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):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Holds 16 Exploration Permits for Coal (EPC’s) in the Bowen and Galilee basins in Queensland where more than 1,400 million tonnes (Mt) of JORC compliant coal resource has been delineated. In addition, Bandanna has some mineral exploration licenses, primarily for oil shale in Queensland. Further M&A activity likely. Currently trading on a 9 per cent discount to Pedler’s $2.15 price target.

2)    Northern Energy Corp (NEC):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

With coal projects in Qld and NSW, NEC is well-funded to continue its progression from explorer to mine developer and coal producer. All of the company’s coal projects are early-stage, but are supported by JORC compliant resources of ~365Mt. Currently trading on a 30 per cent discount to Pedler’s $2.24 price target.

3)    New Hope Corp (NHC):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Has open cut mines at Acland on the Darling Downs and at Rosewood near Ipswich – focuses on niche marketing of its thermal coal, and exports around 65 per cent of coal production to Asia Pacific markets. Upside from its major stake in Northern Energy. Following the flood-affected suspension of production in Qld, NHC restored its Acland rail line late March.

Currently trading on a 10 per cent discount to Pedler’s $5.67 price target.

4)    Whitehaven Coal (WHC):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Is a leading coal producer in the Gunnedah Basin with five mines in the region. WHC has invested $227 million in its Narrabri mine which moved into production in June 2010. The Vickery assets, acquired in January 2010 are the focus of the WHC’s expanded exploration efforts throughout the region. WHC’s management is more interested in developing its existing high-quality coal assets and seeking new growth opportunities – rather than courting recent interest from potential buyers. Currently trading on a 30 per cent discount to Pedler’s $6.99 price target.

Andreas Kouremenos
Resources Analyst
Fosters Stockbroking

1)    Blackwood Corporation (BWD):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Late 2010 it was recapitalised and re-listed on the back of assets held by former mineral sands miner Matilda Minerals. The re-named company is now a coal-focussed group holding an extensive portfolio of 46 granted Exploration Permits for Coal (EPC) covering over 6,300 km2 and a further 22 EPC applications covering an additional 1,400km2 in the major coal basins of Queensland. BWD has identified three priority coal exploration targets in the Southern Bowen Basin and two in the Central and Northern Surat Basin, all targeting export quality thermal coal. Kouremenos expects market value to be driven by exploration results due from mid 2011. The Rolleston Project is regarded as one of the best candidates for early development due to upside from its EPCs and its proximity to existing Bowen Basin coal rail to port infrastructure. Currently trades at $0.24.

2)    Newland Resources (NRL):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Is an emerging coal exploration and development company focused on the acquisition and development of coal assets in the Bowen Basin, Qld. NRL doesn’t yet have a resource, but what appeals to Kouremenos is the track-record of recently-appointed MD Gavin May, and his chairman Tim Sugden – who both know the assets well and are committed to taking NRL to the next level. NRL is targeting 250Mt of coking coal, and Kouremenos expects the share price to at least double to $0.22 on the strength of decent discoveries. NRL is sufficiently funded to support its next drilling programme which is scheduled for August 2011.

Andrew Harrington
Resources Analyst
Patersons Securities

1)    Cockatoo Coal (COK):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Is a rapidly growing Australian metallurgical and thermal coal producer. It has a mine in production at Baralaba PCI open-cut coal mine in the world-class Bowen Basin metallurgical coal region, and many other thermal and coking coal projects in Qld and NSW. COK has raised capital and shareholders/JV partners include large coal consumers from Japan and Korea. Currently trading at a 42 per cent discount to Harrington’s $0.75 price target.

2)    Macarthur Coal (MCC):


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Is the world’s largest producer of (seaborne) low volatile pulverized coal injection (LV PCI) coal product used for steel making. MCC operates two mines in the Bowen Basin and plans to double its 2009 production capacity by 2014 through the development of the Middlemount Mine project, and an additional mine from its extensive project portfolio. MCC is regarded by many as providing excellent leverage to a recovery of coal production to meet steel market demands through LVPCI coal demand. Wet weather disruption means full year 2011 sales amount are likely to be at the lower end of its 4.1-4.3 Mt. Currently trading at a 27 per cent discount to Harrington’s $14.15 price target.


>>Back to the newsletter to view other articles – June 19th 2011


Please note that simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of should seek professional advice before making any investment decisions.