If you are an ESG-oriented investor who does not want anything to do with coal, look away now.
The black rock is Australia’s second-largest export commodity behind iron ore; in the 2023-24 financial year, Australia exported $91 billion worth of coal; $54 billion of metallurgical coal (also known as ‘steel-making,’ or ‘coking’ coal) and $37 billion of thermal coal, used to produce electricity. Australia is the world’s biggest shipper of metallurgical coal and the second-biggest exporter of thermal coal.
In recent years, producers have benefited from price surges in the wake of factors such as the COVID-19 pandemic, floods in Australian coal-mining areas and Russia’s invasion of Ukraine. Coal prices surged to all-time highs in September 2022, on a combination of rising demand and insufficient production to keep up with this demand, and sanctions on Russia.
Those prices have come right back down, with both thermal coal and steelmaking coal down about 70% from their peak levels. But those peaks were unexpected outliers, and longer-term, the outlook is strong for coal. Declining coal consumption in the United States and Europe is expected to be offset by continued demand growth in China and the rest of Asia.
In thermal coal, worldwide, more than 107 countries and 2,000 entities are using coal across roughly 13,800 coal units. About 204 new coal power plants are currently under construction, another 93 such projects have been announced and 260 new ones are in the pre-construction stage. Worldwide, coal use still generates 36% of global electricity production, reaching a new record of 10,434 terawatt hours (TWh) in 2023.
In steelmaking coal, the federal government’s Resources and Energy Quarterly (REQ) projects overall global metallurgical coal demand to rise from 317 million tonnes in 2023 to 331 million tonnes by 2029, as numerous Asian countries advance ambitious steel plans likely to drive an increased pace of steel production.
Australian coal miner Whitehaven Coal projects widening structural shortfalls (demand exceeding supply) in seaborne and metallurgical coal markets out to 2040, with demand growth for metallurgical coal to be largely underpinned by India, whose share of global metallurgical coal demand is forecast to triple from 7% in 2023 to 23% in 2050. Whitehaven expects demand for seaborne metallurgical coal into Asia to grow by 29% by 2050, with India’s demand growing by 110%. As India and South-East Asia emerge as the largest metallurgical coal importers, Whitehaven expects Australian seaborne supply to increase by 15% by 2050, to about 190 million tonnes. Investment bank Morgan Stanley recently moved metallurgical coal to its top commodity pick.
Yes, installation renewable energy capacity continues to grow around the world, and in the minds of its adherents, it dooms coal-fired electricity. Yes, in steelmaking, increased use of lower-emission electric arc furnaces (EAFs) promises to eat into the dominance of the blast furnace method of steelmaking, and EAFs don’t need coke (they melt recycled or scrap metal instead of the raw iron ore that a blast furnace uses). But neither coal-fired electricity or the blast furnace are disappearing anytime soon – and Australia’s coal producers will have markets for much longer than many people expect.
Here are the three best coal investments on the Australian Securities Exchange (ASX) right now. All look under-valued, and investors could buy any of these stocks with reasonable confidence of capital growth in the medium-term.
Coronado Global Resources (CRN, 94.5 cents)
Market capitalisation: $1.6 billion
12-month total return: –47.9%
3-year total return: –1.2% a year
FY25 (December) Estimated Yield: 7.1%, fully franked (grossed-up, 10.2%)
FY25 (December) Estimated P/E ratio: 5.9 times earnings
Analysts’ consensus target price: $1.658 (Stock Doctor/Refinitiv, 11 analysts)
Coronado Global Resources produces and exports high-quality metallurgical coals from a portfolio of four coal complexes (incorporating eight operating mines) in Queensland and in the US states of Virginia and West Virginia. Coronado is the largest pure-play metallurgical coal producer delivering into global export markets, with total sales of 15.6 million tonnes in 2023, with 76% of that figure metallurgical coal.
The major Australian asset is the Curragh complex in the Bowen Basin of central Queensland – one of the world’s largest coal basins and Australia’s largest source of metallurgical coal. Curragh has been operating since 1983 and was acquired by Coronado in 2018. It consists of two open-cut mines, Curragh South and Curragh North.
Curragh’s metallurgical coal is exported to steelmakers throughout Asia, Europe and South America. Curragh’s thermal coal is mainly sold domestically to Stanwell Corporation Limited, a Queensland government-owned entity and the operator of the Stanwell Power Station near Rockhampton, Queensland.
Expansion at Curragh is underpinned by the Mammoth underground project; subject to the receipt of regulatory approvals, Mammoth is expected to mine first coal in December 2024, ramping up to a production rate of up to 2 million tonnes a year in 2025.
