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Coal?


ragnarisapirate
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One of my friends just gave me (what I will refer sarcastically to) as a "hot stock tip" in the coal industry. Having never looked at a coal company before, I was curious what fellow board members have to say about it.

 

I would imagine that there would be a few things to think of in favor of the industry.

 

1) you are not subject to new ways of getting coal coming about (as is the case with horizontal drilling natural gas)

2) if inflation comes, as a raw material, you might have some of the protection of a commodity

3) if the economy is actually getting better, then, more energy will be used, which will also increase the price of coal.

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I have been holding several coal companies in China because of the reasons you mentioned below plus the fact that China's strong growth will require increased demand, especially for electricity. Coal is a primary source for their electricity and China is an importer of coal. The country is also in the process of rolling up the industry into larger companies to improve safety, operations, etc. Pretty much a state-controlled business, but I like the prospects for growth. YZC recently purchased a large coal mine in Australia (Felix) and is in the process of opening other mines in China. This is more of a theme pick than value play, but these companies also appear under-valued.

 

Full Discloure - Long YZC, PUDA, SGZH (interesting cigar butt P/E ~4x)

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If you're interested in coal, metallurgical coal might be the best sub-market to look at. Met coal is rare, has gone up in price from $30/ton to $210/ton in the last decade and a half, and has massive demand baked in for the next decade as the developing world builds infrastructure and develops automobile markets. Massey Energy recently delivered an excellent overview of the met coal market -- here's their presentation:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzk3NDQwfENoaWxkSUQ9NDAzNzM4fFR5cGU9MQ==&t=1

 

C9

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  • 8 months later...

I have been holding several coal companies in China because of the reasons you mentioned below plus the fact that China's strong growth will require increased demand, especially for electricity. Coal is a primary source for their electricity and China is an importer of coal. The country is also in the process of rolling up the industry into larger companies to improve safety, operations, etc. Pretty much a state-controlled business, but I like the prospects for growth. YZC recently purchased a large coal mine in Australia (Felix) and is in the process of opening other mines in China. This is more of a theme pick than value play, but these companies also appear under-valued.

 

Full Discloure - Long YZC, PUDA, SGZH (interesting cigar butt P/E ~4x)

 

Betting on coal production companies in China may not be profitable, even though it is cheap. Mining is always a marginally profitable business. It is true the coal price is rising, but the cost is going up quickly as well.

 

I am betting on coal as well, but there is a better chance to make money in those companies which help coal producers to increase productivity.

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Ravi and those who are interested, FYI.

 

China Resources Power Posts Small Profit Increase

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By YVONNE LEE

 

HONG KONG—China Resources Power Holdings Co. on Monday reported a 1% increase in its first-half net profit, as higher fuel costs eroded the impact of an increase in power output.

 

Net profit for the six months ended June 30 was 2.48 billion Hong Kong dollars (US$319 million), up from HK$2.46 billion a year earlier.

 

The power company, a unit of state-owned China Resources National Corp., said it expects power consumption growth in China to remain strong in the second half of the year, even though coal prices will remain relatively high.

 

The Hong Kong-based power producer plans to increase the production of coal from its own coal mines, especially from Shanxi Province, to offset rising coal costs.

 

"We anticipate that coal production volume from our own coal mines, as well as coal consumption volume from our own coal-fired power plants, will continue to increase in the future years," Chairman Song Lin said in the statement.

 

As part of its efforts to secure coal supply, China Resources raised its first-half total coal output by 63% to 7.7 million metric tons.

 

Revenue rose 37% to HK$29.03 billion from HK$21.16 billion as the company's first-half electricity output grew 24% to 53.79 million megawatt hours.

 

However, higher fuel costs whittled down the company's net profit. China Resources Power said its average fuel costs per unit rose 12% in the first half, and fuel costs accounted for 69% of its total operating costs during the period.

