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Investors warming to red hot coal market

Supply shortages in China and the voracious appetite of India have set the scene for a strong decade for the coal market, according to the Nomura Equity Research’s mining team. Here we look at some of the junior coal miners setting the market alight.
Investors warming to red hot coal market

 

Supply shortages in China and the voracious appetite of India have set the scene for a strong decade for the coal market, according to the Nomura Equity Research’s mining team.

An in-depth look at the sector comes up with positive forecasts for both coking and thermal coal.  So much so that thermal coal is now Nomura’s preferred commodity in 2011.

“After having had copper as our preferred commodity exposure for 2009, and iron ore for 2010, thermal coal becomes our preferred commodity exposure for 2011,” Jake Greenberg said in a note to clients.

The analyst added: “Our bullish view on thermal coal has little to do with recent cold weather or flooding in Queensland or South Africa.”

“We forecast large supply deficits for the seaborne thermal coal market for several years with Indian import demand more than trebling over the next five years and Chinese imports increasing by 50 percent over 2009-12.

“We forecast thermal coal prices to peak in 2012 with an average price of $170 per tonne.”

Furthermore the City broker believes that coal stocks will be alive will be at the epicentre of merger and acquisition activity in the mining industry in 2011.

“Thermal coal remains one of the most fragmented commodity industries with the top five producers accounting for 38 percent of the global seaborne market. 

“This compares with much more consolidated industries, such as seaborne iron ore and platinum, where the top 5 producers account for 70 percent and 87 percent of their respective markets. 

“Compared with other industries such as iron ore and copper, we believe the list of coal assets that may be available for sale is much greater. 

“We also think asset valuations are more realistic across the thermal coal industry compared with other commodities.”

Nomura’s research focuses on London’s major players in the coal market - with Xstrata (LON:XTA) replacing Rio Tinto (LON:RIO, ASX:RIO, NYSE:RIO) as  its ‘top pick’ in the sector and Anglo American (LON:AAL) also getting a positive write-up.

However there are many other coal plays aside from the majors which could benefit from improving prices as well as merger and takeover activity.

Here we take a look at just a few of ‘hottest’ coal stocks in the junior market.

Indeed London’s junior coal plays have been on fire in recent weeks with most of the explorers and mine developers achieving double-digit percentage growth.

Atlantic Coal: The US anthracite coal producer is on the move

Atlantic Coal (LON:ATC)  has been leading the way in the new year’s coal rally on AIM, siting among the top risers on the junior market for a number of consecutive sessions.

Tuesday saw the stock rise over 30 percent. A steady stream of positive newsflow has been driving the penny-share’s growth with investors wading in against the backdrop of rising coal prices.

The group owns the Stockton mine in Pennsylvania, which produces anthracite for the domestic market.

The shares had been languishing at around 0.4p through to Christmas, when it started rising amid positive broker comment, rising production, and positive news flow.

Apart from the impact the recent floods are having on many residential areas in Queensland, the coking coal industry there has also been badly hit, and supply worries are driving up global coal prices.  

City broker Fox-Davies published research last week, noting that Atlantic’s output in the final quarter hit its highest level of 2010, to 31,600 tons. 

In April, Atlantic took delivery of a £3.5 million hydraulic excavator, which appears to have transformed the Stockton operation.

The next major event for Atlantic will be the arrival of two new 100 ton trucks expected at the end of January, which should enable waste removal to be increased significantly. 

Fox-Davies analyst Peter Rose also mentioned last week that the market for anthracite in Pennsylvania remains firm with prices holding up well, and that the floods in Australia have created potential for coal prices to escalate dramatically. 

Atlantic also received a huge vote of confidence last week as Blackrock reversed a previous decision to reduce its investment in the coal miner by increasing its stake. 

The investment giant is buying 75 million new shares in the company at a price of 0.4p, raising its stake from 3.47 percent to 7.24 percent. 

In August last year Blackrock announced it had reduced its holding to below 4 per cent.

Managing director Steve Best commented on the Blackrock decision: "We are delighted that Blackrock has more than doubled its investment in Atlantic to 7.24 percent and welcome its further investment and participation in the development of Atlantic and the advancement of our operations.  

“We believe we are entering a new phase in the development of the company, something that our new investors have recognised."

Universal Coal: An emerging thermal and coking coal producer in South Africa

Universal Coal (ASX:UNV) floated on the Australian Securities Exchange (ASX) last month after it raised AU$20.4 million, the group came to market with interests in three thermal coal projects.

They are Kangala, Brakfontein and Roodekop, and it also has two coking coal projects - Berenice and Somerville.

Across its three thermal coal projects Universal has over 726 million tonnes of JORC coal resources.

It is aiming to bring its first mine, Kangala, into production in 2011, before ramping up to full production by the first quarter of 2012. Meanwhile Roodekop and Brakfontein are expected to follow in 2012.

Last week broker StoneBridge Securities published research on the emerging coal producer, rating the emerging producer as a ‘buy’ with a A$0.95 per share target.

“Universal’s key thermal coal assets are located in the established coal mining region of the Witbank Coalfield presenting opportunities to fast track the pre-production process and quickly generate shareholder value via cash flow generation that could potentially see them deliver coal to existing colliery and or power stations”, the broker said.

Furthermore Stonebridge noted that the coking coal operations could provide further upside to the broker’s valuation.

Stonebridge added: “We believe the valuation applied to the coking projects is very conservative and anticipate additional value could be added quickly here once the company gets to an Indicated or Measured Resource."

Strategic Natural Resources: Set to produce ‘clean coal’ at turn of the year

Strategic Natural Resources (LON:SNRP) plans to bring the Elitheni Mine into production towards the end of this year. The mine is in the Eastern Cape Province in South Africa. 

