Investors should always consider the company, sector and global outlook before buying shares. In the case of coal – thermal for generating electricity and metallurgical or coking for steelmaking – the outlook appears relatively bright.

According to the Australian Bureau of Agricultural and Resource Economics and Sciences, world thermal coal trade is projected to increase by 4 per cent a year to 962 million tonnes in 2016. Increasing thermal coal imports into stgeloping economies, particularly India and China, will drive growth, and growing demand will be met by Australia, Indonesia and Columbia.

In its 2011 March quarterly report on Australian commodities, ABARES says global metallurgical coal trade is forecast to increase at an annual average of 5 per cent to reach 341 million tonnes in 2016, with emerging Asian economies lifting imports. Coal companies may be a welcome addition to any balanced portfolio, and State One Stockbroking’s John Rawicki offers his value selections for investors to consider.

Rawicki’s list focuses on explorers and junior producers, as he believes they offer the most upside in percentage terms if all goes to plan. That’s the point – potentially bigger gains carry substantially higher risk, which investors should carefully weigh before buying stocks with promising objectives.   

Cockatoo Coal (COK)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Rawicki says Cockatoo Coal appeals as a future key producer after posting a $3.5 million profit in full-year 2010. It’s been producing metallurgical coal from its Baralaba mine in Queensland’s Bowen Basin since acquiring it in late 2008, and plans to lift production to 750,000 tonnes a year in the next 12 months, with a further ramp up to 3.5 million tonnes a year by 2014. It owns an advanced thermal coal project in the Surat Basin. “With an impressive 1.13 billion tonne JORC (Joint Ore Reserves Committee) resource across its projects and $25 million cash in the bank, Cockatoo is quickly establishing itself as a major supplier of thermal and coking coal from Australia’s richest coal regions,” he says.

Bathurst Resources (BTU)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Bathurst Resources plans to start producing high quality coking coal from its Bulla project in New Zealand late this year. “The company’s coal is top quality as its low in ash and sulphur and high in carbon,” Rawicki says. “Another benefit is the coal is near the surface and occurs in thick seams.” He says Bathurst has a JORC Resource of 47.1 million tonnes and will spend most of 2011 trying to shore that up towards its planned exploration target of between 60 million and 90 million tonnes.

Endocoal (EOC)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Endocoal is the fourth biggest tenement holder in Queensland’s Bowen Basin. The company aims to delineate a JORC resource of about 100 million tonnes of thermal and coking coal across its Orion Downs Rockwood projects during 2011, a substantial increase from its current 41.2 million tonnes. Rawicki says Endocoal needs these resources in JORC category to be eligible to apply for capacity at the planned Wiggins Island Coal Export Terminal. “So chances are Endocoal will do what it takes to achieve that figure,” he says. “Endocoal is a low-cost explorer with reputable management and is suitable for investors with a healthy appetite for small-cap coal explorers.”

Australia is a top five global coal producer, and thermal exports are forecast to increase by 9 per cent to 161 million tonnes in financial year 2011/12, according to ABARES. Coking coal exports are expected to rise from 159 million tonnes in 2010 to a forecast 174 million tonnes in 2012. Since 2001, Rawicki says thermal coal prices have surged 440 per cent to US$142 a tonne. Coking coal is forecast to hit a record $US400 a tonne this year, as steelmakers face a shortage following the recent Queensland floods. Traditionally, coal contracts were priced annually, but Rawicki says suppliers are increasingly shifting to quarterly and even spot pricing to capture price spikes. “The growing hunger for coal within emerging economies, such as China and India, will continue to drive overall global demand as coal still provides the cheapest form of power for their burgeoning industries,” he says.

Hunnu Coal (HUN)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Hunnu Coal has a 400 million tonne JORC coal resource in Mongolia. It’s planning an aggressive drilling program this year, with an exploration target of between 650 million and 1 billion tonnes of coking and thermal coal. It will have 11 rigs operating across 10 different projects. “The projects are close to coal-hungry China, enabling fast and easy shipment routes,” Rawicki says. “Hunnu is the most active explorer in Mongolia’s coal-rich South Gobi region and investors can expect plenty of drilling results this year. Initial coal quality analysis indicates very high energy content.”

Coal of Africa (CZA)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Rawicki expects Coal of Africa to benefit from higher coking coal prices in response to supply disruptions caused by the Queensland floods. It produced 1.64 million tonnes of thermal and coking coal in the December quarter from two major projects in South Africa. Its major Woestalleen project is forecast to produce 2.5 million tonnes of coal in the next financial year.  “These coal deposits are remarkably undisturbed, horizontal and shallow, enabling a relatively simple and low-cost mining process,” Rawicki says. “The company has secured all the necessary rail and port logistics which will allow the company to ramp up its export operations.”

Riversdale Mining (RIV)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Riversdale Mining has metallurgical and thermal coal projects in Mozambique, which Rawicki says is considered to be in one of the world’s richest coal regions. He says the company’s Benga project contains a massive 4 billion tonne JORC resource, equal in quality to the high-grade coking coal found in Australia’s Bowen Basin. Its adjacent Zambeze project sits on a colossal 9 billion tonne coal resource. Rawicki says Tata Steel, India’s largest steel producer, has a strategic 27.1 per cent stake in Riversdale to secure future coal supplies. Rawicki says investors may find value as Tata Steel was unwilling to accept Rio Tinto’s takeover offer of $16 a share for Riversdale Mining, forcing Rio to sweeten its bid to $16.50. Riversdale closed at $15.95 on March 16, 2011. Riversdale shareholders have until April 1, 2011 to accept Rio Tinto’s offer. In any case, Rawicki says Riversdale, as a stand-alone company, offers a bright long term future.

Cockatoo Coal (COK) 47.5 cents
Bathurst Resources (BTU) 97 cents
Endocoal (EOC) 39 cents
Hunnu Coal (HUN) $1.28
Coal of Africa (CZA) $1.27
Riversdale Mining (RIV) $15.95

Price current to market close, 16 March 2011

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