North American coal companies, specifically juniors operating within the TSX Venture, have been crushed in recent years as the prices of thermal and metallurgical coal have failed to reverse losses. This painful cyclical downtrend may be coming to an end as recent gains in metallurgical coal have given rise to the hope that a bottom for coal, and its struggling producers, could be in. Metallurgical coal, also known as coking coal, rose over 15% in the third quarter of 2013.
Coking coal is used in the creation of steel, whereas thermal coal is used for electricity and power generation.
The Scotiabank Commodity Price Index report, released in late August, suggested prices for coking coal likely hit a cyclical bottom at US$145 in the 3rd quarter of 2013. This has to come as good news for depressed coal companies who, in many cases, have suspended or delayed production until prices stabilize and move higher.
When it comes to coking coal, Canada is a world player, producing 29 million tonnes of metallurgical or coke (steel-making) coal in 2012. The vast majority of coking coal is mined in Western Alberta and B.C., while thermal coal, of which Canada produces upwards of 40 million tons per year, is primarily produced in the Prairie Provinces.
Australia represents just over 70% of seaborne spot coking coal volumes for export. Canada comes in second with just 10% of market share, followed by the US which chips in 5% to global trade.
Steel Index premium coking coal from Australia moved up to $147.40 a tonne last week, a three-month high. Australia is the lowest cost, large scale, exporter of coal in the world.
The quarterly contract price for Western Canada’s coking coal destined for Asian markets continued its multi-year slide this quarter, dropping from $172 in Q2 to $145 in Q3. This $145 price level is in line with a recent contract settled between Australia’s BHP Billiton Mitsubishi Alliance (BMA) and Nippon Steel in Japan. Record exports from Queensland, Australia and the United States have allowed nations such as Japan to stockpile the resource during this latest period of price weakness.
Is the Coking Coal Bottom In?
Current contract prices are near a cyclical bottom, but appear to be stabilizing and moving up.
Tony Meyers, vice-president of Canadian operations for U.S. coal miner Walter Energy Ltd. recently noted that spot prices for metallurgical coal have increased to $145 US a tonne in the third quarter, up from a low of $130 US per tonne.
Meyers commented that, “There is still a lot of (coal production around the world) that’s out of the money, so yeah, it’s pretty tough out there. It’s all about cost control.”
Junior coal companies on the TSX Venture have had their valuations destroyed as negative sentiment in both the overall junior mining space and coal industry have diminished all positive sentiment and risk appetite in recent years. Unsurprisingly, these junior coal companies are responsible for the vast majority of new discoveries.
Toronto based CanAm Coal (COE:TSXV) is an actively traded TSX-Venture stock which reported record revenue of $15.6 Million in August of 2013. Its EBITDA from operations was $2.6 Million and although it represents a 40% increase over Q1 the market has spoken loud and clear.
CanAm Coal Corp. – 1 Year Chart
Unfortunately, there are more than a small handful of forgotten hopefuls that ventured into the coal business when it was trading at a record $300 + per tonne in 2008, or during its second peak in 2010 and 2011, that have become little more than a footnote.
While the last few years have been arduous for junior coal companies, a silver lining has begun to emerge. Colonial Coal International Corp. (CAD:TSXV) is a perfect example. The company is up over 100% from its lows hit in mid-summer as the price of coal stabilized and the company worked to differentiate itself.
Colonial Coal – 1 Year Chart