Coal is Australia’s second-largest export earner (behind iron ore); and Australia is the second-largest exporter of coal in the world, behind Indonesia. (The International Energy Agency [IEA] says that Indonesia only usurped Australia’s number one position when the 2011 Queensland floods curtailed production – and that Australia will reclaim top-dog status over the next three to four years.) Australia is also the world’s largest supplier of coking (steel-making) coal.
But the coal business is barely an investable prospect on the ASX.
This is even more the case for yield-oriented investors such as self-managed super funds (SMSFs).
Given the consolidation that has occurred in recent years in the Australian coal space, dividend-paying pure-play coal exposures are thin on the ground. This may be a good thing: single-commodity exposure equals high risk. Throw in the coal market’s dependence on continued Chinese growth and the risk factor goes even higher.
The two major pure-play coal exposures on the Australian market are Whitehaven Coal (WHC) and New Hope Corporation (NHC).
No yield haven in Whitehaven
Whitehaven is the largest of the pure-plays, valued at $3.24 billion. This week it received conditional federal government approval for the development of its Maules Creek thermal (electricity) and coking coal mine in New South Wales. Whitehaven operates two open-cut and one underground mine in NSW, producing thermal and coking coal. If Maules Creek goes into production, it would more than double Whitehaven’s annual production to almost 20.8 million tonnes a year.
The shares jumped 11% on that news, but shareholders needed some good news after the previous week, when the company more than halved its half-year earnings forecasts to below $10 million. Whitehaven said weak coal prices and the high Australian dollar were the culprits for this downgrade.
But for SMSF investors, Whitehaven is projected to pay a fully franked dividend of 7 cents a share this financial year, and the same in FY14. At $3.18, that places the stock on a nominal yield of 2.2%, or 3.14% with franking credits.
Pass. Next candidate, please.
Hope for New Hope
New Hope Corporation (NHC), valued at $3.5 billion, has open cut mines in Queensland, at Acland on the Darling Downs, and at Rosewood near Ipswich. The company focuses on niche marketing of its thermal coal, and exports about 65% of production to Asia-Pacific markets – mainly China, Japan, Taiwan and Korea, with some shipments going to Chile – and the remainder going to customers in south-east Queensland.
New Hope is 60% owned by investment company Washington H. Soul Pattinson Limited (SOL), and its modus operandi reflects the financial conservatism for which the Soul Pattinson-Brickworks Group is renowned. Since listing at 40 cents in 2003, NHC has paid a dividend every year, putting dividend income totalling $2.13 a share in investors’ pockets.
In the last two years it has swelled that with 35 cents worth of special dividends from the proceeds of asset sales, but that cannot be relied upon. The company paid an ordinary fully franked dividend of 11 cents a share in FY12, and market consensus expects it to pay 16.1 cents a share this financial year, rising to 18.9 cents a share in FY14.
At $4.22, that places New Hope on a historic yield of 2.6%, a prospective FY13 nominal yield of 3.8% and a prospective FY14 nominal yield of 4.48%.
That prospective FY14 yield is starting to get into the SMSF ballpark, because it implies a yield of 5.44% if the shares are held in the accumulation account of an SMSF, and 6.4% if the shares are helping to pay a pension out of the SMSF.
New Hope is about as conservative a coal company as you will find, with a low-cost and low-life main asset in Acland, no debt and about $1.5 billion in cash sitting on the balance sheet. It is coming off a record production year in FY12, in which it shipped out 6.29 million tonnes a year.
But for an SMSF, it comes down to whether you want to take the exposure on coal.
Coal still in demand
Coal clearly is not top of the hit parade for clean-energy enthusiasts and climate-change believers. Against that is the fact that it remains the cheapest feedstock for the generation of electricity – particularly in the developing world – and is likely to stay so for the foreseeable future. Sure, the TV pictures of horrendous smog in Beijing we have seen this month are not a good look, and they have caused plenty of discussion about coal’s future. But the Chinese leadership understands that its most important job is to improve the economy and create jobs and prosperity for its people – and it is using coal to do that.
According to the World Resources Institute, there are 350 new proposed coal-fired power plants in China. Even if not all of that number get approved or built, it shows a massive commitment to new coal development in China.
According to ANZ Research, China is bringing on-line about one gigawatt a week of new thermal power demand, which is equivalent to about three million tonnes of new coal demand every week. That translates to approximately 150-160 million tonnes of new thermal coal demand every year – which is roughly what Australia exports each year.
Add to that the projections by the IEA that coal will rival oil as the world’s top energy source by 2017. The IEA anticipates an increase in coal usage in every region of the world except the USA, where the natural gas boom outweighs coal’s cheapness. According to the IEA, strong demand in China and India, particularly for electricity generation, will keep coal among the world’s primary fuels for the foreseeable future.
It is not, however, as simple as saying that “China and India need coal, we supply it, it’s a good investment.” Australia produces very high-quality coking coal, where there is a shortage of supply, however the same cannot be said for thermal coal. There is no shortage of thermal coal, which is why the supply-demand situation in thermal coal is not as promising as in coking coal.
Then there is the fact that the costs of doing business in Australia are much higher than in other coal-mining countries. Although New Hope has been very successful in controlling its costs, it is still at a disadvantage to many of its peers.
On balance, coal does not represent a single-stock exposure that SMSFs focused on income should be clamouring to have. By all means, SMSFs should look to pick up an interest in the developing world’s appetite for coal, but through one of the big diversified global bulk miners that produce coal, namely BHP Billiton and Rio Tinto. There, BHP’s presence in petroleum shades Rio Tinto. In holding BHP, you have working for you a global production portfolio that includes both coking coal and thermal coal, with the added benefits of petroleum, copper, gold, iron ore, aluminium and nickel.
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