With recession fears fading into the past in Asia and growth increasingly back on track in the West, global energy demand is again surging. It's no big surprise that oil is again making a run for triple digits; it's the other black gold that could yet steal the spotlight for resource investors. Not only was China taken by surprise by this renewed surge for coal demand, the whole region including Japan and Australia seems to have been caught unawares. Coal recently was shipped to China from the US, the first such transaction in five years. Add to this Mongolia's recent changes to mining law, and you have a cocktail for excellent investing opportunities.

A drop in domestic output now has China importing more coal--at the highest prices in over a year. Since the recession hit in earnest in August 2008 (a full year after the sub-prime mortgage sector blew up) coal prices globally have taken a beating, right back to where they were in early 2007.



The shift toward increased imports in China has particularly benefited the price of coking coal, used for steelmaking and much scarcer than thermal coal, which fires power plants. The strength of Chinese imports has "surprised coal miners Xstrata, BHP Billiton (BHP), Rio Tinto (RTP) and Anglo American (AAUK) that were braced for a protracted period of low prices because of low demand in Japan, South Korea and Taiwan, the traditional buyers."

Sharply falling coal prices in late 2008 and early 2009 caused China to put several high-cost mines on ice. This coincided with a crackdown by Beijing on smaller, more dangerous mines. Domestic supplies were cut, and import demand rose.

According to MySteel.net, China exported 11.67 million tonnes of coal with a total value of USD 1.43 billion in the first half of 2009, down by about 50% since 2008. In the same period, China imported 48.26 million tonnes of coal worth USD $3.94 billion, an increase of 130 percent in tonnage and 180% in value. The average import price went up by 22.3% to USD $81.6 per tonne.

The tightness of the market was illustrated recently by US coal sales to China, the first in five years. In addition to Consol Energy Inc.'s (CNX) recent sales, several ships have been hired to haul US coal to China.

In the meantime, China, India and other countries in the region are scrambling to acquire large projects to feed future demand, which is expected to increase sharply as energy demands outpace supply capacity.

Yanzhou Coal Mining Co. (YZC), listed in Hong Kong, New York and Shanghai has tripled from $4 per share to $12 this year, and climbed again last week after Felix Resources Ltd. recommended its shareholders accept a USD$3 billion takeover offer from Yanzhou--China’s fourth-biggest coal producer. Felix produces both coking coal and thermal coal from mines in New South Wales and Queensland.

The great commodities (and China) bull, Jim Rogers sees the situation clearly: ""There's a crisis coming. They are going around the world buying up what they can." Rogers is the Chairman of Rogers Holdings and the author of books including Investment Biker and Adventure Capitalist. He moved to Singapore in 2007 to be close to the groundbreaking Asian markets. He invests heavily in China.

(A eerily prescient aside about Rogers: In September 2007, a full three months before the Great Recession officially began, Rogers told the NY Sun, "We're in a recession right now, especially in housing, automobiles, and some financial sectors." He explained that it is unusual not to have a recession in a five-year period and attributed the prolonged bull run to money printing by the Federal Reserve, both Ben Bernanke, and his predecessor, Alan Greenspan. "If we keep printing money, the Dow will go to 30,000, but the dollar and stock market will eventually collapse," he said. "Stocks don't ever go up forever.")

In India, demand for coal is expected to reach around 2.5 billion tonnes a year by 2031-32, around five times the current rate of extraction, with most of it coming from the power sector. India's International Coal Ventures, a consortium of coal producers set up to secure assets outside of India, said this month that it plans to bid for concessions in the East Bargo area of Australia.

In August, Indian state-run power producer NTPC said it had appointed Macquarie as consultant for acquiring coal mines in Indonesia. IBT Commodities has reported that the Indian firm JSW Energy is close to finalizing a coal-supply linkage pact in Indonesia. The company is also exploring options of acquiring coal mines in South Africa and Australia, to secure coal supplies for its forthcoming power projects. Elsewhwere, TATA Steel is scouting for coking coal and iron ore mines abroad, including in Brazil and Australia, to ensure raw material security for its European operations.

