Having listed just over a year ago (a result of a merger with Gloucester Coal), Australia's largest listed pure-play coal producer, Yancoal Australia (ASX: YAL), has reported a loss of $749.4 million. Presumably the board is hopeful that the new CEO, Reinhold Schmidt, former COO of Xstrata (LSE: XTA) can reverse this result, and generate profit for shareholders.
That would be a welcome change — shares first traded at around $1.30, and the majority of shareholders who bought on market since then are underwater. Shares currently trade at about 73 cents, giving the company a market capitalisation of $726 million. The loss (which exceeds the market capitalisation of the company) was blamed on the falling Australian dollar and an impairment of certain tenements.
One possible way some shareholders could profit from investing in Yancoal is if major shareholder Yanzhou Coal Mining (NASDAQ: YZC) proceeds with its proposed takeover of Yancoal. Yanzhou currently owns 78% of Yancoal, and has made a non-binding indicative proposal for Yancoal shares, offering an interest in its own shares that values Yancoal at close to 30% over the current market capitalisation.
It is no surprise that the Chinese company Yanzhou is keen to accumulate coal assets. In its medium-term outlook, the International Energy Agency has predicted that China will become the world's biggest importer of coal by 2017. In this respect, Australian coal companies are reasonably well situated to continue exploiting Australian resources for the benefit of the Chinese (who both use the coal and would own the company exploiting it).
Investors should ponder why on earth Australian politicians would agree to such an arrangement. Under the proposed takeover of Yancoal, a foreign company would own enormous amounts of Australian resources, which it could exploit with little regard for local communities. Certainly, the profits would flow offshore and the best Australians could hope for would be some "trickle-down" benefits, employment being the most obvious.
The only argument I can see for owning Yancoal shares is the hope of a takeover. The company has just $380 million in cash, and operating cash outflow was over $100 million in FY2013. Furthermore, the company has a whopping $4.9 billion in debt, and has already borrowed money from Yanzhou. The minority shareholders hardly have a strong bargaining position.
Some speculators might think that with rising demand, the price of coal is likely to increase. However, the IEA claimed in December 2012 that enough investments are planned to ensure adequate coal supply, and that current low prices and uncertainty about China's growth will delay and stop some investments. This could mean that low coal prices (especially for thermal coal) will persist for some time.
Importantly, coal investors face the major risk that the governments of the world will continue to try to reduce reliance on coal. Indeed, as recently as July, the USA and China came to an agreement to burn less coal with a view to reducing carbon emissions. Poor air quality resulting from coal use (which causes people to live shorter, less healthy lives) is also a major concern, especially in China. In part due to these concerns, the Goldman Sachs commodities team has said that "The window for thermal coal investment is closing" and has downgraded its forecast price for thermal coal.
Foolish takeaway
Coal mining causes irreversible environmental damage here in Australia, and when the coal is burned, it contributes to the global threat of climate change. Investors in coal companies are hoping to profit at the expense of the greater good. Call me an optimist, but I think that they will face community opposition. Investors should not ignore this risk.
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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.
