Coal miners facing weaker commodity prices, increased volatility

AUSTRALIAN coal miners were the market darlings in the first half of 2008 thanks to massively increased profits from Asian customers, but they have not been immune to volatility as the sub-prime crisis worsens and concerns of a slowdown in Asian coal demand bite.
Coal miners facing weaker commodity prices, increased volatility Coal miners facing weaker commodity prices, increased volatility Coal miners facing weaker commodity prices, increased volatility Coal miners facing weaker commodity prices, increased volatility Coal miners facing weaker commodity prices, increased volatility

 

Kate Haycock

Coal miners have been some of the better performers in the resource sector in the past year, and it seemed strong demand and higher prices would cushion these companies from the waves of volatility that have gripped other parts of the sector.

As coal prices soared earlier this year, miners reached all-time highs on the Australian Securities Exchange around the end of June.

However, since then, things have cooled considerably, with companies recording share price falls of 20-60% since mid-year up to today, with the most recent trough on Thursday, September 18, when most coal plays on the ASX hit six-month lows.

The falls can be blamed on the sub-prime crisis which has undermined confidence in the markets and seen even producing coal miners with solid cash flows punished as investors panicked.

Added to that, coal prices have fallen, and last week’s coal company lows coincided with a drag on commodity prices.

ANZ bank analysts pointed to lower oil prices and concerns that demand was easing in Asia causing Newcastle spot and Richards Bay spot prices to decline 9.5% and 9.6% respectively.

“Reports that a number of Chinese power utilities had rebuilt coal stocks to as high as 20 days weighed on sentiment as did slowing demand through Southeast Asia for Ramadan festivities,” ANZ added.

And while the issues with the markets are far from fixed, despite plans of a $US700 billion bail-out in the United States, coal plays are still better placed than many fellow resource stocks.

In the short-term, the ANZ bank is predicting coal prices to track higher with oil.

“Prices over the coming months should ease, [however] in line with our lower forecast oil

Price,” the bank said.

“Sharply falling freight rates are a warning sign that demand has fallen, although we suspect some of the declines are due to rising shipping capacity.

“Global demand conditions also appear to be faltering – more so in Europe than in Asia. However, ongoing infrastructure constraints in Australia, the likelihood of lower exports out of China [potentially Vietnam and South Africa], and seasonally wet weather in Indonesia, is likely to keep a high floor on prices,” the bank added.

Aquila Resources, which runs the Belvedere mine with Brazilian partner Vale, reached an all-time high of $17.95 on May 28 and then fell to a six-month low of $8.51 on September 18, a plunge of 59% in three months.

The company’s shares have since recovered to $10.20. At the start 2007 Aquila’s shares were at $2.18.

New Hope Corporation hit its all-time high of $5.59 on June 24 but last week reached a six-month low of $4.02, down 28% from its highs.

The company operates the New Acland mine in the Darling Downs and New Oakleigh near Ipswich, and this week reported a $69.3 million profit for the previous financial year.

At the start of 2007 New Hope was trading at $1.29 and has since recovered to $4.40.

Hunter Valley-focused miner Centennial Coal recorded an all-time high of $6.40 on June 26, but by last week had fallen back to $4.62. Its 2007 low was $1.60.

Felix Resources, one of the best performers among resource plays on the Australian Securities Exchange, peaked at $23.28 on June 3, but was down to $17 last week, a 27% fall. It has subsequently recovered to $17.13.

Despite the fall, Felix is still trading well above its March low of $10.41 and massively higher than its 2007 low of $3.92.

Whitehaven Coal reached $4.79 all-time high on June 23, reached $2.69 in the past week just above its yearly low of $2.65 in April. Its 2007 low was $1.42.

Macarthur Coal – subject of much takeover speculation this year – hit an all-time high of $21.21 in mid-June, just as Ken Talbot sold out of the company and reaped massive profits.

Macarthur’s six-month low of $10.05 was reached on September 18, still more than double its 2007 low of $4.35.

Gloucester Coal, meanwhile, peaked at $13.74 on June 24, fell back to $8.85 on September 18, but like the others is still well above $3.21, its 2007 low.

More speculative coal plays also had a strong run.

African coal play Riversdale reached a high of $12.10 on June 30, and since then fell back to $7.34 on 18 September.

In perspective, at the start of 2007 the company’s shares were worth $1.79.

Coal of Africa’s year-rolling high of $4.84 (its all-time high was reached in 1987) came on June 16 and it has since slumped back to a low of $2.09 on 18 September. During 2007 its shares traded as low as 50c.

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