer recommended that investors start a position anyway. One, this industry right now is hot; and two, they want to get in ahead of contracting season. The Mad Money host said to buy more Walter Energy when China increases its interest rates, if the stock is lower then. He expects it drop a bit when the country tightens its monetary policy.

“Swap out of your thermal coal stocks, even the cleaner ones like Peabody [Energy] and Arch [Coal] ,” Cramer said, “and buy some Walter now. Then be ready to purchase more if it gets hit.”







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