Coal: Dawn of the Black Gold Rush
Coal is a complex natural resource that is primarily used to fuel power or cement plants, two commodities that are expected to see increases in demand as global populations and per-capita income in developing nations increase. Increased demand for coal is already being seen in China, which accounts for nearly half of global coal demand, and is being used for power generation and metallurgical coal to produce steel. Now with an increase in demand in neighboring India, the two Asian neighbors can consume a lot of coal together, to fulfill their economic dreams of industrialization and growth.
Coal India IPO Success: India's largest coal producing company Coal India (CIL), which had launched the country's largest IPO, saw tremendous response from investors; backed by released money blocked in the IPO. CIL had received bids for $54 billion worth of equity shares as against issue size of $3.5 billion. The market cap of CIL stood at Rs 2.16 lakh crore, which brought the stock to 4th rank on market cap basis after Reliance Industries (RS), ONGC and SBI. Coal India attracted bids worth at least $48.7 billion, exceeding the gross domestic product of neighboring Sri Lanka, as energy demand in an accelerating economy and a surging stock market helped draw record inflows.
Russian Markets: Brunswick Rail, Russia's largest private railcar leasing firm, has revealed that all of its stock is leased out and wagon rental rates for coal and other materials are up six-fold since January 2009 as a shortage roils the market. Brunswick Rail, founded in 2004, currently leases gondola wagons for coal and other raw materials for $30-$35 per day, compared with $5 per day in January 2009 and $20 per day a year ago.
Australia Coal: Coal is Australia's second biggest export earner after iron ore and rapid growth in China and India have kept global coal markets tight. The rising demand from Asian giants India and China have forced BHP Billiton (BHP), Rio Tinto (RTP), and other mining companies to expand operations to keep up with the huge demand, in turn overstretching the capacity of Australia's Newcastle port by almost 10 million MT on an annual basis as it battles with bad weather and congestion. Meanwhile, Australia's thermal coal prices-- a benchmark for Asia-- rose over $1 PMT during the last week as continuing concern about wet weather in both Indonesia and Australia, as well as Chinese buying interest, boosted prices.
China Coal: According to Thomson Reuters report, with a chilly winter ahead and the Asian Games in November, utilities in China have kicked off stockpiling to meet expected higher power demand, pushing domestic prices to the highest since January. The prospect of more demand from the world's top coal consumer is helping boost Australian and other global coal values, but traders said that so far there haven't been many deals because of constrained supply, and as the Chinese balk at paying high prices.
Coal: Global Price Brief: Coal stockpiles at U.S. power plants rose just 0.6 percent this week but remained 20.5 percent smaller than a year ago, while Coal shipments from Australia's Newcastle port, the world's largest coal export terminal, rose 14 percent in the past week, despite a brief closure on Sunday due to protests at the port. Australia's thermal coal prices, a benchmark for Asia, closed at $94.89 per MT last week, slipping from $97.07 a week earlier. China's benchmark thermal coal prices at Qinhuangdao port stayed flat at about $114 PMT, but dropping stock levels were lifting expectations that buyers may start importing coal again.
Coal ETFs Options:
Although a recent drop in the natural gas prices has had some short term impact on the prices of coal exchange traded funds, an increased demand from Power hungry India-- the world's second largest populous nation-- is set to trigger a rally in the coal ETFs in the coming weeks. Some of the options for investing in Coal ETFs include:
1: Market Vectors Coal ETF (NYSEArca: KOL): The Index provides exposure to publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. As such, the Fund is subject to the risks of investing in this sector.
KOL Top Ten Holdings
1. Peabody Energy Corporation (BTU): 7.81%
2. China Shenhua Energy Company Limited (01088): 7.74%
3. Alpha Natural Resources Inc (New) (ANR): 7.59%
4. China Coal Energy Co. Ltd. (01898): 7.50%
5. Consol Energy, Inc. (CNX): 6.72%
6. Yanzhou Coal Mining Company Limited (01171): 5.73%
7. Joy Global, Inc. (JOYG): 4.51%
8. Bucyrus International, Inc. A (BUCY): 4.43%
9. Arch Coal, Inc. (ACI): 4.29%
10. PT Bumi Resources TBK: 4.26%
Expense Ratio: 0.62%
2: PowerShares Global Coal Portfolio (NASDAQ: PKOL): The Index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the exploration for, and mining of coal, as well as other related activities in the coal industry.
PKOL Top Ten Holdings
1. Peabody Energy Corporation (BTU): 8.78%
2. Cameco (CCJ): 7.93%
3. China Shenhua Energy Company Limited (01088): 7.42%
4. Consol Energy, Inc. (CNX): 6.54%
5. Inner Mongolia Yitai Coal Company Limited (900948): 6.27%
6. Coal & Allied Industries Limited (CNA): 4.32%
7. Alpha Natural Resources Inc (New) (ANR): 4.06%
8. Adaro Energy Tbk: 4.02%
9. PT Indo Tambangraya Megah: 4.01%
10. China Coal Energy Co. Ltd. (01898): 3.92%
Expense Ratio: 0.75%
Disclaimer
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5 comments
Given recent events, for thermal coal I am rather keen on this one:-
http://www.prophecyresource.com
Note: Canadian listed - V.PCY
It's in Mongolia and has recently started production at the Ulaan Ovoo mine, but is not selling to China, which means they get better prices. The coal is shipped to the Pacific coast through Russia, There is therefore tremendous leverage to any increase in seaborne thermal coal prices, such as could happen if for example there were weather problems in Queensland ...
