Two huge energy deals to watch

Could it be that two of the world's bigger coal projects are finally going to get the green light? Certainly the way that the share prices of GCM Resources (LSE:GCM) and Strategic Natural Resources (LSE:SNRP) have been climbing of late suggests that good news could be just around the corner.

Let me start with GCM. Its focus is on the Phulbari coal project. Such is its scale and potential importance to the economy of Bangladesh that GCM's share price soared in 2005, hitting a high of 919p. Then trouble struck in the shape of rioting by some of 40,000 rural dwellers who were threatened with forced relocation. The Government of the day backed off but hopes were revived when a new Government, democratically elected in 2008, vowed to make power generation a top priority.

The need for electricity is evident. With a population of 160 million, Bangladesh is one of the most densely populated countries on the planet. It is also one of the poorest. According to the World Bank, over 80% of the population survive on the equivalent of less than US$2 a day. GDP per capita, at around US$1,500 per annum, is a fraction of the world average.

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And yet Bangladesh has been achieving economic growth of 6% per year and has been identified by Goldman Sachs as one of the countries with the potential to become an economic powerhouse of the 21st century. But if it is going to realise this potential it will need power. And that leaves it with a very simple choice.

How coal can save Bangladesh from total ruin

At present, Bangladesh has the capacity to generate around 4000MW of power. But with demand closer to 5000MW, regular blackouts are hampering the efficiency of existing industries and agriculture. In recognition, the government, in pursuit of accelerated GDP growth of 8%-10% per year, has said that a 50% increase in electricity generation is needed over the next five years.

That is a 'big ask'. Making it harder still is the fact that Bangladesh is running out of the gas that currently fires 90% of its electricity. So the obvious answer is to exploit the country's huge coal reserves. Phulbari has a coal resource of 572m tons, and is the only project that has been subjected to a full environmental and social impact assessment. It alone could support a power generating capacity of 4000MW, and could transform the outlook for electricity availability in the country.

So the question now is whether and when the government will give Phulbari the green light. Some clues suggest that this could be imminent.

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The first of these is that Polo Resources (PRL), has said that approval for Phulbari would make a 'substantially undervalued asset'. PRL has a 29.8% stake, and is known as a shrewd investor in resource projects around the world.

Next, the local media have reported that the Bangladesh government has decided to form a committee to establish a 'coal mine city' at Dinajpu, convenient for Phulbari. And acknowledging past problems, M. Mizbahuddin, secretary of Bangladesh's energy division has said that "rehabilitation of the affected people of the coal mining area and the fixing of compensation packages in consultation with the affected people is the main task of the committee".

So after years on the brink of disaster, Bangladesh looks to have bitten the bullet - the government now looks to be backing coal in a big way.

And Polo isn't the only group to make a breakthrough on a major coal project recently. There are some very interesting things happening in South Africa too.

A masterplan to unlock 150m tons of prime coal

A second coal venture that has faced rather different obstacles is the Elitheni mine of Strategic Natural Resources (LSE:SNRP). This is another huge resource, but found in South Africa. The licence area is the size of Luxembourg, and exploration of just 3% of this has already revealed a resource of 150m tons of anthracitic coal. With South Africa under constant threat of power shortages, this should have considerable value.

SNRP's initial plan was to supply power stations to be built by Peter Earl's IPSA (LSE:IPSA). But in a difficult political and financial climate Earl's plans have foundered, leaving SNRP to explore different markets.

Now it has plans to supply local industry, and is talking to the owners of other South African power stations. But the big hope is to export coal to the power-hungry markets of China, South Korea and, especially, India.

Rail links between Elitheni and South Africa's east coast still survive from colonial days, but SNRP needs to prove the quality of its coal and also ensure sufficient shipping capacity. With the port of Richards Bay bursting at the seams, SNRP believes that it could start to export through East London, before increasing volumes significantly through Coega, where new deepwater terminals capable of docking much larger ships are being built.

This is SNRP's master plan. Today, an independent study found that Elitheni's coal is suitable for industrial markets, power generation and the export markets. With this confirmation, SNRP is now looking forward to signing off-take deals and finally unlocking the potential of its vast coal resource. Well worth keeping an eye on these very promising developments.

This article was first published on 26 October in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.