5 Coal Stocks to Watch – Part Two

A backhoe loads a Terex 240 tonne truck at SouthGobi's Ovoot Tolgoi open pit coal mine.

3. SouthGobi Resources Ltd. (TSX:SGQ)

SouthGobi Resources is focused on exploration and development of metallurgical and thermal coal deposits in Mongolia’s South Gobi Region. The company’s flagship coal mine, Ovoot Tolgoi, is producing and selling coal to customers in China. Ovoot Tolgoi is located in southern Mongolia, approximately 40 kilometres north of the Chinese border. Ivanhoe Mines is SouthGobi Resources’ largest shareholder and owns approximately 57% of the issued and outstanding shares of the company.

In August, SouthGobi Resources set a new monthly record of 441,665 tonnes of coal shipped which was a substantial increase over shipping levels from a year earlier. On an annualized basis, the company is producing at 5.3 million tonnes of coal per year and is on track to meet its production targets for the upcoming quarter.

SouthGobi, along with its major shareholder Ivanhoe Mines, have paved the way for business in Mongolia. And although the process hasn’t always been easy, the Mongolian government is proactive and pro-business. Prime Minister Sukhbaatar Batbold, age 48, has worked hard to open the doors to foreign investment. The country is only 20 years removed from the days of Soviet control and is sorting out its path towards a healthy free market economy which includes the world’s smallest stock exchange (Mongolian Stock Exchange). Established in 1991, stock exchange officials hoped the exchange would help to privatize the majority of state assets. Fast forward to 2010, the MSE reported 336 listed companies with a combined market capitalization of roughly $1 billion. SouthGobi Resources has openly expressed interest in listing on the diminutive exchange to validate the direct benefits associated with foreign ownership in Mongolia. MiningFeeds.com connected with SouthGobi’s President & CEO Alexander Molyneux to learn more about the company’s plans – CLICK HERE – for the exclusive interview.

4. Teck Resources Ltd. (TSX:TCK.B)

Teck is the largest producer of steelmaking coal in North America and the world’s second largest exporter of seaborne steelmaking coal. With five mines in British Columbia and one in Alberta, coal is a proclaimed cornerstone of Teck’s diversified mining business. The majority, approximately 90%, of Teck’s coal is exported for steel production. Shipped by rail to the coast of British Columbia the coal is exported to Asia, Europe and South America. The company’s largest markets in Asia have traditionally been Japan, Korea and Taiwan, but the company expects that China will emerge as a significant importer of steelmaking coal as it continues its process of urbanization. Coal accounted for approximately 59% of Tech’s gross profits before depreciation and amortization for the three month period ending June 30th, 2011.

The global sell-off in commodities has spark outright fear in the equity markets over the past few weeks. The declining prices of base metals, crude oil and coal have resulted in some questioning whether we are perhaps heading into another global recession. In its latest quarterly Global Economic Outlook, Fitch Ratings revised down its growth forecasts for all major advanced economies. Maria Malas-Mroueh, Director in Fitch’s Sovereign team stated, “Fitch does not project a ‘double-dip’ in its baseline global economic projections. However, the likelihood of a recession has increased, as intensified financial market volatility could further amplify risk aversion behaviour and lead to tighter credit conditions.”

And in a recent poll released by Bloomberg, most global investors predict Chinese growth will slow to less than half the current pace by 2016.  China’s gross domestic product rose 9.5 percent last quarter. Unfettered by negative headlines, last Wednesday Teck’s board approved a $475 million spending program to modernize its four-decade-old copper mill at Highland Valley and earmarked another $210 million for their Trail lead and zinc smelting and refining facility. “We still see strong demand for our products, particular our steel-making coal and our copper,” stated Teck spokeswoman Marcia Smith. Teck confirmed the company is in the best financial shape it’s ever been in contrast to the heavy debt it carried into the financial crisis of 2008. Shares of Teck Resources closed today at a yearly low of $28.69, down over $2.20 on the day, marking a healthy decline of 7.2%.

Cline Mining executives inspecting the rehabilitation progress at the New Elk coal mine in Colorado

5. Cline Mining Corp. (TSX:CMK)

On August 9, 2011, Cline Mining welcomed the first commercial metallurgical coal shipment into rail cars  from the bulk rail load-out facility at its New Elk mine. The company continues to ramp up metallurgical coal production at its flagship mine in southern Colorado with the plan to reach an initial level of production totaling 3 million tons annually by the first quarter 2012.

Cline is also developing its Lossan and Lodgepole metallurgical coal mine projects in British Columbia; the Cline Lake gold property Ontario, Canada; and its iron ore properties Bekisopa, Madagascar. As such, the company’s plate is pretty full. To support this junior miner, Cline has entered into a strategic corporate partnership with Mitsui Matsushima, a Japanese coal miner and conglomerate. Mitsui Matsushima is also a shareholder and, as reported by the company, is represented on Cline’s board of directors.

To complete the development of the New Elk coal mine which includes reinstalling the steel rail spur and financing working capital, Cline completed a prospectus offering of 31,372,000 common shares at a price of $2.75 per common share for total gross proceeds of $86,273,000 in June, 2011. Shortly after the offering the stock began to sell-off. Well know Canadian money manager Frank Mersch said Cline Mining was being “unduly punished” in the market downturn as reported by the Globe and Mail. At the time, Cline’s shares were trading at $2.40 and, about the company, Mr. Mersch said, “We think it could be a double.” Unfortunately for Cline Mining shareholders, Mr. Mersch would have been right if hedged his bet in the other direction. Since Mersch’s prediction the company’s shares are down more than 50% and are currently trading for $1.10 on the TSX Exchange.

For 5 Coal Stocks to Watch – Part 1CLICK HERE.

Mike Luft

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