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Coal price boom should deliver considerable boost to Anglo Pacific

Published: 06:42 21 Sep 2016 EDT

Coal price boom should deliver considerable boost to Anglo Pacific
Coal demand is on the up

Is coal a commodity of the past? If you thought so, think again.

This year the price of metallurgical coal has risen further than any other commodity in percentage terms, up a 108% according to data gathered by mining industry data specialists CRU.

CRU uses the Australian FOB price of US$108 at the time of writing in making its calculations, although some shipments as reported on Bloomberg and elsewhere in the media have traded at even higher spot rates.

This is a remarkable turnaround from the multi-year lows hit back in February.

Back then, market sentiment was running in accordance with a well-established narrative: coal isn’t clean, international agreements are curtailing its use, and power stations are closing.

All true, up to a point. But not the whole story.

In an effort to tackle pollution, the Chinese government has ordered the closure of many coal mines. Others are on a limited production schedule. That, combined with recent heavy rains in the key mining province of Shanxi, have led to a supply shock. Supply has also come off in the Western World too.

All of which has given renewed vigour to companies with exposure to coal, like Anglo Pacific Group (LON:APF).

“It’s becoming clear that there will be some winners in coal,” says Julian Treger, Anglo Pacific’s chief executive.

He’s in a better position to judge than most. As a fund manager at Audley Capital during the mining boom he came to know the mining markets extremely well and his subsequent move to Anglo Pacific in 2013 was therefore of significant interest in the market.

Anglo Pacific was already well established in coal, having drawn sizeable annual income for many years from a coal royalty that covers part of Rio Tinto’s Kestrel mine in Queensland.

But Treger’s first major transaction doubled down on that coal exposure, with the acquisition in early 2015 of a 1% gross revenue royalty on the Narrabri mine in New South Wales.

Narrabri doesn’t have met coal, but it does have a significant PCI component to it. PCI, or pulverised coal injection, is half-way between met coal and thermal coal in terms of quality, and is priced accordingly.

And the thermal component at Narrabri has been increasing in value too, since thermal coal is up by more than 30% this year to close to US$70 per tonne.

 

All of which means that Anglo Pacific’s income is likely to be significantly impacted.

At Kestrel the royalty rate, prescribed by Queensland Mineral Resource Regulations, provides for a three tiered fixed percentage, increasing if the price per tonne of coal is over A$150

Since the current spot US dollar metallurgical price translates to well over A$200 per tonne, the company would appear to be comfortably within that range.

A crucial staging post on that journey will be the contract price that Rio Tinto settles on at Kestrel for the coming sales period, which is likely to be decided in the next couple of weeks.

Once that news is out and the numbers are confirmed, a re-rating of Anglo Pacific’s share price seems a real possibility.

 

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