A Cool Head on Coal

Issue 141, September 2015

Continued from Page 1 ➤

...in the last two years, versus its A$1.4bn market cap. After a A$25m deal with Cockatoo last year, it is sitting on 15,000 hectares of coal tenements and A$1.1bn in cash and plans to triple its coal business from 6m tonnes per annum.

Duck & Dive

The success of Wesfarmers and New Hope in timing the cycle raises the question of why conventional coal miners are so reliably flummoxed by each market wobble.

Playing the coal cycle is not nearly as easy as it sounds, says Perth-based coal boss Russell Moran, who this week launched a new venture in western Canada, BC Anthracite. “Coal projects are either worth a lot of money or they're worth nothing,” he says.

“There's a large amount of infrastructure involved, so it's very tough to play the market, because the lead time on permits and construction are so long. Even if you see the coal market turning, you don't necessarily have the ability to duck and dive.”

Long-Term Minded

Another explanation is that multi-industry conglomerates are sufficiently removed from coal to take a cool-headed view of the cycle. Steel groups panic when their coal input costs rise, encouraging deals at the top of the market, whilst mining companies are incentivised to over-invest when prices are booming, but conglomerates seem better positioned to see where coal sits, relative to other industries.

Wesfarmers and Washington H Soul Pattinson, which has moved office just once in 113 years, both also seem willing to risk becoming unfashionable by remaining long-term minded.

New Hope's managing director Shane Stephan has said the company is “fortunate” to have its ownership structure, giving it a longer-term view than rivals, whilst Wesfarmers' chairman Michael Chaney told investors in May that the board's patient outlook was unsuited to hedge funds and traders. “I'm sorry, but that's the way we're running the company,” he said. “We can't please everyone all the time.”

Overpaying

Interestingly, Wesfarmers is accused of overpaying for its largest retail operation, Coles, bought for $20bn in 2007, suggesting that management teams, however cautious, are inclined to see too much upside in their core line of business. Buying Wesfarmers for its coal exposure would also be like buying Rio Tinto for its office space in London.

But industry observers looking for clues of a coal market bottom could do worse than mimic the timing of two of Australia's most staid investment groups. “Be greedy when others are fearful,” Wesfarmers' managing director Richard Goyder said this week. “Now is the time, in a cyclical downturn, to really be thinking about opportunities.”

“Be greedy when others are fearful...”

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