eight stocks to ride the coal boom

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Eight stocks to ride the coal boom

By Mark Story | 19.06.2011

Coal exports during the March quarter may have taken a hefty whack after Queensland’s recent ‘big-wet’ - but the clouds that caused havoc to many coal-plays may have a silver lining.

Admittedly, the knock-on effect of the disrupted coal supply from Australia did cause a short-term rally in prices. While this did defer orders from several major importers, demand now looks set to reassert itself on the market as prices ease and supply/demand fundamentals only reaffirm a robust outlook for the sector at large.

A recent coal report by Wood Mackenzie expects the 28 projects within its coal supply research to contribute 157 million tonnes of marketable coal annually by 2023 – with thermal coal for export representing around 60 per cent. Indeed, more countries will move to develop their coal assets - especially thermal – but to their benefit, most local producers tend to be low-cost operators.

Much of the positive outlook for the sector is wired to greater dependence on thermal coal from Japan, India and China. Australia is also an important source of coal for South Korea, providing 32 per cent of its thermal, 30 per cent of anthracite and 56 per cent of coking coal imports.

The recommissioning of coal-fired power stations - to cover some of the power short-fall left by nuclear plants no longer operating - is expected to add an extra kicker to demand from Japan. Meantime, growing electricity demand in China and India – which together take around a quarter of Australia's total production of coking coal - also places greater pressure on power utilities, where stockpiles have needed replenishing ahead of current high demand season.

In just 10 years China has gone from an exporter of 90 million tonnes of coal to an importer of a corresponding amount. According to Neil Dhar executive vice president of trading house Noble Group, attempts to feed their rapidly growing power industries could see China’s thermal coal imports rise from around 90 million tonnes in 2011 to 200 million tonnes (Mt) in 2015. India's thermal imports are also expected to rise to more than 100 million tonnes by 2015, from around 67 million tonnes this year – then double again by 2024.

Based on tight supply, Andrew Pedler analyst with Wilson HTM expects coal prices to rise on average 30 per cent in 2011, in line with the 30 per cent gains in 2010 – with the price of hard coking and thermal coal reaching US$277.5/t and US$130/t respectively (see table below).

At US$130/Mt, miners can make healthy margins on thermal coal, but in anticipation of any longer-term price weakness, Pedler says investors should identify low-cost producers than can still turn a profit or justify bringing on new mines – should prices head south towards the US$90/Mt threshold.

While the US has mopped up coal shortfalls experienced in recent months, their ability to expand past these levels - especially given their existing infrastructure - look doubtful. As a result, growing demand is expected to see Qld and NSW coal terminals reach their capacity both this year and into 2012 – and this suggests a potential upside for FOB prices over the next financial year.

Floods aside, corporate activity hasn’t been kind to either Gloucester Coal (GCL) or Whitehaven (WHC) – with Gloucester remaining the worst performing stock on the Paterson’s Coal Index – down around 26 per cent. Much of the decline can be attributed to proposed acquisition of Donaldson Coal – and while mines will increase production targets and resources – the price paid for the asset is regarded as excessive.

Due largely to recent market volatility - plus lingering uncertainty over carbon tax, and the proposed MRRT tax - the rush for assets many were expecting never eventuated. But with small and mid-tier operators now looking ripe for takeover at current levels, Rod Buckton coal sector analyst with BGF Capital doesn’t think an upturn in M&T activity is too far away.

Given the growing global competition, especially amongst thermal coal exporters, Buckton says Australia’s low-cost high-energy coals will become more desirable. He says the fact that most coal stocks are acquired for a 30 per cent premium over the share price shouldn’t be lost on investors.

Andrew Pedler
Senior resources Analyst
Wilson HTM

1) Bandanna Energy Ltd (BND):

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