The stock is currently being held back absorbing a recent large financing. This ought to provide good liquidity for anyone wishing to buy in size. That doesn't apply to me, but I do have a large chunk of my account in it. The market cap is around $230m, compared to well in excess of $2bn for South Gobi Resources (T.SGQ), which is about the only company you can compare it with.
such as could happen if for example there were weather problems in Queensland ...
Looks like the current Queensland floods could put back full output for 6 months.
http://www.reuters.com/article/idUSL3E7CH13Q20110117
Only 15 percent of the 57 coal mines in Australia's Queensland state are in full operation after devastating floods, while 60 percent are operating under restrictions and 25 percent are yet to resume operations, the Queensland Resources Council said.
Mining services experts have said it could take up to six months before all mines are back to full operation as the lack of available pumping capacity and environmental regulations slow efforts
I think Nomura posted something fairly recently on Thermal coal.....
Thermal Coal: - Supply shortages in China and the voracious appetite of India have set the scene for a strong decade for the coal market, according to the Nomura Equity Research’s mining team. An in-depth look at the sector comes up with positive forecasts for both coking and thermal coal. So much so that thermal coal is now Nomura’s preferred commodity in 2011.
“After having had copper as our preferred commodity exposure for 2009, and iron ore for 2010, thermal coal becomes our preferred commodity exposure for 2011,” Jake Greenberg said in a note to clients.“We forecast large supply deficits for the seaborne thermal coal market for several years with Indian import demand more than trebling over the next five years and Chinese imports increasing by 50 percent over 2009-12. “We forecast thermal coal prices to peak in 2012 with an average price of $170 per tonne.”
They then went on to list their "plays" which I have since reduced to a princely TWO (for my own focus) I can't remember what the other two or three were(Coal of Africa perhaps but dont quote me!)
Strategic Natural Resources: Set to produce ‘clean coal’ at turn of the year. Plans to bring the Elitheni Mine into production towards the end of this year. The mine is in the Eastern Cape Province in South Africa. Elitheni has a 150 million tonne resource, although SNR has drilled only 3 percent of the project area, which measures 1,800 square kilometres. By extrapolation the company estimates there could be as much as 3 billion tonnes of coal of which as much as 1 billion could possibly be recovered. Initially the mine will produce 500,000 tonnes a year, most of which will be earmarked for the export market. However some will also be mined to satisfy the local industrial market. Eighteen months to three years down the line that figure could be as high as 2.5 million tonnes per annum.
Oracle Coalfields: Developing Pakistan’s largest ever coal mine – covered via RGM stake
Oracle Coalfields (PLUS:ORCP) is on the precipice of bringing into production Pakistan’s largest ever coal mine. The PLUS-listed firm has been working on the Thar Coalfield for the past four years and it now has a series of hurdles to negotiate in the next year to 18 months before the mine gets up and running.
Regency Mines (LON: RGM), which is led by AIM dealmaker Andrew Bell, is a cornerstone investor in Oracle, after it bought 18.5 million shares, or 20.04 percent of the company, for 5.5 pence each back in December.
I'm looking for an entry point into SNRP, have RGM(which has a stake in Oracle) so that's enough exposure for me there imv....
Got this in my email tonight.
A write up on 4 coal companies at differing stages of development from Watshot (James Faulkner) .
(I've had a largish position in Churchill mining for a while and have continued to add on weakness - a great investment at current prices imv.)
In this report, first published last Wednesday on WatsHot.com, the expert tipster takes a detailed look at coal mining and the stocks that could help you take advantage of increasing demand for the fuel.
It may be dirty, but coal is set to return to the spotlight in 2011 as demand for cheap sources of energy heats up in the developing world. Latent trends are currently being exacerbated by the recent floods in Australia which have sent coal prices to a two-year high on the back of supply disruption in the world's largest exporter of coal. The situation is said to be worse than the 2008 flooding when the coking price moved above $300 per tonne for the first time, as the number of mines and transportation infrastructure affected is much greater. For a point of reference, the mines affected in 2008 took at least 6 months to recover from the interruption and return to full capacity. The latest rain comes after the country saw its wettest September/November period on record. In the past few months coal miners Rio Tinto, Xstrata, Vale, MacArthur Coal and Aquila Resources have all declared force majeure in the coal-ri ch Bowen Basin, allowing them to miss delivery commitments. In the week to 24th December, coal prices at the Richards Bay Coal Terminal in Queensland jumped 14% to an average $128.10 per tonne.
