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Coal: the next great commodity story
Coal never gets quite as much attention as oil, but Tom Bulford thinks it could make many a fortune in the next few years. Here, he explains why, and tips two small-cap coal miners to buy now.
Today I want to focus on a 'dirty' little commodity you need to know about. It never gets quite as much attention as oil. But my bet is that it could be the source of many a fortune building investment in the years ahead. I'm talking about coal.
Here are four interesting things you need to know about coal
Coal generates 41% of the world's electricity.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Imports of thermal coal used primarily for power stations will rise by 47% in the next decade, according to consultants at McCloskey.
Meanwhile, McCloskey says world demand for coking coal used in foundries will increase by some 53%.
Where's all this increased demand for coal coming from? You guessed it the usual suspects: China, India and Brazil. But here's why you might not know.
For sure, China has coal reserves of its own. It also has the large Mongolian coal fields on its doorstep. But crucially, India and Brazil do not. These two economic powerhouses are going to need huge supplies of imported coal to fuel their rapid growth.
The big question is where will it come from? Once you know this, you're on to what could be another brilliant opportunity for penny share investors. Keep reading.
At present the main supplier is Australia, notably from the Bowen Basin coal field in Queensland. But two other countries have plenty of coal reserves. These are Indonesia and Mozambique.
I've recently been looking at the prospectus of AIM newcomer the Ncondezi Coal Company (LSE: NCCL). According to that, the artist and explorer Thomas Baines painted an outcrop of coal beside the Zambezi River in Mozambique back in the 1850s.
Had Baines had the foresight, he might have staked out a little territory of his own. In doing so, he could have left a hugely valuable legacy to his descendants. The Zambezi Basin is now set to become one of the world's major suppliers of coal and an exporter to India in particular.
The catalyst for the development of this coal field was the award in 2004 of mining rights to a consortium headed by the giant Brazilian company, Vale, the world's largest iron-ore miner.
Vale is investing a massive $1.3bn in the Moatize coal project in the north-western Tete province of Mozambique. Meanwhile, Australia's Riversdale is weighing in with a $260m project of its own, in conjunction with India's Tata Steel...
The missing piece of the Mozambique coal puzzle
Critical to the success of these two miners and of the others looking to get a slice of the action will be the construction of the necessary infrastructure. In the past, coal has been sent in barges down the Zambezi River. But plans are now under way to develop rail links to the coastal ports of Beira and Nacala.
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Beira is some five hundred kilometres away from the coal fields, but is accessible via the Sena railway line. This line was damaged during Mozambique's civil war. But it's now being upgraded with financial assistance from the World Bank, which sees it as a means, not only of assisting Mozambique, but also providing access to land-locked Zambia and Malawi.
But a better option might be the provision of access to Nacala, a deepwater port that can accommodate the deep-hulled coal transporting ships. Nacala is even further from the coal fields. But in an initiative involving Vale and the consortium that operates the port, the rail link is being modernised although it is unlikely to be ready before 2015.
These transport links will be vital if coal exporters are not to suffer from the sort of log-jams that have affected ports such as South Africa's Richard's Bay, Tanzania's Dar-es-Salaam and Kenya's Mombasa. But now that some major mining companies have got the ball rolling, smaller players are moving in for a piece of the action.
One of these is Coal India, while a second is the Ncondezi Coal Company, which I mentioned above. The latter has identified a large resource of thermal coal and is aiming for first production in 2014. It also hopes to add value to the project both by proving up further reserves but also by identifying higher value coking coal.
A second player, and one very much in the penny share category, is Beacon Hill Resources (LSE: BHR). Beacon Hill already has a magnesite project in Tasmania and has now managed to acquire the only operating coal mine in Mozambique's Tete province.
It wants to raise production from this underground mine to 2 million tons per year, at which level it would generate annual revenues of some $250m. It is aiming to export its first coal in 2012, but that assumes, of course, that the necessary rail and port infrastructure is in place.
Coming up next month is the Mozambique Coal and Energy Conference in Maputo. ' Mozambique's coalfields are the hot topic right now within the international coal community,' says the advance publicity, 'with a number of leading experts suggesting that Mozambique will become the new Bowen Basin'.
Billions of dollars are said to be available to back projects in this area. This may sound like hype, but it's probably true. This is a region to watch.
This article was written for Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth
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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International, he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.
