Is thermal coal an unbackable favourite, or just unbankable?
The shrinking pool of money willing to fund thermal coal in Australia is shifting to private lenders, as a rising number of financial institutions and equity investors quit the unpopular sector.
As of August the tally of Australian financial institutions refusing to finance, invest in, or insure thermal coal hit six, as CBA joined Suncorp, QBE, NAB, Westpac, and Export Finance and Insurance Corporation in creating policies restricting exposure to thermal coal mines and power plants.
About 111 institutions worldwide have effectively set a deadline for when they will quit coal.
For large mines such as Adani’s Carmichael coal mine in Queensland’s Galilee Basin, this is a problem as projects become uninsurable or the cost of insurance becomes unaffordable.
Tim Buckley, director of energy finance studies South East Asia at the Institute for Energy Economics and Financial Analysis (IEEFA), says the depth of the thermal coal insurance market is becoming shallower and the pricing will become more aggressive.
“It’s going to get harder and harder and more and more expensive, and you’ll get to the point where finance is not available and equity owners are just not available to own your company,” he said.
In Adani’s case, it claims to have insurance for the mine but Buckley has not been able to find out which company is behind it.
For miners too small to attract bank debt funding or major insurers, funding and insurance pools are shifting to private entities not shackled by shareholder opinions.
Entities such as Taurus Funds Management, Tribeca Investment Partners, family offices and private equity are already starting to fill the gap.
“I think there is a cost for everything. There will be opportunities for non-traditional insurers to emerge,” Tribeca investment analyst James Eginton says.
Rey Resources (ASX:REY), Moreton Resources (ASX:MRV) and Terracom (ASX:TER) are among those small companies with proposed coal thermal projects or exploration underway.
None responded to requests for comment on whether they have insurance lined up.
Coal mines need two kinds of insurance: normal cover that includes equipment, loss of production, and down time due to weather events, and reclamation bonding which is a bond underwriting site rehabilitation when the mine closes.
Eginton says Tribeca helps out with reclamation bonding but has not dipped a toe into insurance assistance yet.
Mark Gray, managing director of Allegiance Coal (ASX:AHQ) which has a legacy Australian thermal coal project on its books, says even a lot of funds similar to Tribeca and Co are no longer looking at that sector because of the slump in prices.
In September, energy consultancy Wood Mackenzie said prices for high quality thermal coal from Newcastle had almost halved since over a year earlier to about $US65 ($96) per tonne.
Last year following the disappointing float of coking coal business Coronado Resources (ASX:CRN), Taurus chief investment officer Goron Gault told the Financial Times “Australian funds were nervous about backing coal miners for fear of bad publicity due to concerns about climate change”.
Although thermal coal, the lower quality rock that is burned in power plants, is often lumped in with metallurgical or coking coal, a higher quality substance used for making steel, a two-tiered market is beginning to emerge.
“We are seeing a two tiered coal market. The first is thermal which banks and insurers are struggling to support,” veteran corporate adviser Nick Dacres-Manning says.
“Associated with that are governments and government departments and the pressure they face [over approving thermal coal projects].
“The second is coking coal, which is wrongly identified with thermal coal, but once explained that its use is for steelmaking there should be no reason to stop.”
Regional demand for coking coal is theoretically still strong in countries like Vietnam, where steel production doubled this year.
Eginton says a divergence is opening in the market for coal financing, with coking coal projects being easier to find funding for than thermal.
What is also hurting coal mines, and therefore financing and insurance, are lengthening approval times and several other factors.
Dacres-Manning says in 1994 when Centennial Coal was floated it would take three to four years from discovery to production.
“Today, for a thermal coal project that has probably blown out to 10-12 years. There are many different factors at fault but the environmental process is now the hardest part of the development of a coal mine,” he says.
In addition, an overall decrease in value among junior resources companies generally, higher hurdles from the ASX such as not being able to present pre-feasibility studies to the market without funding to action them, and a shrinking pool of available investors for coal is harming funding opportunities for new thermal coal.
Coal is also becoming a political football in NSW and to a lesser extent Queensland, where Adani’s mine is contentious.
Dacres-Manning says these forces are likely to mean more and more privately funded mines.
“Private equity and family offices are more interested in absolute returns over a five year timeframe and less likely to worry about their portfolio against the market’s quarterly performance.”