In contrast with India, Chinese coal producers are dealing with more stark realities of demand growth and limited supply. China is home to 1.3 billion people and has the world’s fastest-growing economy, which relies upon coal for 80% of its energy needs. Compounding scarcity in China is the generally poorer quality of coal in existing Chinese deposits. And in spite of recessionary cutbacks in coal and manufacturing exports in general, China remains the world’s largest coal producer, as well as its largest consumer, accounting for a quarter of the world's coal consumption. It's for this reason that Rogers so correctly argues that there is a crisis coming. China is meeting demand today, barely, but with shortfalls expected to increase annually, any acquisitions completed today will barely cover tomorrow.

A few companies we like:

CIC Energy (CIEGF.PK) could soon benefit from Chinese hunger for coal. In Africa, the Chinese sponsored China-Africa Development Fund has a $5 billion purse at its disposal to assist African companies with equity investment, fund investment, quasi-equity and consulting services. CADF's Liu Xiaolei has previously held talks regarding a potential investment in CIC Energy's $3 billion Mmamabula Energy Project in Botswana. CIC Energy's plans involve a 6 million tonne per year coal mine (initial run-of-mine feed plan), which would in turn feed the company's planned 1,200 megawatt coal-fired power plant.

Prior to getting the go ahead on an offtake agreement from Eskom, which provides 95% of South Africa's power, CIC Energy will have to be able to prove it has funding for the project. Meanwhile, funding shortages have meant that Eskom's funding model will remain uncertain until the end of September.

CIC Energy does anticipate that additional equity investors will participate in the Mmamabula Energy Project.To date, International Power Plc, intends to take a 35% equity stake in the Mmamabula Energy Project (Press release July 27, 2009).

Although signals continue to indicate that the company is progressing in finding the necessary funds for the project, investors have kept cool about CIC. Prior to the market crash late in 2008, the company traded between $7 and $17 per share for over 18 months. CIC Energy has approximately 50 million shares outstanding and trades at $2.20 on the TSX.

The company's plans to build a coal-fired generating station and sell power to both Botswana and South Africa comprise a sound business model. Both countries forecast strong growth in energy requirements; South Africa is already struggling to meet demand with brownouts occurring regularly. With a 43-101 compliant resource of more than 2.6 billion tonnes of thermal coal, mostly in the measured category, the company could fire its planned power plant for 43 years.

A second plan involves a coal-to-hydrocarbons plant, with commercial operations envisaged in 2015. CIC also has long term plans to rail coal from the continent to overseas purchasers such as China.

Goldsource Mines (GXSFF.PK) in 2008 sent a buzz through the investing world with a stock that shot from $0.30 to about $19 per share before getting hosed down by a combination of recession and surprising drill results. While drilling for diamonds in eastern Saskatchewan, the company happened upon a 30 metre coal intercept that overnight changed Goldsource into a coal company and the region into a hub of exploration activity. This month, Goldsource completed the final eight holes of the summer phase of drilling at its wholly-owned Border Project Border, located near Hudson Bay, Saskatchewan, Canada.

The drilling encountered 23 to 50 metre coal intercepts.

A total of twenty core holes, totaling approximately 3,267 metres, were drilled during the summer programme. The most significant coal intervals occurred in the Niska sub-basin. All holes drilled in this phase were designed to test new targets outside the original discovery area.

The company said that drilling to date has discovered 15 coal deposits at Border with excellent potential for additional coal discoveries. Each is a coal deposit in its own right, some measuring greater than a kilometer across.

Goldsource maintains that Border has the potential to be a world class mine and is targeting 500 million to 1 billion tonnes high quality thermal coal (low ash<15%, moderate sulphur <2%, high BTU's >9,000). The company remains conservative with all its numbers: The initial reports in 2008 caused a wave of speculation and elevated the stock price well beyond expectations. That said, if Goldsource was able to raise $18 million at $11.75 per share in difficult times (June 27, 2008!), I'm comfortable its present price.

While the Border project is young, the company is toying with several options, including producing high quality thermal coal for export and coal liquefaction. Additionally, the coal mined would be of a higher quality than that produced in the south of Saskatchwan, and could therefore be sold to power producers in the province and neighboring provinces and states with coal burning power generators.

