In a 2012 speech in Brisbane former Australian Prime Minister John Howard stated that Australia should not be mesmerised by China’s growth but should turn to India. Yet it seems Australian investors remain in the grips of China fever, with the slightest ripple in Chinese economic indicators sending many ASX stocks tumbling.
What Howard saw was a simple matter of demographics. India’s population is increasing and will soon overtake China as the most populous country on the planet. The following chart from the Treasury Department is based on UN projections which forecast the Indian population to reach 1.7 billion by the year 2050.
Source: UN World Population Prospects 2010 and Treasury.
India has another demographic advantage over China in its working age population. In short, China, and Australia as well, will see substantial increases in the non-working while India’s workforce will be increasing. Here is the chart.
Source: UN World Population Prospects 2010 and Treasury.
However, population growth alone is not sufficient to spur economic growth. Howard went on to say in his speech that India needed to “get her act together” to benefit from its younger population.
Flash forward to September 2014 and we have new governments in both Australia and India said to be more “business friendly.” In a recent trade mission to New Delhi Prime Minister Abbot signed a uranium security arrangement with his Indian counterpart; in effect overturning Australia’s ban on uranium exports to India. The deal will need parliamentary approval, but that does not appear to be stopping investors from smelling opportunity. Junior uranium explorer Toro Energy (TOE) shot up more than 40% when investors learned the company’s CEO had been part of the Prime Minister’s trade mission to India. Toro has the necessary approvals for its uranium project in Australia and is actively seeking Indian companies for investment. Toro’s CEO said the company is looking for partners willing to take on a 20 to 25 year supplier relationship. Here is a one month price movement chart for Toro.
It is well known amongst energy investors that India is desperate for more electricity generation. Blackouts are common and 300 million Indians have no electricity at all. India intends to expand its nuclear power generation capacity to account for about 25% of the country’s energy needs by 2050. However, uranium miners are not the only ones who could benefit from increased trade with India. Prime Minister Abbot pledged to pursue a Free Trade Agreement with India that could boost resource stocks across the board.
The new Indian government encourages foreign investment. The government is pursuing free market reforms and reportedly plans to upgrade India’s infrastructure with new roads, high speed trains, factories, and even as many as one hundred new cities (in other words, more havoc ecologically to the planet).
India’s immediate need appears to be electricity. Right now India is running out of coal, its current principal source for electricity generation, with coal accounting for about 66% of capacity. However, Reuters and others are reporting half of India’s power generation plants are down to a one week supply of coal.
India imported around $5 billion worth of Australian coal in the last year, but local Indian business organisations are using the potential of improving trade relations between the two countries as an opportunity to call for more. Some are suggesting greater access to Australian coal is a more immediate and important need than accessing uranium. Of great concern for environmentalists, the Indian government is planning to add 32 new nuclear powered generation facilities by 2032 at a cost of around $85 billion.
But first, below are three Australian uranium mining stocks with the potential to benefit from the nuclear agreement with India. Then we look at four coal stocks that could get a bump from increasing Indian imports and a Free Trade Agreement with India.
Energy Resources Australia (ERA)
Paladin Energy (PDN)
Energy Resources Australia (ERA) and Paladin Energy (PDN) both have existing producing uranium mines, but Energy Resources’ Ranger Mine is near Darwin in the Northern Territory while Paladin’s producing properties are in Namibia and Malawi in Africa.
In February 2014 Paladin announced it was ceasing production at the Malawi mine, moving it into “care and maintenance” status until the price of uranium approaches $US75 per pound. In addition, the mine had been powered by costly diesel generators and now Paladin management states they need cheaper hydroelectricity as well as a better price to reopen the mine. As of 8 September the price of uranium oxide stood at US$32.75 per pound. Paladin does have exploration projects in Australia and the stock is trading below book value. However, given the sovereign risk of mining in Africa and the company’s excessive gearing, Paladin might be a better candidate for a watch list.
ERA’s Ranger mine is ideally located for transport to India and has been producing uranium oxide for more than thirty years. The company is about 68% owned by Rio Tinto (RIO). Despite the promise of increased demand from India, Energy Resources is a highly speculative play, at best. ERA posted its second consecutive half-year loss; with the current loss of $127 million following a Half Year 2013 loss of $53.5 million.