The US operations are the Buchanan complex in Virginia, and the Logan and Greenbrier complexes in West Virginia (Greenbrier is currently closed and on ‘care and maintenance’ status).
Most of Coronado’s production is hard coking coal (HCC), which represents the premium band of metallurgical coals. HCC is used solely in the production of steel through the blast furnace process; it is a crucial input to this process, and effectively, there is no substitution. Broker Morgans says CRN should be seen as a volume-leveraged proxy for compelling HCC price fundamentals into the medium term, offering direct exposure to potentially far higher-than-forecast HCC prices globally (especially in Asia) linked to ongoing supply tightness due to chronic under-investment. Coronado is also a strong dividend payer, although the prospective yield should be treated with caution, based as it is on an expected 6.75 cents 2025 dividend.
Whitehaven Coal (WHC, $5.97)
Market capitalisation: $5 billion
12-month total return: –8%
3-year total return: 39.1% a year
FY25 Estimated Yield: 3%, fully franked (grossed-up, 4.3%)
FY25 Estimated P/E ratio: 9.3 times earnings
Analysts’ consensus target price: $9.10 (Stock Doctor/Refinitiv, 15 analysts)
Whitehaven Coal currently operates six mines in New South Wales and Queensland, producing high-calorific-value (CV) thermal coal and steelmaking coal, including PCI (pulverised coal for injection), a style of metallurgical coal that can be sold both into the steelmaking or thermal coal markets, and semi-soft steelmaking coal, with a capacity of more than 20 million tonnes a year.
The flagship asset is the Maules Creek operation in the Gunnedah Basin in New South Wales, which has planning approval to extract up to 13 million tonnes of coal each year until 2034; in FY24, it churned out 11.4 million tonnes.
In April, Whitehaven bought the Daunia and Blackwater metallurgical coal mines in Queensland from the BHP Mitsubishi Alliance (BMA), a joint venture between BHP and Mitsubishi Development, for $6.5 billion. The company also has two high-quality, large-scale development projects underway, the Vickery open-cut mine near Maules Creek and the Winchester South asset in Queensland.
In FY24, 69% of Whitehaven’s revenue came from thermal coal, with 31% coming from metallurgical coal. But the company’s recent acquisition program is aimed at making 70% of production metallurgical coal, versus 30% production of thermal coal, and that tipping point has been achieved. In the fourth quarter of FY24, metallurgical coal brought in 59% of revenue, and in the current (FY25) year, broker Morgans forecasts that steelmaking coal will generate 64% of revenue in FY25 to thermal coal’s 36%. Japan is the major customer, supplying 50% of revenue, followed by Taiwan (14%), Malaysia (10%), South Korea (7%), India (6%) and Europe (5%), with assorted other markets accounting for 8%.
In August, Whitehaven Coal struck a $1.6 billion deal with two customers, Japanese steel giants Nippon Steel Corporation and JFE Steel Corporation, to sell them a 30% joint venture interest in Blackwater, strengthening its balance sheet.
Analysts are quite bullish on Whitehaven, with Morgans the most optimistic, with a price target of $10 on the stock.
Stanmore Resources (SMR, $2.69)
Market capitalisation: $2.4 billion
12-month total return: –18.2%
3-year total return: 57.7% a year
FY25 (December) Estimated Yield: 6.4% fully franked (grossed-up, 9.1%)
FY25 (December) Estimated P/E ratio: 8.2 times earnings
Analysts’ consensus target price: $3.83 (Stock Doctor/Refinitiv, four analysts)
Stanmore Resources produces mainly metallurgical coal, owning interests in four operating open-cut mines and a portfolio of eight potential developments, mainly in Queensland’s Bowen Basin. In May 2022, Stanmore bought BHP’s 80% share in the South Walker Creek and Poitrel metallurgical coal mines for about $1.8 billion, becoming Australia’s fourth largest metallurgical coal producer and a globally significant player.
In FY24, 60% of revenue came from LV PCI (low-volatility pulverised coal injection) coal, with the next largest source of revenue being hard coking coal (22%), followed by semi-soft coking coal (16%) and export thermal (2%.)
Like Coronado, SMR should benefit from strong HCC price fundamentals in the medium term, with broker Morgans saying SMR’s assets offer long-life cashflow leverage to the resilient outlook for met coal prices. Despite global steel markets presently navigating another lull, Morgans says coal customers fully value the strategic nature of long-life metallurgical coal assets – and investors should think the same way.
Stanmore Resources also has an attractive dividend yield prospect to add to the total-return investment case, although – as with Coronado – the projected FY25 dividend is an estimate. On an historical basis (year to December 2023) Stanmore is trading on a dividend yield of 3.7% fully franked, equivalent to a grossed-up yield of 5.3%.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
