The Black Mineral and the Land Down Under

By David Dittman • December 19, 2012 • Pacific Digest

According to the International Energy Agency’s (IEA) annual Medium-Term Coal Market Report 2012 coal will rival oil as the world’s top energy source by 2017.

Although the growth rate of coal usage will slow from the “breakneck” pace of the last decade, the IEA forecasts global consumption in 2017 at 4.32 billion metric tons of oil equivalent (BTOE). The projection for oil is 4.40 BTOE.

The IEA anticipates an increase in coal usage in every region of the world except the US, where natural gas is replacing the black mineral as feedstock for the generation of electricity. The world will burn around 1.2 billion more metric tons of coal per year by 2017 compared to today. That’s the equivalent to the current coal consumption of Russia and the US combined.

Coal is available in abundance, and demand for power in emerging markets seems to have no limits. In fact according to the IEA coal was burned to satisfy nearly half the increase in energy demand during the first decade of the 21st century.

The IEA coal report, the second time the agency has released an annual study focused solely on the black mineral, suggests this trend will continue and that absent changes in current policy–such as widespread implementation of limits on carbon emissions–coal will catch oil within a decade.

In its first report about the commodity, released in December 2011, the IEA concluded that strong demand in China and India, particularly for electricity generation, will keep coal, if not in the kingly state it occupied in the global energy hierarchy from 2000 through 2010, at least among the world’s primary fuels until 2016.

The second coal market report again concludes that China and India lead the growth in coal consumption over the next five years. China will surpass the rest of the world in coal demand during the outlook period, while India will become the largest seaborne coal importer and second-largest consumer, surpassing the US.

Coal demand grew 4.3 percent in 2011, or 304 million metric tons. Chinese demand grew by 233 metric tons in 2011 and continued to grow in 2012. In 2009 China became a net coal importer for the first time. In 2011 it became the largest coal importer, surpassing Japan.

The only region where coal demand declined was the US, where the discovery and exploitation of shale reserves has made available large stocks of cheap gas from which to generate electricity.

Indonesia surpassed longtime leader Australia as the largest exporter on a tonnage basis. Floods in Queensland in fiscal 2011 constrained Australian exports, while Indonesia growth didn’t stop, surpassing the 300 metric ton line. 

With a population of more than 1 billion, electricity shortages and the largest pocket of energy poverty in the world, India is will make a significant contribution to rising coal consumption through 2017 and beyond.

The IEA forecast is for India to be the largest seaborne coal importer by 2017 and the second-largest coal consumer, surpassing US.

The IEA also predicts that Australia will reclaim the title of World’s Biggest Coal Exporter, despite factors such as rising labor costs and a strong Australian dollar that confer competitive advantages upon Indonesia.

The IEA’s analysis suggests Australia invest enough in infrastructure and mine expansion to export 356 metric tons of coal by 2017, exceeding Indonesia’s 309 metric tons.

AE Portfolio Aggressive Holding New Hope Corp Ltd’s (ASX: NHC, OTC: NHPEF) primary activity is the production of thermal coal, also known as steam coal, which is used all over the world to generate electricity.

Japan, China and Taiwan are New Hope’s three main export markets. Volumes with customers in those markets are generally booked under long-term contracts. The prospect of rising demand from India bodes well for future growth.

The company does set aside 80,000 to 160,000 metric tons for what it calls “new market development,” and during fiscal 2012 it shipped quantities to South Korea as part of such an effort. Most of its coal is sold quarterly on a fixed- or negotiated-price basis, some monthly on an indexed-price basis.

Fiscal 2012 (ended Jul. 31, 2012) operating numbers were solid, particularly in light of consistently declining coal futures prices over the course of the year.

Revenue from ordinary activities rose 15.9 percent to AUD767.5 million, as coal production was up 11.5 percent to a company record 6.29 million metric tons and sales grew 10.6 percent to 6.25 million metric tons. Of this total 5.83 million metric tons were exported and 0.42 million metric tons were for domestic usage. On-site operating costs increased by 0.5 percent from the previous year, reflecting New Hope’s ongoing and successful focus on cost management.