Other aspects of Goldsource that should be attractive to investors:

Undiluted stock, with 19 million shares out.

Cash in the bank: The company raised $18 million when the market cap was higher.

Management: The management team is in the process of putting a gold-silver mine into production in Mexico (SilverCrest Mines). They know what they're doing. We've watched them raise funds favorably on more than one occasion. They follow through.

Excellent infrastructure: Deposit adjacent to railway, highway and service communities.

Government support: We have spoken with the mayor of the nearby town of Hudson Bay. She was effusive about the project.

Aggressive exploration: The company planned $5 - $6M winter drill hole program (commenced Q1-2009) - COMPLETE; Targeting 2009 NI 43-101 Technical Report and preliminary scoping study.

Room for expansion: The project is less than 10% explored; the company has consistently expanded the resource since discovery & owns more land in the region.

Now that the company has a clearer idea of the nature of this deposit, it is proceeding with completing a scoping study and initial resource estimate for the Border project, along with additional drilling in the area and at the Ballantyne project.

Many resource companies (and investors) celebrated last week as Mongolia's new government made sensible changes permitting projects to move ahead, pumping new energy into public companies operating in that country. With these events, some coal companies have seen large gains in their respective stock markets; many have not yet realized gains.

Erdene Resource Development Corp. (ERDCF.PK), which has both coal and copper/moly projects in the region, was more than a little excited to get the news that Mongolia's legislature had repealed its windfall tax on copper and gold. Erdene has two projects with resource estimates in Mongolia, the Zuun Mod, with resource of 230 million pounds moly and another 245 million pounds copper in inferred, indicated and measured categories.

Report on Business wrote last week:

The hefty tax contributed to protracted negotiations for an investment agreement as Ivanhoe and Rio balked at the proposed levy.

Yesterday, under pressure from Mongolia's financially struggling citizens who are reportedly 80-per-cent in favour of allowing the Oyu Tolgoi project to proceed, many of those same legislators voted to cancel the windfall profits tax by 2011. Mongolia will take a 34-per-cent share in the project, well below the 50-per-cent stake that some legislators had recently been seeking.

Ivanhoe advanced by almost $2.50 per share to $11.85 on Thursday. By close on Friday, its shares on the TSX had reached $12.25.

Long-delayed projects have been getting the green light in a number of developing countries amid the economic downturn. In April, Argentina and Chile agreed on a tax structure that gave Toronto gold giant Barrick Gold Corp. permission to build the massive Pascua-Lama project that had been in limbo for years.

Erdene also has the Donkin Coal deposit in Mongolia, with almost 500 million tonnes coal in the inferred and indicated categories.

Spot prices for coking coal surged last week to $160 a tonne, up almost 40% in the last three months and the highest in 12 months. Bank of America-Merrill Lynch recently raised its forecast for coking coal annual contract prices to $140 a tonne next year, up from $129 this year. Thermal coal spot prices have risen too, trading at $75 a tonne, up 25% from March’s low of $60 a tonne.

Erdene's deposit is ranked primarily in the latter category.

The company's CFO, Kenneth MacDonald told me that China would probably be the company's main buyer, should a mine be built. "We're about 175 kilometers by rail from China's steel industry," he told me. "Now that the windfall tax has been repealed and three other laws have been ammended, it looks to us like they're listening now."

For Erdene, the timing couldn't have been better. The company still had $16.3 million in the bank in August, and its new 43-101 report on Zuun Mod signified an almost 40% increase in the value of the metals in the ground.

"Molybdenum has doubled in the last few months. Copper is at an annual high. The coal industry is as strong as ever. Now we're looking for a major partner, possibly a mining company or a customer," MacDonald told resourceINTELLIGENCE TV.

Thermal coal is still well below last year’s record of more than $180 a tonne, but the pressure could be growing.
Source: Seeking Alpha (Author Doug Hadfield)

Author's Profile - An avid resource investor, researcher and writer for years, Doug also hosts the resourceINTELLIGENCE.net segment NEWSMAKERS. Tune in to watch Doug grill promising CEOs and executives on their mining and exploration projects and ask questions you would otherwise never get to ask.