As far as I know, despite concerns over slowing industrial manufacturing, China will still need coal. In fact, Barron’s ran a piece over the weekend titled “China Still Needs Coal.” The lead began this way: “Booming Chinese demand has lit a fire under Asia-Pacific coal stocks and triggered talk of a lengthy supercycle in the region’s dominant fuel. Everywhere, that is, except in China.”

The author points out that China’s leading coal stocks are all down 25% or more of late.

The worries — as far as the genuine China coal miners go — were not without some basis. China, foolishly, told its miners to keep prices stable. The market read this as a de facto price cap. But that doesn’t affect all of the coal companies…

China consumed 47% of the world’s coal last year. The growth of that demand has been mind-boggling — so much so it is hard to wrap one’s mind around it. I wrote about this recently in Capital & Crisis. In 2000, China consumed as much coal as the U.S. Today, it consumes three times as much as the U.S.

As I wrote in C&C, quoting Richard Heinberg at the Post Carbon Institute:

“China will be pressed to produce the coal it needs domestically. In fact, after being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year’s total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia’s coal exports — and Australia is the world’s largest coal exporter — and growing.

“This means if China imports double again next year — not an unrealistic scenario — China will need to import more coal than Australia can currently provide,” Heinberg notes. “One more doubling of import demand and China will be wanting to import 600 million tons per year, about the total amount of coal exported by all exporting nations last year.”

These are good reasons to get long coal, and I have a few speculative favorites.

One is based in Mozambique. Now, this is not a country one would think to invest in offhand. But Mozambique is home to one of the largest unexplored coal basins in the world. It is a speculative gumbo, because it is still early in the game and Mozambique ain’t exactly Canada.

I’ve been researching the Mozambique story. The Economist had a piece recently about it, which I really enjoyed, called “A Faltering Phoenix.” Here’s how the story kicks off:

“About two hours’ flight north of Maputo, the Mozambican capital, lies the town of Tete on the crocodile-infested banks of the Zambezi River. A narrow suspension bridge forms the only crossing point for the main trade route linking landlocked Zimbabwe, Malawi and Zambia. Until a few years ago, Tete was no more than a dusty down-at-heel stopping point for weary lorry drivers. But now, thanks to massive foreign investment in what may be the world’s biggest unexploited coal field, it is fast becoming a bustling boomtown, already boasting three banks, three car-hire companies, half a dozen decent hotels, an international school and a new airport with twice-a-day flights to Maputo.”

If you are fan of old explorers and adventurers, as I am, you may recall the Zambezi River. Between 1853-56, David Livingstone — of “Dr. Livingstone, I presume” fame — led a majestic journey across Africa following the line of Zambezi River. Author Tim Jean writes, Dr. Livingstone “suffered 27 attacks of malaria and almost died at the halfway stage.”

But I digress. Mozambique has been mostly wrecked by civil war. Infrastructure is bad, but there are railways reopening and bridges going up with the aim of knitting Tete to the port of Beira. Tete, as the above quote makes clear, is a boomtown in the heart of coal country.

Here is a helpful map, courtesy of The Economist:

Mozambique already has a large hydroelectric plant. If you are going to build mines, you need a reliable power source. This is lacking in much of Africa. There is more on the way in Mozambique, thanks to the inflow of foreign investment. There is a scramble now to lock down coal deposits and to make deals. The South Africans are the biggest investors in Mozambique. The Chinese are second.

But don’t forget the “faltering” part of this phoenix. The Economist points to the many problems in Mozambique. Desperate poverty. Corruption. Crime. And international aid is more than half the total state budget. It’s not an easy place to do business.

Anyway, the company I’m looking at has a potentially lucrative coal deposit. The stock has held up pretty well in this storm. I was hoping it would get knocked down. Nonetheless, the other coal miners I have on my radar right now, this is a speculation. As such, it’s not a name that I can release to all 400,000 Penny Sleuth readers without artificially inflating its share price. I’m going to have to keep it reserved for my own readers…

[Ed. Note: If you want to take Chris’ theme and run with it, there are a couple of ways you can go long coal right now – like the PowerShares Global Coal Portfolio ETF (NASDAQ: PKOL) or the Market Vectors Coal ETF (NYSE: KOL). Both of these funds own a basket of coal equities, not the commodity itself.

