L&L Energy ( Nasdaq - LLEN ) -- Breaks Out

L&L Energy (LLEN $2.10) reported excellent better than expected Q3 (Jan.) results.  The company is an American managed coal producer that operates in China's interior.  Regulatory crackdowns on the entire industry, to promote worker safety, impacted performance in 2011 and 2012.  Output declined while the government inspected all the mines in the region.  L&L Energy received passing grades.  But the interruption caused earnings to decline.  During that stretch the company swapped a variety of properties, trading proven commodities for high potential mines that required devlopment but held substantially greater profit potential.  Those efforts started to bear fruit earlier in the fiscal year (April).  Momentum accelerated in the January quarter as volume picked up and margins expanded.

Earnings jumped 167% to $.32 a share.  Sales climbed 98% to $59.9 million.  The advance was led by a 253% increase in coal production.  Wholesale and coal washing operations also improved.  Expansion efforts promise to keep output rising in future periods.  The April quarter will be affected by the Chinese New Year celebration.  So the immediate sequential comparison might be flat.  But further gains are likely in fiscal 2014.  We estimate income will finish around $.90 a share this year and $1.25 a share in fiscal 2014.

Acquisitions are possible.  The Chinese central government has implemented a consolidation program for the coal industry.  Small operators are required to merge with larger groups by the end of calendar 2013.  The actual transactions need to be consummated by 2015.  L&L Energy has identified several candidates.  Substantial leverage could be achieved.  A successful roll-up strategy could reinforce the share price.  A higher price, in turn, could yield even more accretive acquisitions.

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