Elitheni has a 150 million tonne resource, although SNR has drilled only 3 percent of the project area, which measures 1,800 square kilometres. 

By extrapolation the company estimates there could be as much as 3 billion tonnes of coal of which as much as 1 billion could possibly be recovered.

Initially the mine will produce 500,000 tonnes a year, most of which will be earmarked for the export market. However some will also be mined to satisfy the local industrial market. Eighteen months to three years down the line that figure could be as high as 2.5 million tonnes per annum. 

In recent interview with Proactive Investors Jeremy Metcalfe, communications director at SNR, highlighted the broad market applications for the Elitheni coal.

“Clearly the biggest market of course is to provide coal to independent power companies so that they can make and sell electricity,” Metcalfe said.

“South Africa is extremely short of electricity and will remain short over the coming years.  So that is clearly a very big market for us. 

“We’ve also indentified a number of industrial users who, not being confident that they can always have access to electricity, have established their own burners and boilers to convert coal into electricity and heat and power.  These are targets of ours and we will be supplying a number of those businesses over the coming years with considerable quantities of our coal.”

With this strategy in mind the group has also been working with a leading boiler manufacturer to develop a new burners, intended for local industry partners, that will specifically use Elitheni’s cleaner smokeless coal.

Metcalfe added: “we have joined forces with one of the largest boiler makers in the world, Thermax and we will be announcing some fairly major contract details fairly soon.”

Coal Of Africa: The best way to play coking coal in UK market?

Coal of Africa (LON:CZA, ASX:CZA, JSE:CZA) is the best way to play coking coal in the UK market, according to

Charles Kernot, mining analyst at Evolution Securities. 

The firm’s key projects are found in South Africa and they include the Woestalleen Colliery, the Mooiplaats thermal coal mine, the Vele coking coal project and the Makhado coking coal project.

Kernot believes that CZA is set to benefit from the bullish commodity trends, arising from the widespread flooding that has washed out much of Australia’s coal mining industry.

“2011 has certainly got off to an interesting start for the Australians with the terrible flooding issues in Queensland and, more specific to mining, for the coal producers of the Bowen Basin”, Kernot said.

“Australia is by far the largest coking coal exporter and the vast majority of production is from this coal basin. Our belief is that coking coal production is likely to be adversely impacted for several months and that this will squeeze world seaborne supply, pushing up prices.”

He adds: “We see (Coal of Africa) as the best way to play coking coal in the UK market. 

“The company has significant coking (and thermal) coal resources in South Africa and has done an excellent job in securing the required infrastructure which should enable the group to export its product.”

The analyst rates Coal of Africa as a ‘buy’ with a 205 pence per share target.

Kernot expects the group to overcome the ongoing regulatory problems at the Vele Colliery in South Africa and it will make further progress licensing the Makhado project. Consequently he expects the stock to get a re-rating in the coming year.

Kernot adds: “The issues facing the company at Vele are ongoing and we would expect regular updates on this issue. 

“Looking to the Makhado project, we are hopeful that Coal of Africa will soon apply for its New Order Mining Rights for this property, the granting of which would enable the group to progress towards development at this site.” 

Oracle Coalfields: Developing Pakistan’s largest ever coal mine

Oracle Coalfields (PLUS:ORCP) is on the precipice of bringing into production Pakistan’s largest ever coal mine.

The PLUS-listed firm has been working on the Thar Coalfield for the past four years and it now has a series of hurdles to negotiate in the next year to 18 months before the mine gets up and running.

Regency Mines (LON: RGM), which is led by AIM dealmaker Andrew Bell, is a cornerstone investor in Oracle, after it bought 18.5 million shares, or 20.04 percent of the company, for 5.5 pence each back in December.

The Thar project is located around 380 kilometres from Karachi in Sindh Province.  Here Oracle plans to excavate lignite coal, which is brown in colour and has lower calorific value than the thermal coal that goes for export from places such as Indonesia.  It’s the sort of stuff that is found in abundance in Victoria, Australia and Germany. 

Oracle has a measured JORC resource of 1.4 billion tonnes and proven reserves of 371 million tonnes.

It plans to develop the mine in two stages. First it will get the mine up and running with over 100 million tonnes in the proven category, while in the second phase it will prove-up another 200 million tonnes which will provide scalability over mine life.

The mines production has already been earmarked to target the coal-hungry domestic power generation market. The emerging coal producer is set benefit from the large amount of demand in the electricity in Pakistan, where power generation capacity has failed to keep pace with the developing nation’s massive population growth.

This means that in major conurbations such as Karachi, population 18 million, utility firms have to deliberately shut down power generators - something often referred to as  load shedding - this can lead to outages of up six hours for some homes in the city. In Karachi the estimated daily power shortfall is between 2-3,000 megawatts. 

Thar is expected to begin coal production in 2012.

Churchill Mining: Looking for a partner to develop East Kutai in Indonesia

Churchill Mining (LON:CHL) is currently developing the East Kutai coal project in Indonesia, which has a net present value of US$1.8 billion. A September feasibility study confirmed East Kutai as a world class deposit with a JORC resource of 2.73 billion tonnes.

Last year, Churchill hired Credit Suisse to find a “big brother with deep pockets” to fund the development of the mine. However, it is is keeping all of its options open and is still looking at possibly running East Kutai as a stand-alone project funded by equity and debt.

To ensure the success of the project Churchill has created an Indonesian advisory board that “guarantees access to all levels of industry and government” and it has negotiated an off-take deal with the state electricity company.

It has also  completed the purchase of the land to be used as the site of the future port facility for the shipment of coal from East Kutai.

 

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January 12 2016

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