Untethered from corporate responsibility and shareholder demands, private equity firms are in for the “bonanza of a lifetime” in a scenario where coal defies the currents of the energy transition.

Those are the thoughts of Vale’s Luciano Siani Pires. The Brazilian iron ore giant has just sold its met coal operations in Mozambique to Indian steelmaker Jindal.

As diversified miners facing pressure from activist shareholders and green-minded super funds turned their backs on coal, Vale targeted Chinese and Indian steel producers to find a buyer for the unwanted asset.

To Pires’ surprise, he said in a LinkedIn post, Vale signed 30 non-disclosure agreements with western private equity firms keen to scope out coal assets as prices soared to record levels in 2021.

“Precisely because coal-related assets have become toxic for listed companies, private equity firms are hunting thermal coal power plants and coal mining properties across the world at bargain prices, aiming at juicy returns, as they do not have ESG-minded constituencies to attend to,” Pires said.

“Coal prices have been stubbornly high, and they may stay so in the coming years due to the lack of investment in new capacity for environmental reasons.

“A similar trend may happen in Oil, as most majors are wary to commit the capital required to develop new fields given declining demand and decarbonisation trends.

“In both Coal and Oil, private equity firms are betting that the energy transition will take longer than expected and that demand will outpace a shrinking supply. The ensuing combination of high commodity prices and low acquisition costs for unwelcome assets may provide these firms the bonanza of a lifetime.”

Pires’ comments show the conundrum for coal investors. While public pressure grows against the industry, those who remain faithful are likely to benefit from temporary supply shocks and price hikes.

 

Can it continue?

Coal miners are facing an existential crisis, though given the profits they’re currently spinning, it may be more mid-life than end of life.

The global economy is in a bind.

Governments are putting out targets to get to net zero, increasing the proportion of their grid supplied from renewable sources and sharpening the approvals process for controversial, greenhouse gas spewing businesses like coal mines.

That means less new supply is coming online than before. When a series of unusual supply disruptions described by experts as the equivalent of flipping heads on a coin five times in a row struck in mid-2021, it sent prices into overdrive.

Prices for met coal in China boomed sky high in 2021 amid a ban on Aussie imports, scaling above US$600/t before a Government-induced pump in domestic production dragged them back below US$350/t by the end of the year (still higher than any point since 2011).

Australian coal, diverted to secondary markets like India, Taiwan, South Korea and Japan, climbed above an incredible US$400/t for premium hard coking coal and was still at US$359/t on Monday.

Thermal coal entered 2021 at around US$80/t, rising to a record of US$269.50/t on October 5 before a sharp fall as domestic production in India and China eased their respective energy crises. It started 2022 at US$157.50/t, a price at which Aussie miners will be generating massive profits.

For now, coal demand remains staunch. Driven by India and China the International Energy Agency predicts 2022 will be a record year for coal demand, something which could keep peaking until 2024, despite calls for immediate action on climate change from last year’s “code red” IPCC report.

Major players continued to shave down their exposure to coal in 2021, with Vale exiting the Mozambican trade, BHP (ASX:BHP) selling its non-core BMC met coal business to Stanmore (ASX:SMR) for US$1.2 billion and joining Anglo American in selling their shares in Colombia’s Cerrejon mine to Glencore for a combined US$588m.

But junior miners reemerged, winning big on their bets that the green shift had undervalued coal mines.

Bowen Coal (ASX:BCB), led by former Stanmore boss Nick Jorss, is up 337.5% over the past year. Bathurst Resources (ASX:BRL) gained 93%, taking its market cap over $100 million, and Allegiance Coal (ASX:AHQ), which bought a string of US coal mines, was up 31% and became a coal exporter late in 2021.

Meanwhile the bellwether ASX group of Yancoal (ASX:YAL), New Hope Corporation (ASX:NHC), Whitehaven Coal (ASX:WHC) and Coronado (ASX:CRN) added billions to their collective market cap, and paid off hundreds of millions in debt as they shifted from massive losses in FY21 to big profits in the first half of FY22.

The price run alleviated pressure on small miners who were loss making at 2020 prices. Blair Athol coal mine owner Terracom (ASX:TER), which lost ~$95 million after tax in FY2021, made $31.9 million in positive EBITDA in November alone with an expected December quarter cash margin of $122/t. It helped Terracom pay US$44.1m of its US$167.1m Euroclear Bond early across the first half of 2021.

 

Coal Miners share prices today:

 

 

What is in store for coal in 2022?

At the same time coal miners are finding it harder to receive approvals due to ESG and particularly climate concerns, something which has reduced the pipeline to replace ageing production.

That is despite a relatively high level of support from Australian Governments, which has seen the stage set for controversial extensions of South32’s (ASX:S32) Dendrobium mine near Wollongong, New Hope Corp’s New Acland Stage 3 and the first shipments from Adani’s hotly contested Carmichael coal mine in Queensland.

While Australian Resources Minister Keith Pitt is bullish in his view coal, and particularly “high quality” Australian thermal and met coal, will be in heavy use for decades to come, other Western governments have been cracking down.

Canada has proven tougher. A number of Australian companies, including Gina Rinehart’s Riversdale Resources, have been foiled in their attempts to develop met coal mines in Canada’s Crowsnest Pass.

A next door neighbour pivoted to green energy instead.

“I think the biggest issue for coal of all types is going to be permitting of new supply,” Lion Selection Group’s Hedley Widdup said.

