NATHAN Tinkler, at least, can see the light at the end of the coal tunnel with his $4 billion plus offer for Whitehaven Coal, but many cannot, with coal stocks hitting their lowest values in years.
The Tinkler question led this columnist to ask whether there may be value at the smaller end of the spectrum.
After all, most junior coal companies have been hit hard as the coal price has fallen to its lowest in years too. They have been caught in a three-way pincer movement of increasing uncertainty about global economic growth, the shale gas phenomenon in the US and the green movement.
Australian junior producers are not helped when the big producers, such as Rio Tinto and BHP Billiton, talk down coal's prospects in attempts to get projects rushed through. On top of that is the realisation that infrastructure is taking longer than anticipated to put in place, or being abandoned.
This year Queensland's LNP government scrapped a $9 billion expansion of the Abbot Point coal terminal near Bowen in the state's north.
So, what to do?
Patersons Securities analyst Matthew Trivett says the answer for investors lies offshore: "Opportunities in the sector are in companies that have projects in Indonesia and Mongolia, where the operating costs are much lower."
Under the Radar has previously tipped one of his favourites, Altura Mining (ASX: AJM), which is developing the Tabalong mine in South Kalimantan, Indonesia.
It will cost Altura $40 million to develop its mine, while an underground coalmine in the Surat Basin in Australia would set you back at least $600 million.
Altura managing director James Brown previously ran Adaro, New Hope's multibillion-dollar coal project in Indonesia.
He doesn't mess around when explaining why it's so important to be a low-cost producer of high-energy, meaning high-grade, coal: "It costs the same to produce a tonne of low-grade coal as it does high-grade."
Australian coal producers need to process coal through wash plants, which is one reason costs are so high, says Brown. Altura's coal is simply crushed and sold raw.
"What about the sovereign risk?" you may ask.
There is sovereign risk in every country. Just look at the political conflict involving the carbon tax and the mining tax in Australia.
But in Indonesia, where many may have such a concern, coal has been excluded from a recent export tax. The export bans relating to the coal sector have been mooted only for low-calorie producing coal.
So, the bans would not affect Altura, as Tabalong produces high-calorie thermal coal which is used to generate electricity.
Nor would the bans affect Trivett's other favourite in Indonesia, Cokal (ASX: CKA), which is looking to get a metallurgical coal project off the ground. Its site in Central Kalimantan is next to the giant PT Juloi Coal mine owned by BHP and Adaro Energy.
Trivett also likes Guildford Coal (ASX: GUF) in Mongolia.
This is a very low-cost operation because its mine is close to the Chinese border.
It costs Guildford about $25 a tonne to produce the stuff, while it can sell it at about $50 a tonne. Economics in the sector don't get much better than that.
All three Altura, Cokal and Guildford are trading at about half of Trivett's valuations, and all have different factors that could propel their shares higher. All are definitely worth keeping an eye on at the very least.
You can bet Nathan Tinkler is watching them.
Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits a fortnightly newsletter www.undertheradarreport.com.au
Frequently Asked Questions about this Article…
Why are coal stocks trading at their lowest levels in years?
Coal stocks have been hit by a mix of factors: uncertainty about global economic growth, the US shale-gas boom cutting demand for coal, and pressure from the green movement. Junior coal producers have also been hurt by high local costs, infrastructure delays or cancellations (for example the scrapped $9 billion Abbot Point expansion in Queensland) and negative commentary from large miners such as Rio Tinto and BHP Billiton.
Are there investment opportunities in the coal sector despite low coal prices?
Yes — the article notes analysts see opportunities, particularly among smaller companies with low-cost operations offshore. While many junior coal stocks have been battered, firms with low operating costs and high-energy coal projects in places like Indonesia and Mongolia may offer value for investors watching the sector.
Why do analysts favour Indonesian and Mongolian coal projects for investors?
Analysts say projects in Indonesia and Mongolia generally have much lower operating costs than many Australian operations. Lower development and operating costs can make these projects more resilient during weak coal-price periods, improving margins and potential investor returns compared with higher-cost Australian mines.
What should investors know about Altura Mining (ASX: AJM) and its Tabalong project?
Altura Mining is developing the Tabalong mine in South Kalimantan, Indonesia. The company estimates development will cost about $40 million — far less than comparable Australian underground projects — and its product is crushed and sold raw rather than processed through expensive wash plants. Altura’s managing director, James Brown, has prior experience running Adaro and New Hope projects in Indonesia.
What does the article say about Cokal (ASX: CKA) and its Indonesian coal project?
Cokal is pursuing a metallurgical coal project in Central Kalimantan, Indonesia, with a site located next to the large PT Juloi Coal mine owned by BHP and Adaro Energy. Because the project targets metallurgical coal and higher-quality product, it would not be affected by export bans mooted for low-calorie coal.
Why is Guildford Coal (ASX: GUF) highlighted as a low-cost coal play?
Guildford Coal’s Mongolian operation benefits from proximity to the Chinese border, keeping costs low. The article states Guildford’s production costs are about $25 a tonne while it can sell coal for roughly $50 a tonne, creating attractive operating economics compared with many peers.
Should everyday investors be worried about sovereign risk or Indonesian export taxes for coal projects?
The article notes sovereign risk exists everywhere, including in Australia (eg. political debates over carbon and mining taxes). In Indonesia, recent export tax measures have excluded coal, and proposed export bans target only low-calorie coal — not high-calorie thermal coal like Tabalong’s output or metallurgical coal projects such as Cokal’s. That said, sovereign risk is a factor investors should consider when evaluating offshore coal exposure.
How are Altura, Cokal and Guildford trading relative to analyst valuations and what should investors watch?
Patersons analyst Matthew Trivett has higher valuations for Altura, Cokal and Guildford than current market prices; the article says all three are trading at about half of Trivett’s valuations. Each company has different catalysts that could push shares higher, so the article suggests they’re worth keeping an eye on — while remembering that junior coal stocks carry sector-specific and country risks.
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