The fact that Australia accounts for almost two-thirds of the global coking coal trade points to continued price spikes in the coming months. Coking coal is a vital ingredient in steel-making, and unlike thermal coal it has no obvious replacement. With demand for coking coal remaining very strong indeed in India and China, and a move to a quarterly pricing system has facilitated higher price levels since it was implemented. The Steel Authority recently agreed to pay $225 per tonne to suppliers, a level that is 74% higher than the price it paid during the year ended 31st March 2010. Broker UBS forecasts that prices will hit $250 a tonne in the second quarter of 2011.
The outlook for thermal coal - the form of coal used in power stations - also looks bright. A report from Deutsche Bank said prices for thermal coal are likely to be 17% higher than expected because of global shortages over the next two years. The bank predicts that thermal coal prices will reach $118 per tonne next year and $140 in 2012. Here, too, the picture is one of rising demand exacerbated by constrained supply in key producing areas.
Rising prices have proved a catalyst for M&A activity in the sector. The most notable activity of late includes Rio Tinto's £2.2 billion bid for Riversdale Mining's Mozambique operations; Vallar's $3 billion deal to make a mining company from the coal assets of the Bakrie family in Indonesia; and Walter Energy's $3.3 billion bid for Western Coal earlier this year (on which WatsHot subscribers bagged a 180% profit). 2010 saw 27 coal deals, compared to 25 in 2009, with single mega-asset transactions accounting for 15 deals and up 50% on 2009 levels, according to Wood Mackenzie Group. This trend is likely to continue in 2011. Here are a few ideas of how to play it.
Churchill Mining (CHL)
Churchill has a potentially world-class project on its hands in the East Kutai project in Indonesia. Even in the project's current embryonic state, broker Astaire believes the company could achieve a sale value in excess of $300 million - significantly greater than the firm's current market capitalisation of 114 million pounds. Whatever the eventual outcome, payback would be relatively swift. At 20Mtpa (million tonnes per annum) and a conservative cash operating margin of $20 per tonne, the project would generate free cashflow of $400 million per annum for at least 30 years. At a more realistic margin of $30 per tonne (based on $45/t revenue and $15/t costs), this increases to $600 million per annum. Recent studies have suggested that the production rate could be as high as 35 Mtpa. Getting the project into production will require deep pockets, with direct capital expenditure estimated at $1.2 billion. However, the company states that it looks forward to "moving swiftly into the next stage in the ongoing strategic process and bringing this large scale Project into development", and discussions with third parties are ongoing.
Beacon Hill Resources (BHR)
Rio Tinto's $16 per share offer for Mozambique coal developer Riversdale is good news for neighbouring Beacon Hill Resources. The Moatize basin in Mozambique is one of the last undeveloped fields containing potential to produce hard coking coal and Rio's move has brought it into the spotlight. Beacon Hill Resources already produces coal on a small scale from the Minas Moatize mine, and has fully funded plans to lift production in 2012 to over 2 Mtpa (million tonnes per annum), 30% of which is expected to be coking coal for the export market. The firm enjoys first mover advantage in the basin and the current infrastructure is capable of handling the planned ramp-up in production. Broker Collins Stewart expects the shares to be a top performer in 2011. The broker values Minas Moatize at 160 million pounds, of which 68% could be attributable to Beacon Hill, implying a pre-funding NPV (net present value) per share of 55p.
Ncondezi Coal (NCCL)
Also operating in Mozambique is Ncondezi Coal, which is located in a separate basin 26km to the north of Moatize where the presence of coking coal has yet to be proved. The shares rose sharply in December in anticipation of a significant upgrade to the existing 1.8 billion tonne JORC Resource following a recently completed 76-hole drilling programme. Upon completion, the company announced that coal had been intersected on all previously undrilled blocks, and comprehensive results are due to be announced some time in the first quarter of 2011. If coking coal is present in significant quantities then the shares should fly; if not, they will probably fall back. This is therefore an investment for risk tolerant investors only.
Coal of Africa (CZA)
South Africa-focused Coal of Africa recently entered into an agreement to pay a total consideration of $75 million for the 1 billion tonne Chapudi Coal Project, which is contiguous with the firm's Makhado Coking Coal Project. Acquired from Rio Tinto Minerals Development Limited and Kwezi Mining Limited, the Chapudi Coal Project provides the company with an additional estimated 1.04 billion tonne JORC resource (of which 90Mt is Measured, 220Mt Indicated and 730Mt Inferred), which could potentially transform its existing 947Mt Makahdo Project into a major coal mining complex situated in the Soutpansberg Basin. Near-term upside could be provided from the results from the Makhado Project definitive feasibility study due in early 2011, or the results of the bulk sample pit being developed to support the off-take agreement with Arcelor Mittal. The shares traded as high as 300p back in 2008, but the recession came along as well as several operating setbacks, pushing the shares as low as 50p. They currently trade at 110p, and broker Evolution has a risk-adjusted 205p target price.
What the chuff is Cameco doing in that ETF? I like the company, but uranium != coal in any way shape or form.
Anyway, my top coal picks would all be Australian, namely Linc Energy (ASX:LNC), New Hope Corporation (ASX:NHC) and White Energy (ASX:WEC). All of these guys are involved in the stranded coal business, which is where the really big bucks should be made over the long-term.