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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 28 August 2016

Coal rallies hard

Coal price booms

A spectacular rally in coal prices has led to some equivalently spectacular price action on the share markets.

Whitehaven Coal (WHC) blazed from a low of 36 cents earlier in the year to above $2.00, before easing back for a Friday close of $1.84.

Civil and mining contractor NRW Holdings (NWH) has a number of key coal contracts - including with Middlemount and Rio Tinto - and has been more than 15-bagged from 4 cents to 62.5 cents.

In the year to 30 June 2016 NWH reported revenues of $288 million and EBITDA of $47.4 million.

Despite an order book swelling to $1 billion, the company did not announce a final dividend, instead opting to pursue a significant reduction in net debt, with a target of clearing all debt balances within 30 months.

With the outlook for resources sector stabilising and infrastructure taking off, the market recognises improved tender opportunities for service providing companies.

Index weights

While iron ore has been a top performer in 2016 to date, a number of analysts, including from Westpac, expect that this strength will not last until the end of the year due to oversupply.

Coking coal on the other hand has rallied by nearly 25 per cent in August to be up by a tearaway 73 per cent since the middle of February. 

The Reserve Bank of Australia (RBA) will release its Index of Commodity Prices for the month of August this week. 

In July the index increased by 4.1 per cent since it is reported in monthly average terms.

However, if it was reported using spot prices for the bulk commodities, the index would have increased by 8.3 per cent in July, to actually be 3.5 per cent higher over the past year. 

Given the likely downward pressure on iron ore prices, the outlook for coal, oil and LNG - and to some extent gold - will be crucial to the resources revenues and national income.