Top of the promising factors was the $US7.7 billion asset-value write-down booked by Glencore Xstrata. While the big resource group did not provide a break-down of the losses it is a reasonable guess that a large portion applied to the group’s coal assets, which have been hit by lower coal prices, like everybody else in the business.
While easy to interpret as a negative, the act of writing off the value of an investment can actually be a very positive step because it means a new base has been established in a company’s accounts. While shareholders might feel the pain it is not necessarily the case at the operational level.
Effectively, Glencore Xstrata is making a fresh start by writing down the value of assets to better reflect their future earnings potential. However, and this is significant, it is keeping most of the business operating in preparation for an upswing in prices.
Hard on the heels of the Glencore Xstrata write-downs came a remarkable assessment of Australia’s stock-exchange listed coal stocks, including the first buy tips seen by The Hog in more than a year.
CommSec, the stockbroking arm of the Commonwealth Bank, has recommended New Hope as a coal miner to buy because of its solid management and cost control culture, along with Carabella Resources because of its short path to production.
The Carabella tip has been the better of the two with the emerging metallurgical coal producer rising sharply over the past two weeks from around 18c to recent trades at 27.5c, with a peak price last week of 31.5c. New Hope has been less inspiring, rising from $3.85 to $3.95.
However, and this is the key point, the prices of both stocks on the CommSec list rose rather than fell, which has to be one of the best stock market results for the coal industry in an awfully long time.
The good news continues and while The Hog might have donned his rose-coloured glasses this morning (it is almost spring, after all) there came a combo of solid exploration and pleasing coal-market news.
On the exploration front there was a remarkably upbeat reaction from investors to news from Liberty Resources that it had encountered multiple coal seams in the latest round of drilling on its leases in Queensland’s Bowen Basin.
Best thickness of Fort Coopers Coal Measures came in at 48 metres with multiple seams hit in all 54 holes drilled along a six kilometres discovery area.
Until a few weeks ago news like that would have sunk without trace, such has been the level of despair in the coal industry, and among coal investors.
This week, the reaction was different. Liberty’s share price more than doubled in two days of heavy trading as speculators rediscovered a coal exploration stock, pushing it up from 4c to a 12-month high of 9.1c on Wednesday before marking it back to around 7.9c.
It will be a long time before Liberty mines any of its coal, however, the reaction of investors indicates that there is new-found interest in the sector.
An explanation for that fresh interest might be found in the fourth piece of evidence pointing to a turn in the overall coal market and that came from Shanghai, courtesy of a report on reliable news service of a rebound in Chinese coal imports.
According to Reuters, China’s coal imports, excluding lignite, rose in July by 26% compared with June’s imports with Australian exporters the biggest winners.
A total of 22.77 million tonnes of thermal coal was delivered to China in July compared with 18.04 million tonnes in June. While monthly figures can bounce around, the latest monthly data means Chinese thermal coal imports this calendar year are up 13.7% on the first seven months of 2012.
Metallurgical coal imports also rose thanks to strong demand from steel mills with the July import level coming in at 5.88 million tonnes, a rise of 25% on the June figure.
Taken as a whole, and The Hog is keen to not get over-excited, there is a pattern to be seen in those separate events.
Glencore Xstrata and the other big miners have effectively finished “cleaning house” after the big commodity price correction of the past few years. Stockbrokers are picking winners among coal stocks. Exploration news is being greeted with a rush of share-buying orders rather than being ignored, and China is buying more coal.
It is not a boom, but it does appear that the downturn has ended and recovery has started.
