At the close of the 19th century American humourist and social critic Mark Twain responded to a newspaper obituary announcing his demise, saying reports of my death are greatly exaggerated.
Coal demand was once the favored predictor of global economic health in the days when the commodity had little competition. The shale gas revolution in the US and the availability of liquefied natural gas (LNG) as alternatives sent the “King” into decline, with many analysts and energy experts everywhere penning obituaries for King Coal.
In support of their argument, proponents of the coming demise of coal looked to coal demand being cut in half between 1990 and a 2035 forecast, as seen in the following 2015 chart from the IEA (International Energy Agency).
In contrast, skeptics used chart forecasts like these to point out although declining, coal is not going away. A more recent 2017 chart from the US EIA (Energy Information Agency) shows strengthening demand for coal.
Confused investors can search the Internet for similar demand charts with conflicting numbers. However, reputable sources such as Europe’s Royal Dutch Shell see a decline beginning in 2040 and accelerating into the 22nd century.
What the “death” proponents may have missed is the role of coal in electricity generation, especially in countries where natural gas or LNG is not a viable option.
Aussie investors bold enough to take a chance on ASX coal stocks during the dark days commencing in 2011 are beginning to reap some rewards. Following a rebound in coal strengthening in 2017, we now learn that coal will exceed iron ore as Australian’s top export commodity during 2018/2019. The top ASX coal stocks are uniquely positioned to meet the growing demand for coal in the Asia Pacific Region.
The following table includes ASX coal stocks with positive 2-year earnings growth forecasts and/or positive historical earnings and share price performance records.
Whitehaven Coal Limited (WHC) is our largest pure play coal miner, producing both thermal coal used for electricity generation and coking (metallurgical) coal used for steel production.
Despite the volatility of coal prices, the company has posted an enviable earnings and dividend growth track record as well as solid shareholder returns over time. Many investors may prefer to seek the relative safety of a diversified miner, but Whitehaven has managed to outperform mining giant BHP Billiton (BHP) over 5 and 10 years.
Whitehaven currently operates six mines in New South Wales; five open-cut mines and one underground mine. Open-cut mining is recognised as more efficient and cost effective than underground mining. The company has seen a remarkable turnaround in the last three years with net profit after tax (NPAT) going from an FY 2015 loss of $331 million to a profit of $21 million in FY 2016 and a staggering 1828% increase to $405 million in FY 2017. Half Year 2018 results were impressive as well, with a 63% boost in revenue and a 39% rise in profit.
In 2018 Whitehaven has acquired the Winchester South Mining operations from Rio Tinto (RIO). Rio Tinto has completed the process of shedding all its coal assets.
For investors looking for diversification extending beyond mining and energy, the Washington H. Soul Pattinson and Company Limited (SOL) is worth consideration.
The company is an investment firm extending beyond cash, property, and term deposit investments to include a diversified portfolio of equities. The Washington H. Soul Pattinson and Company may lack the glamor of many ASX stocks, but the company, now it its fifth generation of family ownership, has been trading on the ASX since 1903 and has never missed a dividend payment to its investors.
The company’s portfolio of energy equity ownership – natural resources, building materials, telecommunications, retail, agriculture, and investment firms – have exposed the stock price to the inherent volatility of commodity prices. As such, despite outstanding price performance over ten years, investors waiting to buy on the dips have had ample opportunities to do so.
Altogether, the company has equity interests in 11 ASX listed companies and two wholly owned subsidiaries representing five different sectors. Here is a list of the holdings:
• 25.2% interest in telecommunications company TPG Telecom (TPM);
• 59.6% interest in coal miner New Hope Corporation (NHC);
• 44% interest in building materials provider Brickworks Limited (BKW);
• 19.4% interest in Australian Pharmaceutical Industries (API)
• 9.5% interest in BKI Investment Company (BKI);
• 100% ownership of copper miner CopperChem Limited;
• 30.3% interest in Malaysian listed Apex Healthcare;
• 18.9% interest in pharmaceutical company TPI Enterprises Limited (TPE);
• 22.6% interest in healthcare company Clover Corporation (CLV);
• 100% ownership of corporate advisory firm Pitt Capital Partners;
• 5.11% interest in waste management company Bingo Industries (BIN).
