This piece examines the Fund’s successful thematic investment in metallurgical coal (met coal). It outlines why we were initially drawn to the opportunity in July 2025, how the thesis has unfolded in practice, and why, despite having taken profits along the way, we continue to hold a smaller position today.

Metallurgical coal was deeply unpopular, chronically underfunded and priced at a level that left much of the industry struggling to earn an adequate return. That combination created the sort of asymmetric opportunity we look for.

The Collins St Global Fund is primarily built around identifying businesses that are competitively advantaged yet trading below our assessment of intrinsic value. These are typically companies with a durable moat of some sort, strong balance sheets and the ability to compound value over long periods.

But that is not the only way markets create opportunity. This was a thematic investment the fund made, and it is entirely consistent with our broader investment philosophy. We are looking for situations where price and value have become disconnected.

An Unfashionable Opportunity

From time to time, an entire industry becomes so disliked, and valuations so compressed, that the downside is increasingly reflected in the price while the upside from even a modest improvement is not. These situations are most often found in cyclical sectors and commodities, where sentiment can move much faster than underlying supply and demand.

Metallurgical coal, or met coal, was one of those situations in July 2025.

Coal carried an obvious stigma. Capital had been leaving the industry for years, lenders were reluctant to finance new mines, and many institutional investors had excluded the sector altogether. At the same time, the benchmark met coal price had fallen to around US$180 per tonne. Our cost-curve work suggested that, at this level, roughly two-thirds of global supply was earning little or no acceptable economic return after sustaining capital and other costs.

The market’s conclusion was that coal was structurally challenged, therefore coal equities deserved structurally distressed valuations. However, this ignored the medium-term supply dynamics.

Not All Coal Is the Same

The word “coal” tends to collapse two different commodities into one politically charged label.

Thermal coal is primarily burned to generate electricity. Metallurgical coal is used to produce coke, a critical input in conventional blast-furnace steelmaking. Substitution is possible at the margin through electric arc furnaces and, over time, emerging lower-carbon steel technologies. But the existing global steel system cannot simply stop using met coal without a major, and capital-intensive, reconfiguration of production capacity.

Demand did not need to boom for our thesis to work. It merely needed to remain resilient.

When Underinvestment in Supply Meets Stable Demand

The foundations of the thesis were relatively simple.

For more than a decade, the industry has invested cautiously in new supply. Environmental opposition, permitting complexity, long development timelines and restricted access to bank and institutional capital have made new mines increasingly difficult to finance. Industry capital expenditure has declined steadily since peaking in 2011 and is now more than 50% below those levels. Even where an economic resource exists, converting it into exportable production can take years.

Meanwhile, demand proved more durable than the market narrative implied. Chinese steel demand had softened by around 1% year on year, and its long-term outlook remained uncertain, but India and other developing economies were expanding steel capacity and absorbing part of this weakness. The result was not strong aggregate demand growth likely to attract immediate attention. Rather, it was broadly stable demand against a constrained supply base.

A mine is a depleting asset. Maintaining output requires continuous development, equipment replacement and access to the next section of reserves. When prices sit below the level needed to cover operating costs, sustaining capital and an adequate return, producers can tolerate the pain only for so long. Higher-cost mines curtail production, development is deferred, marginal operations close and financially weaker owners eventually run out of options.

That process was already occurring. Supply was beginning to leave the market, yet the prevailing equity valuations appeared to assume that depressed prices would persist indefinitely.

They rarely do. If demand remains stable while uneconomic supply exits, the market must eventually clear at a higher price. The timing is never precise, but the mechanism is not complicated.

Over the past 12 to 15 months, that assessment began to play out. Supply tightened, met coal pricing recovered from its lows, and the operating leverage embedded in the better-positioned producers became visible.

The Cost Curve Was the Margin of Safety

The depressed commodity price established the upside opportunity, but the industry cost curve helped protect the downside.

At around US$180 per tonne, our analysis indicated that much of the sector was not earning an adequate return. That did not guarantee an immediate recovery. Commodity prices can remain irrational for longer than expected, inventories can rise, and producers sometimes continue operating at a loss to preserve employment, meet contracts or generate cash for fixed obligations.

But a price below the sustainable cost of supply contains the seeds of its own reversal. The longer it persists, the more production is removed and the fewer new projects are sanctioned. Unlike a technology product, where low prices can stimulate rapid capacity additions, new met coal supply faces years of permitting, construction and infrastructure development.

That gave the setup its asymmetry. If prices remained depressed, low-cost, well-capitalised producers could survive and potentially gain share. If prices normalised, their earnings and free cash flow would rise disproportionately. We did not need to forecast a return to peak-cycle pricing; we needed the commodity to move back toward a level at which the industry could sustain itself.

How We Chose to Express the View

A correct commodity thesis can still produce a poor investment if it is expressed through the wrong company.