 

Most of China's power producers reported a sharp fall in earnings during the first-half, mainly due to a surge in coal costs, which more than offset high growth in power generation and tariff increases in the second quarter.

 

In the first half, China's spot thermal coal price rose 15% on year, but power producers won't be able to pass all the rising coal costs on to grid operators or consumers due to Beijing's reluctance to loosen state caps on power prices.

 

The blue-chip power producer recommended a first-half dividend of six Hong Kong cents, unchanged from last year.

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  • 7 months later...

I am feeling in the same situation as Ragnar: analyzing a coal company (Powder River Basin) and understanding enough.

 

Almost no net debt, very cash flow positive, most production contracted for next two years, large growing reserves, low cost producer ($9/ton), no union, surface mining, access to the Pacific BNSF, seems very cheap. That should tip which company .

 

What should I be worrying about besides the natgas glut?

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I don't really understand the long case for coal, with cheap gas, plants will be moving over to NG, which diminishes the market, exporting it is a possibility, but if prices are low, how feasible can it be to export coal to China given that they have coal reserves of their own? We haven't even gotten to the potentially heavy environmental regulations that could come up.

 

Met coal does sound interesting tho.

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Met coal has the headwind of a huge supply response coming out of Outer Mongolia, not to mention Inner Mongolia which has also increased production.

 

Thermal coal has headwinds in the US and China.  In the US ng delivered prices are much lower than coal.  In both the US and China environmental considerations make it the energy source of least choice.  In China most of that smog comes from the burning of coal and charcoal.  Its not clear what the new leadership will do about it.

 

In China you used to see mostly women wearing protective masks.  Now the number of people wearing masks is much larger and its men also.  there are other commodity plays which would not have such big negatives to overcome.

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  • 9 months later...
I don't really understand the long case for coal, with cheap gas, plants will be moving over to NG, which diminishes the market, exporting it is a possibility, but if prices are low, how feasible can it be to export coal to China given that they have coal reserves of their own?

 

That's easy. NG low prices are unsustainable because shale boom is unsustainable. Energy demand will rise. Coal will be the only option.

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I am feeling in the same situation as Ragnar: analyzing a coal company (Powder River Basin) and understanding enough.

 

Almost no net debt, very cash flow positive, most production contracted for next two years, large growing reserves, low cost producer ($9/ton), no union, surface mining, access to the Pacific BNSF, seems very cheap. That should tip which company .

 

What should I be worrying about besides the natgas glut?

 

No expert in coal Plan, but a couple of items come to mind from recent articles. There are new EPA regulations for coal plants in the states, from what I remember, all new plants require carbon capture technology (very expensive technology, and typically reduces the output of power available from the plant).    The other items I would check out is the effect of peak steel (and the effect of China's slowing construction) and petcoke (from shale oil/heavy oil) on the coal market.  Europe is importing more coal given the low cost to produce power vs nat gas (USA is dumping coal for nat gas plants) this could change if the US ends up opening up exports for refined products (hard to say with the huge job boom vs issues in Ukraine and energy security for Europe), either way there are LNG terminals that are given the green light.  FInally there is an article on the FT, but I could only dig up a similar one on the NYtimes. http://www.nytimes.com/2014/08/17/opinion/sunday/china-confronts-its-coal-problem.html?_r=0

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I think there are two long term threats to coal, gas and solar.

 

The problem with shale gas in Asia is that there is often lack of water supply. Gas fields are enourmous though. So it is not likely that coal is replaced by gas anytime soon in even the most optimistc scenario. Also since exports in most optimistic scenario's will only be tiny compared to energy needed.

 

I do think long term, that solar is a threat. But that is at the minimum on a 7-8 time frame. So meanwhile demand for coal will almost certainly rise. Increased demand in asia will vastly outstrip reduced demand for coal in EU and the US.

 

Also Australia has a lower cost base for coal then China, so you will probably see more domestic coal producers there being shaken out then in the rest of the world.

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