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A China import ban may help key Aussie coal miners. While the ban isn’t in place yet, this is definitely a space to watch.

Thermal coal used for generating electricity is Australia’s third largest export commodity behind coking coal (used for steel making) and our top export commodity, iron ore. 

Coal prices rallied strongly in 2010 and 2011, fueled by floods in Southeast Asia and Australia and the tsunami in Japan.  Then the US shale gas boom propelled a shift from coal to natural gas as the price of gas fell.  In the face of declining demand, coal producers failed to cut back production, hence explaining why prices today are depressed (see chart below):

As you can see in the chart, in early June the price was $85 per tonne, a price not seen since 2009.  At the Coaltrans Asia conference in Bali, the general message was that thermal coal prices will remain depressed unless Aussie miners cut back production.

Reportedly, the National Energy Administration (NEA) in China is weighing up a policy to curb imports of low-grade thermal and coking coal. Air quality in China is becoming a national health problem. Under consideration is a ban on imports of thermal and coking coal with high ash and sulfur content.  

This could be a catalyst for Australia’s coal producers, since Indonesian coal is of lower quality than what we mine here.  To date, the proposal faces internal opposition from the Chinese electricity generation sector.  Should it come to pass Macquarie Bank notes that Indonesian coal producers will suffer and a “two-tier” coal market may result, with substantially lower prices offered for low grade coal.

The best bets among ASX listed coal stocks would likely be pure plays whose principal commodity is thermal coal. Mining giants BHP and Rio might benefit as well, but Rio is actively looking to sell assets to reduce its exposure to coal, and BHP appears committed to a growth strategy focused on oil and gas production.   

The following table lists 6 potential beneficiaries of the China import ban.  The performance and debt indicators reflect year end figures for FY2012.  Here is the table listed by market cap:

Company (Code)

Share Price

52 WK % Change

P/E

P/B

 

2 Yr EPS Growth Forecast

Profit Margin

 

Operating Margin

Long term Debt

 

Gearing

 

New Hope (NHC)

$3.81

-8%

25.4

1.5

-28.8%

25/3%

28.9%

$00.00

0%

Whitehaven Coal (WHC)

$2.19

-49%

126.44 (TTM)

0.66

-53.6%

9.3%

11.9%

$195m

14.4%

Washington H Soul Pattison (SOL)

$13.75

+5%

22.07

1.15

-8.6%

22.4%

32.3%

$2.2m

1.4%

Coalspur Mines (CPL)

$0.45

-48%

N/A

1.48

21.7

N/A

N/A

$29m

17.9%

Blackgold International (BGG)

$0.20

-5%

4.42

1.47

N/A

45.4%

54.2%

$16.1m

62.8%

Bandana Energy (BND)

$0.105

-73%

33.77

0.27

N/A

2256%

-1546%

$00.00

0%

 

At first glance the Price to Book ratio for all stocks looks attractive.  However, the ASX Energy Sector P/B is 0.68 which leaves only the smallest company, Bandana Energy (BND) with a market cap of only $55m, as a possible bargain pick.  BND’s outsized profit margin is an artifact of calculating extreme values.  The fact is Bandana is still in the exploration phase with no revenue expected from producing coal mines until mid-2015.  Yet the company went from an NPAT of -$4.4m in FY2011 to +$3.1m in FY2012 due to income from financing and other non-operational activities.

Bandana is one to watch with a host of coal projects and five tenements for oil shale with 100% interest.  The company’s flagship thermal coal prospect is Springsure Creek located in the Queensland coal fields.  On 19 June 2013 management released a project update for Springsure Creek in which they pointed out the low sulphur higher energy content of Springsure Creek is well above the energy and sulphur content standards under consideration in the Chinese ban.

Springsure is an underground mine with a companion agricultural project to demonstrate the compatibility of mining and agriculture interests.  This is a long life mine of 40 years with an anticipated annual production of 11 million tonnes per annum (Mtpa).  Bandana has no debt with approximately $132 million cash on hand as of the most recent quarter.  The company is actively pursuing joint ventures with potential Chinese and Korean investors.  

What makes Bandana stand apart goes beyond the quality of the coal and the life and production output of the mine.  Springsure is close to rail and port transport and is in the advanced stages of the regulatory approval process.  Following the latest update UBS reiterated its NEUTRAL rating with a $0.20 price target; progress towards the mid-2015 production target seems to be “on track,” although some concern surrounded funding in an uncertain pricing environment.  CIMB Securities maintained its OUTPERFORM recommendation in May but cut the target price from $0.50 to $0.35.

The 73% year over year share price drop reflects the lagging coal price as the stock was outperforming going into 2011.  Here is a five year price chart:

With a market cap of $178m little known Blackgold International (BGG) is another coal producer to watch.  This one an extra layer of risk to Bandana as the company is registered in Australia and trades on the ASX but its four underground operating mines are in China.  Blackgold is the largest non-state owned thermal coal producer in China.  While the China import ban is an environmental move, it will also support domestic coal producers.  All four of Blackgold’s mines produce coal above the threshold standards being discussed for the import ban.

