Kevin Rudd, in one of his first acts as Prime Minister, has unleashed long-term change for the coal sector with his signing of the Kyoto Protocol on climate change. Australia's ratification of the global agreement means less coal production onshore in the long term. But long term is far away as far as local investors are concerned. Coal stocks are soaring and the smarter operators are �offshoring�.
And who could blame them? Clogged ports mean restricted shipments, constraining coal companies� revenues, and everyone knew Rudd was always going to sign the sternly anti-coal Kyoto treaty as soon as he could, despite deep uncertainties about what it really means for the Australian economy.
The answer to the remarkable revival of investor interest in coal lies, somewhat perversely, in the oil price.
As the oil price has moves closer to $US100 a barrel, taking natural gas and all other energy prices with it, Asian power generators are voting with their wallets and switching to coal.
The best example is in India, where the State Government of Andra Pradesh is planning to switch from burning gas to coal because of the twin problems of price and availability. The alternative � and this is the absolute key to coal (and all energy demand in Asia) � is limited electricity supply at a time when consumers are demanding more: a recipe for trouble.
On the market, the niceties of the �save the planet� debate are being completely ignored but sooner or later the new post-Kyoto reality will bite.
Take one of the better small stocks, Macarthur Coal, as an example of what�s happened. On November 15 it issued a significant profit downgrade. Rather than match the June-half profit of $42.2 million, management tipped a current half profit of between $12 million and $18 million, blaming rail and port problems for reduced shipments.
Despite the threat of its profit falling by as much as 71%, Macarthur�s shares fell by just 6%, down 50� from $8.25 to $7.75 on the day of the downgrade. Today, just two weeks after the profit warning, the stock has more than regained all of its lost ground and is trading around $8.70, producing this remarkable equation: profit down 71%, share price up 5.5%.
It�s a similar story with other local coal favourites. Gloucester Coal reached a 12-month share price high of $6.19 on November 29, and Centennial Coal repeated the trick on the next day when it traded as high as $5.05 � and all this in the shadow of the brave new �Kyoto world� where coal is public enemy number one.
What�s happening is that investors are ignoring the immediate threat of lower profits and Kyoto signing ceremonies, preferring to look at what lies ahead � and by ahead, we are talking in the next two-to-three years, not the next five to 10 when a totally different set of Kyoto-driven forces will become important.
Right now, the high oil price and sluggish shipments out of Australia are factors feeding into the coal market when the price of steaming coal, used to generate electricity, has risen to about $US83 a tonne, 50% more than last year�s benchmark price of $US55 a tonne.
It�s the same in the coking coal market, which supplies the steel-making industry. Metallurgical coal is trading at about $US130 a tonne, also up 50%, and tipped to go higher because of a worldwide shortage of premium quality coking coal.
Here are the key questions for investors:
How to cash in on the higher coal prices? Can Australian coal companies even get their existing output to market, let alone any expanded production? How long will the high prices last? Will signing Kyoto bring the local coal boom crashing down?
The best locally focused coal stocks, such as Macarthur, Centennial, and Gloucester, have already performed strongly. Their prices today reflect next year�s higher sales revenue � rail, port, and shipping constraints permitting.
Even high-quality newcomers to the coal business, such as Whitehaven Coal and Aquila Resources, have performed well.
A mix of stocks such as Macarthur, Gloucester, Centennial, Whitehaven, Aquila, Felix and New Hope Corporation will provide solid exposure to locally mined coal but although investing in stocks like those will be rewarding, the downside risks cannot be ignored.
The most obvious is the simple question of just getting coal to the customers, and for that blame the Queensland and NSW governments, which have failed to provide sufficient rail or port capacity � a situation that will not improve because even the upgrades that are under way will not be enough to keep pace with rising Asian demand.
But, the longer-term worry for local coal stocks is the signing of the Kyoto Protocol and the clash it will produce between miners who want to expand, and environmentalists who want to close the industry.
This is a conflict which will be fought at all levels of Australian society, including inside Rudd�s Cabinet where pro-mining ministers, such as Martin Ferguson, will butt heads with anti-mining heroes such as Peter Garrett (although his job as Environment Minister seems to be shrinking by the day as Senator Penny Wong is made Minister for Climate Change, represented by Treasurer Wayne Swan in the House of Representatives).
That�s why investors with an eye on the longer-term future will do what the industry is already doing � start offshoring.
It is a fabulous irony of the Kyoto-driven world that production of a major carbon-emitting material such as coal will not fall. It will simply be mined somewhere else, such as in Africa and Indonesia where there are �Kyoto-free�, coal-rich zones called emerging countries.
To best see where Australia�s coal industry is heading take the time to look at southern Africa, especially the former Portuguese colony of Mozambique.
It is here that Australian explorers and mine developers are doing their best to export Australian coal � not by the shipload, but in the form of an entire industry.
This story of exporting an industry to another location, effectively bypassing future Kyoto coal-mining restrictions, can be demonstrated in a number of companies but best shown through Riversdale Coal.
Sydney-based and Australian-run, Riversdale has one small coal mine in production in South Africa, and a much bigger project approaching the development phase across the border in Mozambique.
It also has a share price, which has run from $1.79 to $10.24 over the past 12 months.
The twin keys to Riversdale are its discovery of high-quality coking coal in the Moatize region of Mozambique, and a joint venture signed in August with Indian industrial giant, Tata.
In effect, we have Australian mining expertise, in a non-Kyoto coal-mining zone, developing a project with an Asian partner. That�s largely why Riversdale was able to easily raise $235 million via a placement of 25.3 million shares at a price of $9.30 on November 23 with the share price barely missing a beat, and already trading almost $1 higher when a modest correction might have been expected after a big share issue.
From a strict economic perspective, it's is not only the best of all worlds, it is a template for what will happen as coal mining in Australian comes under increased environmental pressure.
RIV Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