“’Coal’ is an emotive phrase, and in the places it is most emotive there doesn’t seem to be a great deal of “are we talking thermal or coking” asked.

“The hotter ESG becomes as an investing theme, the less easy expanding or developing new supply of most coal will be.”

 

How resilient will coal be?

There have already been positive signals for Australian coal producers early in 2022, after Indonesian authorities issued an export ban to alleviate energy shortages at home.

The ban was due for review yesterday, with Indonesia’s state power company PLN saying it had secured enough supplies to stave off power outages in January.

The incident highlights the ongoing role coal is playing in power grids overseas despite its sliding use in the Australian market.

Kingsley Jones from Jevons Global expects coal prices and demand to fluctuate in step with natural gas prices. High natural gas prices and low supply have led to the expansion of thermal coal plant use in places like Asia, the US and Europe.

“This is what is happening already and we can see from the situation in the USA and Europe that higher natural gas prices make coal restart economic,” he said.

“That is why coal plants are restarting right now. This is a bad outcome for emissions, but a natural consequence of the push to stop investment in gas.

“This is backfiring now with coal prices rising off additional power demand to substitute for natural gas.

“In our view, the coal industry will likely experience periods (like now) where prices and margins are very good followed by long periods where it makes no money.”

He said interest in new coal plant investment will likely be low unless there are options to sequester the carbon produced, something that despite support from governments like Australia’s, it has been difficult to establish at scale.

“Whitecap resources in Canada runs a tight oil operation that sequesters carbon dioxide piped from a neighbouring coal-fired power station,” Jones said.

“That is used for enhanced oil production for a net-negative cycle emission profile. This approach is unlikely to achieve major scale, but it is why we think you will see many “orphaned assets” move to private equity where they can be bought cheaply and then retrofitted or otherwise reorganised for lower emissions.

“The public markets are unlikely to show much interest in this area, but we think it may prove profitable for some that do.”

 

ASX coal stocks 12 month performance

Scroll or swipe to reveal table. Click headings to sort.

CODE COMPANY PRICE 1 YEAR RETURN % 1 WEEK RETURN % 1 MONTH RETURN % 6 MONTH RETURN % MARKET CAP
SMR Stanmore Resources 1.155 39% 12% 16% 70% $297,446,975
AHQ Allegiance Coal Ltd 0.54 61% 9% 2% -19% $202,706,473
ATU Atrum Coal Ltd 0.035 -87% 25% 17% 34% $23,383,103
MCM Mc Mining Ltd 0.094 -49% -1% 13% -18% $14,515,438
JAL Jameson Resources 0.07 -36% 0% -13% -20% $23,983,232
BRL Bathurst Res Ltd. 0.745 91% 1% 16% 69% $127,358,959
PAK Pacific American Hld 0.017 -17% 6% 6% 1% $8,123,916
GRX Greenx Metals Ltd 0.23 -9% 5% 10% -14% $54,245,837
LNY Laneway Res Ltd 0.006 -14% 0% 20% 33% $25,698,396
BCB Bowen Coal Limited 0.175 298% 3% 35% 149% $229,752,449
CRN Coronado Global Res 1.32 22% 6% 17% 47% $2,246,447,998
NHC New Hope Corporation 2.24 58% -2% 9% 21% $1,897,774,147
WHC Whitehaven Coal 2.69 64% 1% 10% 31% $2,839,771,638
NCZ New Century Resource 2.24 -36% 9% 10% -34% $299,968,733
CKA Cokal Ltd 0.145 88% -3% -6% 127% $140,842,347
AKM Aspire Mining Ltd 0.081 -23% -1% 4% -4% $42,641,507
TIG Tigers Realm Coal 0.022 100% 10% 10% 175% $300,534,154
YAL Yancoal Aust Ltd 2.8 15% 7% 12% 35% $3,882,091,945
TER Terracom Ltd 0.185 12% 6% 9% 37% $146,953,488
NAE New Age Exploration 0.01 -23% -17% 0% -17% $16,512,837

 

 

Can prices blow consensus out of the water again?

So what will coal prices do this year after an unpredictable 2021?

Research analysts and forecasters who severely undershot their predictions last year were forced to up their estimates as the year progressed and the market tightness persisted.

Perspectives on where met coal and thermal coal will go in 2022 are diverse.

Commonwealth Bank’s Vivek Dhar sees met coal averaging US$280/t in the March quarter with thermal coal averaging US$160/t before sliding to US$155/t and US$80/t respectively by the end of the year.

UBS estimates hard coking coal will average US$238/t in 2022, with thermal coal fetching an average price of US$118/t before sliding in 2023 to US$154/t and US$95/t, respectively.

Australian Government forecasters, who say coal exports will be worth around $90 billion to the Australian economy in 2021-22, have similar estimates.

Tribeca Investment Partners head of research Todd Warren said the market had been badly wrong footed by the run in coal prices.

He said Australian coal in particular would find a strong buyer’s market, with ESG and emissions concerns likely to see overseas customers seek out the higher quality Australian product.

“The reality is that the quality of Australian coal both met and thermal means that it will always find a home,” he said.

“And indeed, more often than not in an environment of increasing environmental sensitivity, the high quality met coal or the low ash, high BTU Australian thermal coal will always in the foreseeable future have demand for it.

“We expect that to continue … spot remains well above consensus and we expect consensus will have to come up.”

At Stockhead, we tell it like it is. While Allegiance Coal is a Stockhead advertiser, it did not sponsor this article.