New Hope’s 100 percent-owned Queensland Bulk Handling (QBH) facility exported 8.67 million metric tons of coal on 120 vessels during the 12 months ended Jul. 31, 2012, a 33 percent increase on the 6.52 million metric tons shipped on 88 vessels in fiscal 2011.

New Hope posted net profit after tax (NPAT) of AUD167.1  million, 66.8 percent lower than fiscal 2011, as last year’s result benefitted from a AUD369.7 million non-recurring gain from the sale of interests in Arrow Energy and its Lenton project. NPAT before non-recurring items was up 16.5 percent to AUD171.1 million from AUD146.9 million a year ago.

The company declared yet another special dividend along with its regular final dividend and earnings announcement for fiscal 2012. The special dividend is AUD0.20 per share, the final AUD0.05.

Total dividends paid in respect of fiscal 2011, including a special dividend of AUD0.15 per share, were AUD0.2525. Including the AUD0.06 interim dividend in May for fiscal 2012 New Hope will have paid AUD0.31 per share, a 22.8 percent increase over total dividends paid in respect of fiscal 2011.

New Hope’s cash and short-term investment reserve total approximately AUD1.5 billion. That allows it to do things like top off payments to investors with what are becoming regular “special” dividend declarations coinciding with the announcement of full fiscal-year results; it’s done so each year since fiscal 2005.

New Hope has regularly paid back to shareholders from retained earnings that it hasn’t invested back into the business. It has reduced debt to zero over the past 10 years and is not borrowing to cover the payout. Fiscal 2012 interim and final dividends totaling AUD0.11 per share represented 53.3 percent of the AUD0.206 earnings per share New Hope reported on Sept. 18.

A strong balance sheet will also enable New Hope to take advantage of opportunities created by the current downturn for the coal market. As CEO and Managing Director Robert Neale noted during the company’s conference call to discuss fiscal 2012 earnings, time is likely to be New Hope’s friend rather than its enemy.

All of New Hope’s budgeted fiscal 2013 production is contracted under multiyear, long-term contracts. Management noted in its fiscal 2012 earnings-release statement that “New Hope is poised to deliver another year of solid operational performance.”

And, as the IEA’s report on coal for 2012 suggests, the long-term outlook for the commodity is positive–particularly for Australia-based companies exporting to emerging Asia.

The Roundup

Here’s other news of note for AE Portfolio Holdings since the December issue went to post on Friday.

AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) announced this week that it will reduce electricity rates for residential and small-business customers in South Australia. On Dec. 18 the South Australia’s state government announced that it would deregulate retail prices as of Feb. 1, 2013.

All South Australian residences and small businesses on standing contract price arrangements as of Jan. 31 will see rate reductions back-dated to Jan. 1, 9.1 percent for homes and 4.5 percent for businesses.

Theses reduced rates will be fixed for two years from that date, other than for changes to network charges and costs related to efforts to increase energy efficiency.

All South Australian residences and businesses that transfer to a standing contract price after Feb. 1 will see a 4.5 percent reduction to the current standing contract price.

In a statement announcing the rate reductions AGL management noted its support for the government’s decision to deregulate the South Australian market.

AGL also said it would withdraw its lawsuit against the Essential Services Commission of South Australia concerning the agency’s right to review an agreed-to rate structure upon implementation of the government’s reforms.

AGL Energy is a buy under USD16 on the Australian Securities Exchange (ASX) using the symbol AGK, on the US over-the-counter (OTC) market using the symbol AGLNF or via its US American Depositary Receipt (ADR) which is worth one ordinary ASX-listed share and is traded on the US OTC market.

Australand Property Group (ASX: ALZ, OTC: AUAOF), which last week rejected a AUD2.8 billon offer from GPT Group (ASX: GPT, OTC: GPTGF) for its industrial and commercial property divisions, is now rumored to be the object of fellow A-REIT Mirvac Group’s (ASX: MGR, OTC: MRVGF) acquisitive desires.