Blackgold management feels the company’s stock is significantly undervalued and the numbers suggest they may be right.  The company began trading on the ASX in early 2011.  For FY 2011 Blackgold showed a net profit after tax of $29.5m and a return on equity of 23.6%.  For FY 2012 NPAT was $45.4m with an impressive ROE of 33.4%.  The P/E is a tantalising 4.42 but growth estimates are absent due to the lack of analyst coverage.

Blackgold had been looking to list on the Hong Kong Exchange (SEHK) but is now focusing its effort on the Singapore Exchange (SGX).  In addition to its mining operation, the company has a subsidiary that trades PCI coal imported from third party producers in Australia and Indonesia.  PCI, an acronym describing coal derived from the pulverised coal injection technology, is used in steel production and as such is considered a form of coking coal.  Blackgold is a thinly traded stock averaging about 40k shares per day versus 1m shares per day for smaller rival Bandana Energy.  Here is a price chart for the company since it began trading:

The final stock in the table that could be considered a risky junior miner is Coalspur Mines (CPL) with a market cap of $246m.  Coalspur is another company trading on the ASX with mining interests elsewhere.  The company is headquartered in Perth with offices in Alberta, Canada where it is developing the Vista Coal Project into what management claims has the “potential to be one of the largest thermal coal export mines in North America.”

The project has two stages with the ultimate goal of 12Mtpa with a mine life of 29 years.  The infrastructure to transport the coal for export from ports in Western Canada is in place with the first shipments of coal anticipated in mid-2015.  On 19 June 2013 the company announced it was ready to proceed with Phase 1 with secured capital funding of $458m.  The stock price had gained a bit beginning on 14 June and the news sent the price higher.  Here is a one month chart:

According to Thomson/First Call there are five analysts covering CPL.  Note the company also trades on the Toronto Stock Exchange under the code CPT.  One analyst has a STRONG BUY on the company with two at BUY rating; one at HOLD; and one at UNDERPERFORM.  Coalspur has additional exploration activity underway at Vista South and Vista Extension.  

Washington H. Soul Pattinson (SOL) is classified as an energy company but in reality it is an investment conglomerate giving its investors exposure to a variety of ASX sectors, including coal mining, telecommunications, building materials and pharmaceuticals.  Its largest holding is New Hope Corporation (NHC), the largest coal producer by market cap on the ASX.  Investment advisory firm Pitt Capital Partners Limited is its other principal operating subsidiary.

SOL has been on the ASX since 1903.  If you buy a share of SOL you get exposure to the following companies:

•    Australian Pharmaceutical Industries Limited (API)

•    Brickworks Limited (BKW)

•    Clover Corporation Limited (.

•    Ruralco Holdings Limited (RHL)

•    TPG Telecom Limited (TPM)

The company’s grossed up yield for FY 2012 was 4.6% and its ten year share price performance has been stellar.  Here is a ten year chart showing the company handily outperforming the ASX 200 XJO:

Whitehaven Coal (WHC) has suffered a tough year along with the entire mining sector but the share priced bounced 9% as mining titan Nathan Tinker sold his stake.  The buyer was Farallon Capital Management, now the biggest shareholder.  A board seat for Farallon may be in the offing and while JPMorgan reiterated its BUY rating on WHC, it does not see Farallon “looking for the quick flip.” However, the spectre of M&A activity in the sector might in part explain the positive reaction to the news.  The one month chart says it all:

On 16 April 2013 Citi downgraded Whitehaven to NEUTRAL from BUY after Citi’s global commodities group downgraded its forecasts for copper, coal, gold, and aluminum.  The target price for WHC was cut from $3.70 to $2.30.  CIMB Securities is the only other major investment firm in agreement, citing the company’s reliance on low grade coking coal.  Whitehaven has plans to increase its focus on thermal coal principally from its Maules Creek operation, but CIMB feels that could be a long time in coming.  Deutsche Bank, UBS, JPMorgan, BA-Merrill Lynch, and Credit Suisse all have BUY, OVERWEIGHT, or OUPERFORM recommendations.

If there is a reason to invest in WHC it is Maules Creek.  Macquarie noted WHC’s current share price ignores the long term potential growth from Maules Creek as part of the reason for its OUTPERFORM recommendation.

New Hope Corporation (NHC) is the largest publicly traded coal producer in Australia with a market cap of $3.2 billion.  The company’s principal revenue source is the 6 million tonnes per year of high quality thermal coal.  The company has the strongest balance sheet of any stock in our table, with no debt and an impressive $1.3 billion cash on hand as of the most recent quarter.  

NHC is also well diversified.  The company has interests in coal seam gas, oil, agricultural/mining compatibility, port management, and is active in developing coal to liquids technologies.  Data from Thomson/First Call shows a majority of analysts are bullish on the stock, with 3 STRONG BUYS, two BUYS, one HOLD, and two UNDERPERFORMS.  However, a one year price chart suggests an alternative strategy to coal exposure through shares of New Hope.  The chart compares NHC to its largest shareholder, Saul H Pattinson:

 

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