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The Casey Files: Go East, Young Coal Miner

By Dave Forest
The Casey Energy Speculator
December 7, 2005

In February 2005, I wrote an article for the International Speculator called "Too Late for Coal?" The takeaway was that valuations on junior coal companies had run well ahead of the fundamentals for these firms.

Indeed, as Dave Forest, managing editor of the Casey Energy Speculator, points out in the following article, there has been a severe retrenchment this year in the share prices for many of the junior coals.

But the fact remains that the market for coal as a commodity is still booming, fed by the astonishing growth taking place in China. So how do we profit? Dave has a few ideas...

-Doug Casey

(Ed. Note: If you are interested in profiting from all things energy, check out the Casey Energy Speculator. It's so good it comes with unique guarantee: if at any time in the first 6 months after subscribing, you don't find it to be worth the money, simply cancel for a 100% refund. You've got nothing, and I mean nothing, to lose... to check it out. Click here.

Come hear the tale of woe that is the junior coal mining sector...

When metallurgical coal reached $125 per ton in late 2004, the market assumed the party was just getting started. And how better to gain leverage than with the handful of small-market-cap companies eyeing rich new coal deposits in British Columbia? The press reported an unprecedented bull market for coal stocks, and analysts conjectured the birth of a coal trust sector.

One of the most celebrated companies was Grande Cache Coal (T.GCE). After IPO'ing at C$2.70 in May 2004, the stock pole-vaulted to C$17.47 in December, up nearly 550%.

But then the time came to actually mine coal. In January 2005, Grande Cache reported preliminary results from its Smoky River coal field in western Alberta. The cost to produce and deliver a ton of the black stuff would be close to $70-even though the company's sales contracts had some buyers paying only $64.

To make matters worse, Grande Cache still hadn't found rail capacity to get its coal to Pacific ports, for export to Asian customers. Analysts jumped on the company like a pack of wolves, slashing cash flow projections by 30% and sending the share price into a tumble from which it hasn't recovered.

Then things got worse. After announcing a C$18.9 million loss for the 12 months ending March 31, GCE lost $12.2 million in the second calendar quarter alone, and last week reported a $10.5 million loss for the third quarter. With this dismal performance, Chief Financial Officer Thomas Pierce resigned in September, followed soon after by Chief Operating Officer Eugene Wusaty. The share price plunged again, from C$9.50 to as low as C$1.90.

While Grande Cache has lived the worst-case scenario, the stories for other coal miners in western Canada are far from rosy. Pine Valley Mining (V.PVM) fell from C$7.00 to C$2.50. One of our Casey-watched companies, Western Canadian Coal (T.WTN), also dropped from C$7.00 to C$2.50. (But we still believe there's good reason to hold this stock, especially when the coal sector is distressed. For more on that reason, check out the Casey Energy Speculator, and sign up for a no-risk trial subscription).

In every case, the story is the same: skyrocketing costs. With most resource prices rising, mining and petroleum companies face increasing competition for equipment, raw materials and employees. The last has been a major problem in western Canada, as many laborers have headed to the booming oil sands of Alberta, where employers are paying top dollar.

Given these problems, a new trend is emerging: a preference for international coal projects. After all, if cost control is the key to coal mining profits, what better solution than to head overseas, where labor is plentiful and cheap?

In fact, the only coal junior with a winning stock this year has been QGX Ltd. (T.QGX), an explorer focused on Mongolia. After finding coal on its Baruun Naran lease late in March, QGX drill tested the deposits, identifying 10 good-sized coal seams. Over the course of 2005, the stock climbed from C$1.50 to as high as C$5.75-a gain of 280%.

Perhaps inspired by this success, a crop of new international coal players has emerged in the last two months. At the end of September, Adobe Ventures announced the acquisition of a working coal mine and a port facility in northern Colombia. The company has since changed its name to Coalcorp Mining (V.CCJ) and is now looking to raise C$150 million in equity to develop its Colombian holdings.

Further abroad, Ivana Ventures (V.ANA) in September announced a joint venture with the Xinjiang Bureau of Coal Field Geology, in northwestern China. ANA plans to spend C$2 million to prove up known coal deposits, and it recently gained a high-profile participant when Rick Van Nieuwenhuyse, president and CEO of NovaGold, joined the board of directors.

Some larger exploration companies are also going international. Ivanhoe Mines (T.IVN) recently hired none other than ex-Grande Cache COO Wusaty to head up development of its coal properties in Mongolia.

In that same country, our Casey-watched Western Prospector Group (V.WNP) holds 20,000 hectares of coal licenses. Visiting the site this fall, we saw that these claims host significant thicknesses of coal and are located adjacent to an operating rail line. Given QGX's success in Mongolia, these properties could add significant value to WNP above and beyond its signature uranium projects especially with energy-hungry China recently agreeing to spend $300 million developing Mongolian coal projects, along with other minerals.

Of course, none of these firms has yet produced any coal, and it remains to be seen how cost-effective their overseas operations will be. But given the low labor costs they enjoy, it is a good bet that they will outperform the coal miners in high-cost British Columbia. If so, the future of coal investing may well be international.

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