We screened the global listed met coal universe for four characteristics: a low position on the cost curve, a strong balance sheet, disciplined capital allocation and a valuation that did not already anticipate a recovery. Balance-sheet strength was particularly important. In an industry where external financing had become expensive, scarce and reputationally difficult, the ability to self-fund operations was not merely desirable; it was a competitive advantage.

We ultimately established positions in three US-listed companies: Warrior Met Coal, Alpha Metallurgical Resources and Core Natural Resources.

Warrior offered exposure to high-quality hard coking coal and a major internally funded growth project in Blue Creek. Alpha combined an export-focused met coal portfolio with substantial liquidity and a history of aggressively retiring shares. Core Natural Resources brought scale and an explicit framework for returning a large share of free cash flow to shareholders.

The common thread was financial self-sufficiency. These businesses did not require a friendly capital market to survive the bottom of the cycle. They could fund their mines, manage through weak pricing and, where appropriate, return capital to shareholders while waiting for the commodity backdrop to improve.

That mattered because the weakest balance sheet can overwhelm the best commodity thesis. A highly leveraged producer may be forced to issue equity, refinance on punitive terms or sell assets just before conditions turn. By focusing on companies with cash-rich or conservatively financed balance sheets, we sought to ensure that time worked for us rather than against us.

We also considered the Australian-listed producers. Ultimately, we found the US names more attractive. In our assessment, the ASX-listed alternatives generally offered less compelling valuations, weaker or more encumbered balance sheets, or greater exposure to royalty regimes that absorbed a larger portion of the upside. This was not a judgement that the Australian assets were poor. It was a judgement that the risk-adjusted expression of the thesis was better elsewhere.

A US Investment Without a Pure US-Dollar Bet

At first glance, buying three US-listed companies may appear inconsistent with our cautious view on the US dollar. In practice, the exposure is more nuanced. Met coal is a globally traded commodity priced predominantly in US dollars, while the underlying demand comes from steelmakers across Asia, Europe and the Americas. A weaker US dollar often supports US-dollar commodity prices because the product becomes cheaper in other currencies, providing a partial operational offset.

Export producers may also earn global revenues against a largely domestic cost base. This is not a perfect currency hedge; an Australian investor still faces translation risk when US equity values are converted back into Australian dollars, and company costs can rise. However, the earnings exposure is tied more closely to global commodity economics than to US domestic purchasing power alone.

What Actually Drove the Return

The return did not come from one dramatic event. It came from several parts of the thesis reinforcing one another.

Supply discipline became more evident as weaker, higher cost operations either chose or were forced to curtail production. With few new projects available to respond quickly, this reduction in supply helped met coal prices rise by more than 45%, from around US$180 per tonne to above US$260 per tonne. Additionally, our holdings also executed well. Costs improved, production recovered or expanded, and balance sheets remained resilient.

The equity response was amplified relative to the move in the commodity price. High operating leverage meant that improving met coal prices translated into a disproportionate increase in earnings and cash flow, effectively making the businesses leveraged exposures to the commodity. Expectations had also been exceptionally low. When stocks are priced for persistently depressed conditions, they do not require perfection to perform well. A shift from “unsustainably bad” to merely “normal” can create a large change in earnings, free cash flow and the valuation multiple investors are willing to apply.

Taking Money Off the Table

During July 2025 we built a large thematic position in the Global Fund because the combination of depressed commodity pricing, extreme equity valuations and robust company balance sheets offered an unusually favourable skew. As prices and share prices recovered, that skew narrowed.

The underlying companies may still be undervalued relative to the cash flows they can generate at today’s met coal price. But the opportunity is no longer as asymmetric as it was in July 2025. Some of the supply correction has occurred, the commodity has moved away from its most distressed level, and investors now recognise more of the operating leverage that was previously being ignored.

Accordingly, we have taken money off the table at several points and redeployed it into other investments where we see stronger prospective risk-adjusted returns.

We continue to hold a smaller position of around ~4% of the portfolio because the structural supply constraints have not disappeared, the companies remain financially sound, and current valuations still offer upside if pricing remains supportive. But our position size reflects the opportunity available today, not the opportunity that existed twelve months ago.

A Useful Reminder About Asymmetry

The met coal investment sits outside the Fund’s usual collection of high-quality compounders, but it is entirely consistent with our broader investment philosophy. Warrior Met Coal, Alpha Metallurgical Resources and Core Natural Resources were all deeply unloved and the price of the respective stocks was disconnected from their underlying value.

The met coal industry had been starved of capital, the commodity was sitting near an unsustainable point on the cost curve, demand was more resilient than sentiment implied, and the strongest producers had the balance sheets to wait. We did not need the market to fall in love with coal. We simply needed supply and demand to reassert themselves.

Since the fund established its position in July 2025, the stocks have risen by an average of 83.64% as at 31 August 2026.

Sometimes the cleanest investment outcomes begin in the market’s dirtiest corners.

Disclosure

The Collins St Global Fund retains a small position in companies discussed in this article.