The Chinese Coal Conundrum (PUDA)

At the beginning of 2011, I wrote an article about a Chinese coal company called Puda Coal (PUDA.PK).

Here's the crux of the piece:

"…my recommendation would be to buy Chinese coal companies like Puda – with domestic production. Even if China's coal demand is reduced by half, they'll still need to tap into their domestic supply. It's relatively cheaper than Australian coal, it's readily available and it's extremely important to China's growth and sustainability. I'd recommend picking up shares of Puda under $20."

Why am I telling you about this company now? Well, it's been a long 10 months since I wrote that piece on Puda.

Since then, Puda fell to 50 cents a share on suspicion that its Chairman (Ming Zhao) has sold American shareholders down the river, in so many words.

Shares were halted (meaning you could neither buy or sell them) back in April on this suspicion, and since they were unhalted in August, they've crashed spectacularly. They've also been delisted from the NYSE, and are only trading on the pink sheets.

The SEC intends to sue the Chairman, the CEO and CFO have both resigned – and it's basically a worst case scenario for a stock.

I've since told some readers to sell as soon as possible. If that means taking a 90% loss, then consider yourself lucky that you're not getting out at a total loss.

I'm not proud that I told you to buy this company. It's the worst investment I've ever recommended – and worse still, there was really no way to get out of this stock before it fell as far as it did.

When shares get halted due to this kind of blatant malfeasance, it means you're going to end up taking it in the shorts no matter how closely you follow the day to day price movements.

I received a question about this stock from a reader recently.

LR wrote:

"I was one of the suckers that bought Puda at close to $12.00 a share. By the time I heard about Little's reveal, Puda was frozen @ $6.00 a share. Unfortunately I still have all 3,000 shares.

I heard that the CEO was going to buy all outstanding shares. Is that true? Or was he just posturing to get out of the headlines?

Now Puda is down to $.60 or so. Do you think I should sell it or wait for the CEO to take Puda private by paying the stockholders $12 a share as he offered?"

Thanks for writing in, LR – even considering the ill tidings of your question.

I can't recommend believing a single word from the Chairman of this company. As far as I can tell, he's done nothing but lie to shareholders, the SEC, and a variety of other people.

If you can get out at 60 cents a share, I'd take it. The risk is that you'll lose the remainder of your investment – and a total loss is never advisable.

I hope we can all learn a lesson from this Puda debacle. I know have. I hope I don't have to learn any more of these lessons either, and I'm extremely contrite and empathetic if you lost money on this stock.

If you're interested in more of my commentary on Chinese stocks specifically, you should read this piece I wrote yesterday.

Good investing,

Kevin McElroy
Editor
Resource Prospector