In addition to the softening price of uranium, the company had to cease operations at Ranger in December of 2013 following a toxic leak. Production is expected to restart this quarter and the company has an underground mining exploration project underway in the area. ERA management believes the price of uranium will recover sometime in late 2015 and into 2016. This projection dates back to January 2014 and appears to be based on the addition of twenty eight nuclear power generating plants under construction in China and the anticipated restart of some of Japan’s nuclear plants, idled since the Fukushima disaster. And then there’s the prospect of demand from India.
Both Paladin and Energy Resources have had challenging years but a one year price chart shows a small uptick following the positive news out of India. Here is the chart.
Toro Energy (TOE) has exploration assets in Australia and in Namibia but it is the company’s Wiluna Uranium Project in Western Australia that is attracting attention. The company also has an exploration project in Western Australia near the border Northern Territory. Toro is aggressively promoting the fact that Wiluna will be the first uranium mine in Western Australia. On 11 September Toro issued a press release touting the Indian agreement and the potential it has for Toro shareholders.
Uranium stocks are out of favor with analysts and investors alike. However, the price action with Toro Energy suggests there may be contrarians out there who believe the sector has a future. The three mentioned here all have assets in Australia.
For extreme punters, Deep Yellow Limited (DYL) is currently shedding its Australian uranium assets to focus exclusively on its prospects in Namibia. Black Range Minerals (BLR) has exploration assets in the US but of more interest to the intrepid is its joint venture with a company that is seeking to commercialize a new process for extracting uranium called Ablation.
Toro Energy may be up 25% year over year, but prior to the nuclear agreement with India, the share price was struggling. Here is a one year chart for TOE.
King Coal may be badly battered, but it appears to be unwilling to die. Commodity researchers at ANZ are forecasting an average price for thermal coal needed for electricity generation of US$74 per tonne, down from last year’s average price of US$84 per tonne. In addition ANZ sees little recovery over the next three years. However, over the long term ANZ believes coal will remain a key power source in China and predicts increasing demand from accelerating infrastructure and industrial activity in India.
The following table lists four badly beaten Australian coal miners that may be of interest to contrarians and punters alike.
New Hope Corporation
For those with the intestinal fortitude to take a chance on coal stocks, Whitehaven Coal (WHC) and Bandanna Energy (BND) have the most attractive combination of book value, earnings forecast, and low debt. However, Bandanna has as yet no producing mines and is currently under suspension while it seeks an extension on its funding facility to continue its exploration activities until all regulatory hurdles are overcome. Bandanna’s future rests with its Springsure Creek underground thermal coal project, which should begin producing in mid-2015. The combination of the funding facility extension and regulatory approvals in the face of increasing resistance to coal mining in general are enough to make most investors avoid this stock.
Yancoal Australia (YAL) looks attractive on the surface; until you get to the company’s outsized gearing. As of the most recent quarter the company’s total debt was $5.1 billion against $365 million total cash. Nevertheless, this company operates both thermal and metallurgical coal mines in Queensland and New South Wales along with adequate port facilities and a substantial reserve base. Yancoal’s majority shareholder is Chinese based Yanzhou Coal Mining Company.
Here is how the share prices of Bandanna and Yancoal have fared over the last two years.
New Hope Corporation (NHC) is owned by Washington H. Soul Pattinson and Co. Limited (SOL), a broadly diversified company with interests in share ownership, coal mining, pharmaceutical products, and building products. If you believe that coal will withstand competition from renewables and natural gas, investing in SOL might be a safer choice.
Whitehaven Coal Limited (WHC) has more bullish analysts covering the stock than any other stock in our table. While there are two analysts at Underperform and one at Sell, there are three analysts at Strong Buy and seven recommending investors Buy WHC. The company’s Full Year 2014 Results were superior to any other coal producer, showing a 21% increase in revenue and a profit loss of $38.4 million, more than 50% lower than the prior year’s loss of $88.7 million. Here is how the prices of the two stocks have performed over the past two years.
Liquefied Natural Gas (LNG) will play a larger role in India’s energy mix in the future and the country is building ten additional LNG Import Terminals. Currently Qatar is India’s major trading partner for LNG but a Free Trade Agreement between Australia and India could impact that. The CEO of Woodside Petroleum (WPL) was on the Prime Minister’s trip to India, pushing for LNG imports. However, the high cost of Australian LNG is reportedly a barrier to any long-term agreements.
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