Australand’s share price has rallied from AUD2.77 on Nov. 16 on the ASX to a close of AUD3.39 on Dec. 19 in Sydney, settling down from AUD3.46 the previous day.

On Dec. 14 Australand management announced that the A-REIT’s final distribution for the year ending Dec. 31, 2012, would be AUD0.11 cents per stapled security, bringing total distributions for the year to AUD0.215.

The final distribution will be paid Feb. 8, 2013, to shareholders of record as of Dec. 31, 2012. Shares will trade ex-dividend on Dec. 21. Australand Property Group is a buy on the ASX using the symbol ALZ and on the US OTC market using the symbol AUAOF under USD2.80.

Australia & New Zealand Banking Group Ltd’s (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) credit quality is “very strong,” according to a report by the ratings agency DBRS.

This conclusion is supported by the ANZ’s strong domestic retail banking franchise; execution of its “super-regional” expansion strategy; its strong financial risk profile; and a supportive regulatory environment.

DBRS maintained its long-term issuer rating at AA, its short-term rating at R-1H, its subordinated debt rating at AAL, its senior unsecured debt rating at AA and its long-term bank deposits rating at AA. The outlook for ANZ is “stable.”

Underlying DBRS’ long-term rating is the implied support of the Australian government.

DBRS did note that ANZ’s and its peers’ longstanding reliance on offshore wholesale funding markets remains a challenge. Slowing domestic loan growth, however, should enable ANZ to reduce risks related to this issue by funding the majority of new loans through deposits and by further extending the duration of its offshore wholesale funding portfolio and liquidity.

A key positive–which sets ANZ apart from the other three members of Australia’s Big Four banks–is its strategy to create a “super-regional” bank by expanding into the Asia-Pacific region. ANZ is on track to derive 25 percent to 30 percent of earnings from the broader region by 2017. Deposit growth in Asia-Pacific has already provided a significant source of new funding for ANZ.

Australia & New Zealand Banking Group is a buy under USD24 on the ASX using the symbol ANZ or on the US OTC market using the symbol ANEWF.

It also trades on the US OTC market as an American Depositary Receipt under the symbol ANZBY. ANZ’s ADR is worth one ordinary, ASX-listed share and is also a buy under USD24.

Here are dates for the next round of reporting season, which for most companies will be for the first half of fiscal 2013. We’ve noted where the reporting period differs.

Please consult the Portfolio tables at www.AussieEdge.com for current advice.

Conservative Holdings

  • Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
  • AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Feb. 27, 2013 (confirmed)
  • APA Group (ASX: APA, OTC: APAJF)–Feb. 20, 2013 (confirmed)
  • Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Feb. 8, 2013 (full year 2012, estimate)
  • Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Feb. 18, 2013 (first quarter fiscal 2013, estimate)
  • Cardno Ltd (ASX: CDD, OTC: COLDF)–Feb. 14, 2013 (estimate)
  • CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Feb. 13, 2013 (confirmed)
  • Envestra Ltd (ASX: ENV, OTC: EVSRF)–Feb. 21, 2013 (confirmed)
  • M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Feb. 27, 2013 (estimate)
  • Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Feb. 25, 2013 (estimate)
  • SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Feb. 22, 2013 (estimate)
  • Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Feb. 7, 2013 (confirmed)
  • Transurban Group (ASX: TCL, OTC: TRAUF)–Feb. 5, 2013 (confirmed)
  • Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Feb. 18, 2013 (estimate)

Aggressive Holdings

  • Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Feb. 25, 2013 (estimate)
  • BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Feb. 20, 2013 (confirmed)
  • GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 21, 2013 (estimate)
  • Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Feb. 18, 2013 (estimate)
  • Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Feb. 11, 2013 (estimate)
  • New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Mar. 19, 2013 (estimate)
  • Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Feb. 21, 2013 (full year 2012, estimate)
  • Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Feb. 21, 2013 (confirmed)
  • Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Feb. 24, 2012 (full year 2012, confirmed)
  • WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Feb. 28, 2013 (estimate)
Following are links to our discussion and analysis of the most recently announced financial and operating results for Portfolio Holdings.

Conservative Holdings

Aggressive Holdings

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