The company has increased both profit and revenue in each of the last three fiscal years, with a 122% revenue increase between FY 2016 and FY 2017 and a 64% profit increase.
Investors who prefer more targeted diversification ignore SOL’s majority ownership of coal miner New Hope and invest directly in NHC, a diversified energy company. New Hope has operations and exploration assets in coal, oil, and gas, along with ownership of coal export facilities in the port of Brisbane. In addition, New Hope has agricultural operations, rehabilitating land surrounding its mining sites for cattle grazing.
The company has the best two-year earnings growth forecast of any stock in our table, but also sports the poorest historical performance, both in terms of earnings growth and shareholder return. The share price has struggled since the price of coal began its decline in 2011 and has only recently began to move upward.
Between FY 2016 and FY 2017 the company’s financial results began to turn, reversing a 2016 loss of $54 million on $509 million in revenue into a profit of $141 million on revenues of $839 million.
New Hope currently operates two open cut coal mines in Queensland and one in NSW, producing thermal coal, with about 90% going to export markets. The company prides itself on producing Tivoli Coal – “one of Australia’s cleanest coals”. New Hope’s business model calls for growth through acquisitions, exploration, and development of existing resources. The company has two formerly producing coal mines under rehabilitation.
New Hope’s Half Year 2018 Financial Results were outstanding, with a 111% increase in NPAT and a 36% revenue increase.
In November of 2017 New Hope’s Joint Venture partner announced the acquisition of four mining tenements and related infrastructure from Peabody Energy. New Hope has a commanding 90% interest in the JV. In 2016 the company acquired 40% of NSW thermal coal Bengalla Mine from a subsidiary of Rio Tinto. Some analysts credit this acquisition as a major contributor to the company’s rising fortunes.
Junior miner Stanmore Coal Limited (SMR) has posted the strongest year over year share price performance of any stock in the table. The company’s flagship project – the Isaac Plains Metallurgical Coal Complex – was cast off by its former owners, Brazil’s Vale and Japan’s Sumitomo Corp, in the face of coal prices hovering around $70 per tonne. Stanmore jumped in, buying the complex in 2015 and taking it from maintenance status back to initial production stage by May of 2016. The company has five other projects in development or exploration stages, with three prospective for metallurgical coal and two for thermal coal. The company is currently expanding the Isaac Plains operation with production from the Isaac Plains East thermal coal operation expected by Q1 of 2019. The company posted its first profit in FY 2017 of $12 million on revenues of $137 million.
Half Year 2018 Results continued the positive momentum from 2017, with a record profit of $8 million, up from a $547 million-dollar loss in the Half Year 2017, along with a 39% revenue increase for the period to $82 million.
Struggling ASX junior coal miner Guilford Coal (GUF) changed its name to TerraCom Resources Limited (TER) in 2015, commencing a turnaround effort. At the time the company had a producing coking coal mine in Mongolia and two thermal coal development projects in Queensland.
In a deal similar to the Stanmore Isaac Plains Complex acquisition, in July of 2016 TerraCom acquired the shuttered Blair Athol Coal Mine in Queensland from embattled Rio Tinto, along with all related infrastructure and equipment. At the time the major players were in a frenzied fire sale of assets in maintenance or low producing status and the price paid by TerraCom was $1.00! Stanmore also paid this bargain basement price for Isaac Plains.
The company turned Blair Athol back into production status by August of 2017, with an anticipated ramp up to a 2 million tonnes per annum annualised run rate. On 22 December the company announced forecasted annualised production rates for FY 2018 of 1.5mtpa (million tonnes per annum) from the BNU Coking Coal Mine in Mongolia and 2mtpa from the Blair Athol Thermal Coal Mine.
The company has an additional six prospective coal assets in various stages of development but has slowed development in favor of focusing on its two producing mines. In early June of this year the company’s exploration activities at the BNU site uncovered a major new coal deposit.
An early May update on sales from the Blair Athol Mine apparently whetted investors’ appetites with the announcement of trial shipments into Japan and Korea, with the stock price on the rise ever since.