Though the world may be moving towards the trend of pursuing cleaner and more efficient energy sources, we are still dependent on coal as a major energy source.
Investing in the coal industry may have been rather profitable recently with coal price soaring to a year-to-date high.
The rise in coal price was surprising as September has historically been a “slack season”.
In mid-September, the Harga Batubara Acuan (HBA), Indonesia’s thermal coal reference price HBA, climbed to US$92/tonne with a 44% year-on-year growth.
In China, one of the benchmark prices Qinghuangdao 5500 GAR FOB spot price also increased by 24.2% year-on-year, falling into the red zone by the thermal coal price alert mechanism, which signals that the price is abnormal.
Both China and Indonesia have been rolling out cooling measures to bring price downwards to better reflect supply and demand and to prepare the market for a price correction.
In China, the National Development and Reform Commission has set up two new rules to control the minimum and maximum requirements of coal inventories.
Firstly, they mandated power plants in different locations to have at least 15 to 20 day’s worth of coal stocks, depending on location.
They also banned the act of stockpiling to ensure that there will be a steady supply of coal in peak seasons (summer and winter).
In Indonesia, the Ministry of Energy and Mineral Resources has announced that they will be drafting new rules in an attempt to reduce electricity prices by coming up with a new pricing formula, though no timeframe has been set.
The current coal price is likely too high to sustain and thus needs to be corrected downwards.
Despite the new up and coming cooling measures that will bring down the price of coal, investors can still look out for developments in these three coal companies that are likely to reward investors.
1. Golden Energy and Resources (GEAR)
Based in Indonesia with 42,904 hectares of coal concession area, and with more than 50% of the firm’s coal being supplied to the domestic market, the new price control that will be implemented is expected to strike a blow to GEAR.
However, the firm is projected to still profit off the rise in coal price as it has more than 15 trading partners which allow the group to export more of its supply.
This will help GEAR deflect the damage inflicted by the low domestic coal price, which is likely to drop lower than market price due to government intervention.
Furthermore, GEAR has been commended for its strong balance sheet with net cash position of US$34m, and a gross gearing ratio of only 0.2x which signifies low defaulting risk.
GEAR has also reported a high net profit growth of US$48.7m in the first half of this year, a sign of a potentially high full-year dividend for shareholders.
Investors looking out for growing firm with high payouts can consider including this stock in their portfolio.
Phillip Securities Research: Golden Energy and Resources Limited (SGX: AUE) – BUY; Target price $0.59
2. Geo Energy Resources
Affected mainly by China’s actions as its export makes out 70 to 80% of its total sales, China’s effort in stabilising the coal price will be helpful for the firm.
With a clearer range of prices, the firm will be able to have better predictions of its margin and profitability.
Furthermore, the current increase in coal price is certainly helpful for Geo’s profits.
Phillip Securities Research: Geo Energy Resources Limited (SGX: RE4) – BUY; Target price $0.44
3. Blackgold Natural Resources
Blackgold is unlikely to be affected by the new domestic pricing changes in Indonesia as its sales are being based on a “cost-plus” model.
With the profit margin being pre-determined within contract terms, this means that price changes will not affect the firm.
Though Blackgold will not be making more profits when the spot price is higher than the contracted price, it also means that a lower price under the new rules will not negatively impact it either.
Phillip Securities Research: Blackgold Natural Resources Limited (SGX: 41H) – TRADING BUY; Target price $0.16