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Coal has fuelled an appetite for British mining stocks in the first quarter of this year, despite the wider mining sector facing a more challenging environment, according to research by Ernst & Young.

The absence of mining sector flotations on AIM in the first quarter – the first time that has happened for six years – coupled with news that two mining groups delisted their shares from AIM before voluntary liquidation in the first quarter of 2008, could be “the start of a new trend”, Michael Lynch-Bell, the global mining and metals transactions leader for Ernst & Young, said.

However, Ernst & Young revealed in its quarterly Mining Eye index that coal has been firing up AIM mining stocks, with a reduction in supply causing a rise in coking coal spot prices. A flood in Queensland, Australia, halted production and snowstorms in China and continuing power problems in South Africa have compounded supply problems.

“Squeeze on supply should continue to make AIM coalminers an attractive proposition even for the major players,” the research said.

It said that in April, Posco, the South Korean steelmaker, agreed to a 205 per cent to 210 per cent rise in the price of coking coal from Australia, while ArcelorMittal apparently agreed to pay the BHP Mitsubishi Alliance $305 a tonne for contract coking coal. Thermal coal contract prices also gained well, with Chubu Electric Power, of Japan, agreeing with Xstrata a 125 per cent increase to $125 a tonne.

It is understood that an increase in merger and acquisitions activity and related bid speculation have also been responsible for driving up share prices in the coal sector. The report said that shares in Coal of Africa have gained about 30 per cent in the first quarter on the back of both rising coal prices and bid speculation. Shares in Western Canadian Coal more than doubled in the quarter thanks to bid speculation.

Across the mining sector, Ernst & Young highlighted that the situation remained more challenging. It said that the credit crunch could lead to a fall in available funding for developing mining projects, particularly among “smaller, more speculative companies”. “An inability to secure finance from third parties could see some of AIM’s mining names fall by the wayside in one way or another,” the group said.

However, although there were no IPOs during the first quarter, funds raised from mining secondary issues remained healthy at £295 million compared with £220 million in the first quarter of 2007.

Mr Lynch-Bell said: “To a certain extent, the mining sector represented a relatively attractive solid haven for investors last quarter as metals continue to reach peaks. However, aversion to risk has amplified volatility and for some AIM miners the impact has very much been on the downside.”