Falling coal prices have claimed another corporate scalp, with would-be coal miner Bandanna Energy Limited (ASX: BND) finally appointing administrators. It seems that the company will not achieve its ill-conceived goal of "becoming Australia's next coal producer."
As you can see from the chart below, companies that rely on buoyant demand for thermal coal have been rightly punished by the market over the last 12 months.
Asides from Bandanna Energy, the chart above depicts the share price history of a variety of coal-exposed ASX companies. Let's take a look at each of them.
New Hope Corporation Limited (ASX: NHC) is perhaps the most conservatively run coal company in Australia, with piles of cash and the expertise of majority shareholder Washington H Soul Pattinson Limited (ASX: SOL) to draw on. It is focussed on cost reduction and is sensibly not expanding its operations in the current climate.
Whitehaven Coal Limited (ASX: WHC) is perhaps the least conservatively run coal company in Australia, with net debt of over $650 million and an expansion program timed perfectly to coincide with falling prices. Furthermore, the company's Maules Creek project has drawn the ire (and opposition) of farmers, activists and others who consider the project too marginal to justify the destruction of endangered habitat. The company is also the target of the divestment movement, but counts Sydney University as a shareholder, despite the fact that many staff and students oppose the investment.
Delta SBD Limited (ASX: DSB) is an indebted mining services company focussed on coal mining and it wins my prize for being the most obvious value trap of the past year. Its enormous share price decline over the last year was partly due to the fact that one of its important contracts was with Whitehaven Coal, as well as the industry-wide reduction in mining capital expenditure and the company's uncomfortable levels of debt.
Cockatoo Coal Limited (ASX: COK) is a small Australian coal miner hoping to expand its operations – using debt, of course, in order "to take
advantage of the expected upswing in the [metallurgical] coal demand and price." While metallurgical coal is higher value than thermal coal, the market is sensitive to Chinese demand for steel, and the spot price is sitting near four-year lows. I prefer not to speculate on commodity price movements, although I'm sure shareholders are pleased that the company "expects" improved prices.
In any event I expect each of these companies to perform poorly in the coming years. Thermal coal is an 18th-century technology that is losing relevance this century. Indeed, China has implemented new coal quality standards that the Bureau of Resource Economics expects will affect over 20 million tonnes of Australian export coal.
Furthermore, Tim Buckley from the Institute of Energy Economics and Financial Analysis argues that greater renewable energy penetration, the re-initiation of suspended nuclear programs, less energy-intensive growth and increased efficiency at existing coal power plants support "a forecast made in mid 2013 by Bernstein Research that from a position as the world's largest importer of thermal coal in 2013… China could return to being an opportunistic net exporter of thermal coal this decade." Even if Chinese demand for coal demand stays stronger for longer than expected, coal-exposed companies are looking like a poor investment in the long run.
