THE INVESTORS CASHING IN ON A LOVE OF COAL WE AUST 3 December...

THE INVESTORS CASHING IN ON A LOVE OF COAL
WE AUST 3 December (extract):
TANSY HARCOURT

Finding someone willing to stand up and say they love investing in coal is about as hard as most people would think.
But they’re out there making a dump truck of money – 20 per cent-plus returns compared with 5 per cent for the ASX 200.
Those who will talk say that to ignore coal when there are currently no viable alternatives to use for bulk steel and energy production is about as silly as cutting off your nose to spite your face.
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This magnetic repulsion between banks and investors trying to reduce their exposures to carbon emitters and the growing demand for coal has turned many of these companies into virtual cash machines.
As a result, those who are able to get comfortable with the ethics of coal are demanding and enjoying massive risk returns of more than 20 per cent based on spot prices, with New Hope, Whitehaven, Yancoal and TerraCom among those smashing profit records in August and delivering huge returns.
It’s a stark contrast to the 5 per cent returns of the ASX 200 and heavy littering of cautious – if any – forward-looking profit statements of the broader stockmarket.
Coal companies are reliant on shareholders because they generally can’t raise bank debt to fund expansion and their shareholder pool is limited because professional investors and industry superannuation funds usually cannot buy in because of ESG mandates.
The ASX-listed investment group Washington H. Soul Pattinson has always “felt good” about its investment in New Hope, says managing director Todd Barlow – although the company has reduced its shareholding from 60 per cent to about 40 per cent as part of a portfolio rebalance.
Barlow, who sits on the board of New Hope as the coal company’s largest investor, says his firm takes the view that it’s better to take an active role in ensuring coal is mined with a strong ESG focus, including land rehabilitation. “We’ve never taken the approach that if we sell down New Hope that somehow the world is going to be a better place,” Barlow says.
It’s a view shared by Tanarra Capital’s John Wylie. “Forcing disinvestment just changes the ownership and sometimes you end up with less transparency, which can worsen the situation,” the veteran investment banker says. “Coal ownership needs a nuanced approach.”
What isn’t nuanced is the risk that comes with coal investing. Apart from the volatility that comes with anything dependent on global spot prices, there are persistent calls for a hard shutdown of coal mines because of their contribution to greenhouse gases. Data released last year, for instance, showed Australia had the highest level of emissions from coal per capita, significantly above second-placed South Korea and others including China and the US.
But even Bain & Co’s Australian head of sustainability and responsibility practice, Agathe Gross – who is calling for a greater emissions reduction target of 50 per cent instead of 43 per cent – believes it is just not realistic to shut these mines down in the short term. “Can you afford to keep the lights on if you shut them down tomorrow? Probably not, so it needs a more measured approach,” Gross says.
The inevitability of coal mine closures means that for companies investing in new mines or greenfield projects the numbers need to stack up quickly.
Barlow says New Hope’s biggest recent investment in coal was the $860m purchase of a 40 per cent stake in Bengalla Mining from Wesfarmers in 2018. It took four years to recoup its money the first time – when coal prices fell below $50 – then 18 months to earn the same amount from the investment again. Barlow says it will take less than a year to earn the amount a third time.
“It’s a function of buying well and the coal price now being really high,” Barlow says. “If you’re getting paid back in four years, that’s a 25 per cent return per annum. But then with the coal price now going much higher, it’s paying us back one time to capital every year. So that’s a very attractive return on investment.”
Mining is a cyclical industry with high regulatory risk. But as retirees, or those soon to be, look at their ever shrinking share portfolio and diminished dividend returns, there is an obvious question to be asked: is there still ethical money to be made investing in coal?
Jorss is one who thinks there is still plenty left in the tank.
“You need steel to industrialise and to decarbonise,” he says.
“Most sensible investors understand this is not going to be a rapid transition. Not with met coal. I think prices will stay generally higher for a long period of time.”