Thermal coal gaining steam

Are thermal coal-fired power plants like Isogo Unit 2 a short-term answer to Japan's power requirements?

Thermal coal is gaining steam. When thermal, which is the cheapest and most common type of coal, is burned its steam powers turbines that generate electricity for either public electricity grids or for large-scale industrial use. In a recent analyst poll by Reuters, forecasts for average 2011 thermal coal prices were solicited from 22 analysts and industry players. The poll, which was conducted in February, 2011, was $30-37 a tonne higher than the predictions given a year earlier. From the survey, the median forecast for the black carbon delivered in Amsterdam-Rotterdam-Antwerp (the European benchmark) for 2011 was estimated at $121.00 a tonne.

Prices for thermal coal began to rise in December, 2010. Supply constraints were the culprit; wide-spread flooding in Australia’s Queensland State was the catalyst. Australia is the world’s number one exporter of coal (thermal and steelmaking) accounting for about 26.5% of worldwide exports. And then there was the devastating earthquake in Japan. Since then, the European benchmark has risen nearly 11% to $135 a tonne, a 2.5 year high.

On April 1st, global diversified mining giant Xstrata (LSE: XTA) and Japanese utility company Chugoku Electric settled an annual coal contract at record levels. The contract was ultimately settled for just under $130 per tonne, more than thirty percent higher than last year, despite the current weakness in coal demand caused by the earthquake in Japan. Several power plants were damaged in the disaster so some utilities deferred their cargoes to a later date.

Japan is the world’s largest thermal coal importer and, at some point, Japanese demand for power will recover as factories reopen and the country rebuilds itself. And with the possibility that nuclear power output will be constrained, coal-fired plants will have to work harder to produce more power. June through September is the country’s traditional peak months for electricity consumption and some industry experts predict Japan will require an extra 500,000 tonnes per month. On average, Japan consumes 10 million tonnes of thermal coal each month.

Some think the boom in imported thermal coal demand across Asia, led by Japan, China, South Korea and India, could last for the next several years. With industry experts bullish on demand, we take a look at a couple of Canadian listed thermal coal companies that could stand to benefit from these prognostications.

Coalspur Mines (TSX:CPT) is based in Hinton region of Alberta, Canada. Coalspur’s flagship coal project is the Vista Coal Project which, the company believes, has the potential to be one of the largest thermal coal mines in North America. The project is being developed to meet the expected growing energy demands from the Asia Pacific market. The Vista Coal Project has a NI 43-101 Measured and Indicated coal resource base of over 900 million tonnes. Coalspur is currently undertaking a bankable feasibility study on the project which is anticipated to be complete before the end of the year. The processing facility is expected to cost close to $1 billion. Coalspur recently announced a $55.5 million financing at $1.85.

Sherritt International (TSX:S), perhaps better know as a leader in the mining and refining of nickel and its energy operations in Cuba, a lesser known fact about Shirritt is that it’s the largest thermal coal producer in Canada. Sherritt operates seven mine-mouth mines in Alberta and Saskatchewan. These mining operations supply electricity generation companies with coal under long-term contracts. Annual production from Sherritt’s mine-mouth operations is estimated at 35 million tonnes. The company also produced 4 million tonnes of thermal coal from its mountain mining operations. On February 23rd, 2011 Sherritt reported fourth quarter net income of $81 million, or $0.27 a share, up from $48.3 million, or $0.16 a share, a year earlier. Sherritt’s shares closed the week at $7.65.

Mike Luft

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