Still, to take advantage of the speculative potential of Chinese coal right now, you’ll need to invest in something less diversified.]

Sincerely,
Chris Mayer
Penny Sleuth

July 23, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

June 2010 Is the Time to Buy Coal was originally featured in the Penny Sleuth.

In a 241-172 vote on Saturday night, another energy bill was passed in the House with slightly different requirements. In the new bill, there is a provision requiring electric utilities to generate 15% of their electricity from renewable energy sources. Currently, only 2.6% of our energy comes from renewable sources. This new requirement could spell some big changes elsewhere.

Currently, coal accounts for about half of all electricity production in this country. This bill would significantly hurt the already damaged coal industry, or so one would think…

The coal industry has been in bad shape for the past few years because of higher diesel prices and new safety rules. Industry experts are now expecting a massive consolidation will hopefully change things.

Compared to other mining industries, coal is the only one in the U.S. that hasn’t undergone a consolidation. In today’s Wall Street Journal, Kris Maher tells us why; “[The] three major drivers of acquisitions in other commodities – resource scarcity, high cash flows that companies are eager to reinvest, and favorable valuations of companies based on strong pricing models of commodities – are lacking in U.S. coal.” This is about to change…

Coal is not scarce. Of any resource, we have the most coal. The U.S. still has the world’s most coal reserves. But other countries don’t have that luxury. So countries like China and India, which are burning through coal like it’s a three-pack-a-day-smoker’s morning cigarette, are in great need of foreign coal. They just can’t produce enough to meet their own demand.

Unfortunately, the United States hasn’t benefited much from this. In the first quarter of this year, only 3.9% of the coal produced was exported. Most of the coal companies in the U.S. are small regional producers, not exporters. But with more demand from abroad, the big international coal companies like BHP Billiton and Rio Tinto, who have the capability to ship their coal around the world, could easily swoop in and gobble up a few U.S. companies.

The second point made by Maher was the low cash flows of these coal companies compared to other mining companies. That make sense in the U.S., but companies like BHP and Rio have enough cash on hand to buy a few of the smaller U.S. ones, without batting an eye.

Just look at Wilber Ross and his International Coal Group (NYSE: ICO). Ross, billionaire/textile, steel, and auto components tycoon, bought out two distressed American coal companies Horizon and Anchor because he realized the potential here. It is quite foreseeable that other big investors and companies could jump in on the reserve potentials of these types of junior mining companies.

Lastly, the WSJ article mentions valuations of coal companies based on strong pricing models of commodities. These models are thrown out the window, or at least they should be, when you bring in the complexities of international demand and clean coal technologies. No one is capable of determining how big this clean coal trend will become. It is still in the initial stages of a potential industry-changing breakthrough.

Whichever bill comes out on top (if any), either the House’s or the Senate’s, the coal market will be affected, but not as much as people are guessing it will. Even if the U.S. goes 15% green, it’s only 15%. Plus, it won’t affect exports one bit. Look for these international mining companies to come down from their perch and devour these tiny U.S. coal companies to exploit their reserves.

Sincerely,
Jim Nelson
August 6, 2007

P.S.: The best way to invest in possible acquisitions like these is to buy shares in the smaller buyout candidates before they get bought. But, this is not always easy. You don’t know for sure which ones are the buyout candidates and which ones are going to miss the boat. It’s tough to navigate the world of acquisitions. Luckily, you don’t have to. My fellow Penny Sleuth editor, Greg Guenthner, is an expert at this, and in his newsletter, Penny Stock Fortunes, he tells his readers which companies are the most likely to be bought out and which ones don’t need to be.

Investing in Coal was originally featured in the Penny Sleuth.