5 Coal Stocks to Watch – Part One

China produces and consumes almost 50% of the world's annual coal production.

China’s seemingly insatiable demand for raw materials has fuelled a bull market in commodities since 2001. And coal, has literally fuelled the fires of industrial development in China. The coal industry in China is, by far, the largest in the world. But did you know it is also the most deadly? The Chinese coal industry is the most dangerous in the world for deaths resulting from accidents and disease. Mr. Tang, a Representative of Pingding Mountain Coal Miners’ Rights in Henan, noted, “The majority of local coal mine workers (at Pingding Mountain) suffer from pneumoconiosis. My friends and relatives have all contracted this illness. Many have suddenly died from this illness due to lack of air.” There are over 100,000 coal miners working at Pingding Mountain alone. Pingding Mountain is located in the province of Shanix which produces about 25 percent of China’s annual coal requirements.

Many countries in the Asia Pacific region, including China, are major buyers of coal. From an industry perspective this is important because freight charges make up a considerable percentage of the cost of imported coal. On a global scale, China is a low cost producer when compared to other major coal-producing countries. Coal production costs are low in China because labour costs are low. Labour only accounts for about 20 percent of the total production costs of Chinese coal mines, whereas in more developed countries, labour sometimes constitutes as much as 60 percent of production costs. With China at the heart of the international coal industry we begin our watch list with a company that looks to supply Chinese demand from neighbouring Mongolia.

1. Prophecy Coal Corp. (TSX-V:PCY)

It has been a very eventful year for Prophecy Coal. A $42 million public financing, the spin-off of sister company Prophecy Platinum (TSX-V: NKL) and now the challenge of managing growth in the face of volatile markets. Lately, the markets have had a major impact on the company’s share price. Prophecy is currently trading at $0.44 per share which yields a market cap of roughly $90 million. Currently, with $64 million in shares of Prophecy Platinum, $40 million in property and equipment; and a little less that $10 million in cash on the books (as at June 30th, 2011), you are getting the company’s Mongolian coal assets and Canadian mineral properties for, well, less than free.

In July, 2011 Prophecy Coal announced a defensive plan to give the company’s shareholders and directors time to consider alternatives should a hostile takeover attempt emerge. This was primarily in response to the released of a new resource estimate by Prophecy Platinum for its Wellgreen property in Yukon. Shares of Prophecy Platinum surged after the news from $0.60 to $6.00 per share and subsequently greatly increased the asset value of Prophecy Coal. Prophecy Platinum is currently trading at $2.82.

Prophecy Coal reports more than 1.4 billion tonnes of thermal coal on two properties in Mongolia and began selling coal to Russian and Mongolian buyers this year. Situated next to China, the world’s largest coal consumer, Prophecy’s President & CEO, John Lee, thinks Prophecy is well positioned to take advantage of China’s ever-growing energy requirements. We sat down with Mr. Lee to discuss the company’s eventful year and to find out what is on the horizon in 2012 – CLICK HERE – for the interview.

Grand Cache Coal's processing plant has a raw coal feed capacity of approximately 600 tonnes per hour.

2. Grande Cache Coal Corp. (TSX:GCE)

Mining coal is only part of the equation. Once coal is mined from open pit and underground operations at Grande Cache Coal’s Smokey River Coalfield in Alberta it needs to be processed into “clean coal” for steelmaking.  Heavy media cyclones are used to clean the raw coarse coal and flotation is used to wash the fine raw coal.

After the coal is washed the raw coarse coal is separated into clean coal and rejects.  The drained coarse clean coal is dewatered in centrifuges and discharged to a separate conveyor. The drained coarse reject material is conveyed to a discard bin and removed by truck to the company’s disposal facility. The fine raw coal is separated into clean coal and fine refuse in a bank of flotation cells. The clean coal froth is passed to a vacuum disc filters for dewatering. The filter cake is then discharged from the disc filters and combined with the clean coarse coal on the clean coal conveyor for transport to the thermal dryer, where the coal is dried.

The thermal dryer, located in a separate building, is fuelled with natural gas. Dried clean coal from the dryer is then conveyed to a clean coal stockpile where it is readied for rail transport to the Westshore Terminals in Vancouver for export. Agreeably, the entire process is somewhat “dry”. Regardless, in fiscal 2011, the company produced about 1.55 million tonnes of clean coal.

Year over year Grande Cache Coal has struggled in 2011. Production was down slightly and the company recently cut its production targets for 2012. While fiscal first-quarter earnings released in August were well below the street’s expectations as costs increased. But with increased production still expected for 2012, Canaccord Genuity analyst Gary Lampard sees diluted earnings per share improving significantly in the second quarter and maintained a “buy” rating (although he cut his target by $0.50 to $11.25). Shares of Grande Cache Coal are currently trading at year lows and can now be had for $3.52.

For 5 Coal Stocks to Watch – Part 2CLICK HERE.

Mike Luft

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