The notion that long-term investors should be investing in un-diversified coal companies is mistaken, but there are high risk, high reward resource plays that are on the ascent – and these are sometimes worth a look (as long as you don't chase the share price). For example, as Motley Fool analyst Mike King points out, graphite miners have been making shareholders smile.
As the chart below shows Lamboo Resources Ltd (ASX: LMB), Triton Minerals Ltd (ASX: TON), Syrah Resources Ltd (ASX: SYR) and even Kibaran Resources Ltd (ASX: KNL) are up anywhere from 110% to 700% in the last year, as a speculative furore washes through the sector. Like many, I missed the gains on offer…
Now I am not saying you should dive in at these prices, but the point is, these companies are skyrocketing because they have long-term tailwinds in their favour. Why? Because graphite is a key ingredient in batteries – indeed, the recent excitement over the above four stocks is partly down to the prospect that Tesla Motors will need large amounts of graphite as it scales up electric car production.
At any rate, graphite has significant potential as a battery material and graphene – a 1 atom thick layer of graphite – has uses in nanotechnology and other applications that we haven't even imagined yet. While resource stocks (especially hyped-up ones) are not my game, at least this product has long-term demand tailwinds. Graphite miners will support the proliferation of renewable energy, which requires storage as it satisfies a higher proportion of demand.
In contrast, some commentators are "positive about the future prospects for coal from this point on" because the sector has taken an absolute beating and because: "High LNG [liquefied natural gas] prices are threatening to crimp demand as many countries are increasingly unwilling, or unable to afford these supplies…"
This reasoning is mistaken for several reasons:
1. In many places (especially poor countries) there is no adequate electricity grid, so portable fuel such as LNG is required. Higher LNG prices strengthen the case for distributed generation, such as solar, not new coal plants.
2. When making the case for coal, some writers forget that Australia is currently building LNG export facilities capable of making us the world's biggest exporter (overtaking Qatar). The US and Malaysia also have plans to increase exports. It is reasonable to at least wait and see whether this drives down prices (as expected).
3. Where coal is cheaper than distributed renewable energy generation, it is cheaper because there are coal reserves in that location. It is not economical to import coal thousands of kilometres if a coal plant is not already built. New coal plants, where they are built, will generally be built as close as possible to coal reserves – this is simple common sense as it is easier to transport electricity than thermal coal.
We will probably see a rebound in the share prices of New Hope Corporation Limited (ASX: NHC) and WHITEHAVEN COAL LIMITED (ASX: WHC) at some point (I know not when), but over the long term, I think the businesses are in decline. To quote Warren Buffett: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
A significant proportion of Australia's coal exports are already unprofitable at current prices: they happen because of take-or-pay contracts with haulers like Aurizon Holdings Ltd (ASX: AZJ). Maybe you can make a dollar out of Whitehaven Coal, but I'd prefer to invest in a commodity with long-term tailwinds.
