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Precious metal explorers dominated the float market in the past three years as companies took advantage of a higher gold price to raise capital. Coal explorers had less fanfare. Yet a group of six coal initial public offerings – one of the best-performed segments of the IPO market – may have further to go if coal prices rise and Queensland’s Bowen Basin has more exploration success.

The median share price gain from six coal explorers that have listed since 2008 is 140 per cent (based on the latest price against the issue price). Shares in Stanmore Coal, one of 2009’s best floats, are up from a 20-cent issue price to $1.29. Stanmore has projects in the Bowen and Surat coal basins.

The latest Queensland coal float, Carabella Resources, has had a flying start, its 40-cent shares rallying to $2.04 since listing in December. Another 2010 listing, Guildford Coal, is up from 20 cents to 68 cents. Guildford has exploration projects in the Maryborough, Bowen and Galilee basins.

Other Queensland coal IPOs have had been mixed. Shares in MetroCoal, a 2009 listing, are down from a 25-cent issue price to 24 cents. Hudson Resources spin-off Tiaro Coal, stgeloping projects near Maryborough, is up from the 20-cents issue price to 22 cents. Only Endocoal has so far disappointed investors, its 60-cents shares dropping to 38 cents since listing in 2010.

Three main factors explain the attraction in Queensland coal IPOs. The first is location: the Bowen Basin is Australia’s largest coal reserve, covering more than 60,000 square kilometres in Central Queensland. Early-stage coal explorers such as Carabella, which has a coking-coal project in an area with excellent infrastructure, have been in demand.

The second is the outlook for coal, both in the short and long term. Government forecaster ABARE predicts the disruption from natural disasters to Queensland’s coal exports between December and March could be between $2 billion and $2.5 billion in revenue, but adds: “… it is anticipated that coal prices could be settled at higher levels, partially offsetting the adverse impact on coal industry revenues”.

A Stanmore Coal investor presentation notes that global demand for metallurgical coal is forecast to increase by around 8 per cent between 2008 and 2012, and thermal-coal demand will be underpinned by continued growth in China and India, and, to a lesser degree, Korea and Japan. In theory, stronger global demand should mean higher coal prices and higher valuations for in-ground coal resources.

The third attraction was valuation. Carabella, Stanmore and Guildford clearly came to the market too cheaply – possibly because they listed in a still-troubled market for IPOs. Carabella, for example, floated with a valuation worth 37 cents a tonne on an enterprise-value basis (equity plus debt, less cash, divided by the resource tonnage) that complied with the Joint Ore Reserves Committee Code (JORC). That was in line with Stanmore’s enterprise value per JORC tonne and less than most coal companies.

The obvious question for investors is, can the shares of the Queensland coal exploration IPOs move higher after such strong early gains? Carabella and Stanmore look to have the highest-quality assets, although should still be considered speculative.

Carabella (CLR)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)   

Carabella was formed last year to acquire seven tenements. The main one, Mabbin Creek, is in the Bowen Basin, west of Mackay. Mabbin Creek has a maiden estimate of 91.7 million tonnes of coking coal complying with the JORC Code – and another 30 to 45 million tonnes of exploration targets at its Grosvenor West project. Wet weather affected exploration, but Mabbin Creek is back on track.

The plan is to get Grosvenor West to a JORC measured status then start feasibility studies late this year, and confirm additional tonnages at other Mabbin Creek target sites. If results go its way, Carabella will have plenty of good news this year as it moves towards production. Preliminary work suggests potential for open-pit production, which would bolster Carabella’s margins.

The key question for prospective investors in Carabella is valuation. After accounting for restricted securities (which the ASX deems cannot be traded for one or two years), Carabella’s market capitalisation is well over $200 million, a fair bite for an early-stage explorer. Prospective investors might wait for some heat to come from the share price before considering Carabella.

Stanmore Coal (SMR)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)  

Stanmore Coal has received less attention, but arguably has one of the best management teams of the Queensland coal IPOs. It has 318 million tonnes of JORC-inferred resources of coking and thermal coal across its Mackenzie River and The Range projects, and exploration targets of up to 370 million tonnes. Stanmore wants first coal production by 2015.

Stanmore’s current market capitalisation is about $160 million – less than Cabarella, even though it currently has a larger JORC resource. Care is needed with straight resource comparisons between Stanmore and Carabella because different types of coal are being compared. But it may be that Carabella’s recent stellar run has tipped the valuation tables in favour of Stanmore.

Stanmore had strong exploration results in its first year as a listed company, has an experienced board and, importantly, no debt and $25 million in cash to fund its next exploration stage. It also has several exploration targets yet to be drilled.

Long-term believers in the outlook for Australia’s coal industry and especially the Bowen Basin, and who want to target explorers that can make it to production, should examine the Queensland coal IPOs. Like many small floats, some have slipped under the mainstream investment radar despite strong exploration gains and share-price rallies.

Stanmore and Carabella look the best places to start, although investing in micro-cap coal explorers is not for the faint-hearted and must be considered speculative.

Tony Featherstone is a former managing editor of BRW and Shares magazines, and a business journalist for almost 20 years. He is not a licensed financial adviser. This column provides general information and ideas on market, sector and company trends, rather than specific financial advice. Readers should not imply stock recommendations from this column. Do further research or consult a licensed financial adviser before acting on information in this column. The author does not own shares in any company mentioned in this article.