Expecting Australian Coal Mines to Remain Under Water for Months

by: Stone Fox Capital

The recent floods in the state of Queensland in Australia have ravaged the operations of coal mines, specifically those that mine coking coal. Queensland produces roughly 90% of the coking coal in Australia, so that's a huge impact to the global trade of this commodity.

According to this report from Mining Weekly, some of the flooded mines, especially open pit mines, could be off line for up to 6 months. It's still early in the process, but it'll be interesting to see how this will play out on demand and pricing.

Stone Fox favorite Alpha Natural Resources (ANR) was absolutely crushed in Friday's trading when the company reported an increase in coking coal shipments for 2011, but higher costs. I'm not sure what about the higher costs caught anybody off guard, especially knowing how regulators have cracked down on Eastern US underground mines. Maybe it was a combination of issues - including a potential bid for Massey Energy (NYSE:MEE) or the issue with the Arch Coal (ACI) mine being blocked - that sent the stock down 7.75%.

The weak stock action for the whole sector seems to fly in the face of the demand/supply equation these days. Especially for stocks which have huge supplies of coking coal, like ANR and MEE. Regardless of whether companies like MEE struggled in 2010 in the face of higher regulatory scrutiny, those issues will either be solved or the higher costs will just get absorbed into even higher prices for not only coking coal but also thermal coal.

These devastating floods in Australia further highlight the scarce nature of hard-to-mine commodities. Any company with access to huge reserves should be deemed very valuable at this time. ANR and MEE remain the favorites based on potential for coking coal production and shipments.

The big question for the next week or two remains whether MEE will accept any of the buyout offers from the likes of ANR, ACI, or MT. The former could turn into a coking coal powerhouse while the latter has the potential to become vertically integrated to reduce its reliance on sharply higher prices for the ever precious coking coal. Not many opportunities come along to snap up an in-demand commodity, so it would seem that the bidding war would be intense.

After a three day weekend, Tuesday could be interesting.

Via Mining Weekly:

  • Coal mines in Australia's flood-ravaged Queensland state could take up to six months to return to full operation as the lack of water pumping and storage capacity is slowing efforts to clear pits, mining contractors said.
  • Australia accounts for about two-thirds of global coking coal trade and Queensland produces roughly 90 percent of Australia's share.
  • Production has restarted in a few places and the lucky ones will be clear in two to four weeks but some mines will take three to six months," Walker said.
  • Warrick Ryan, an Operations Manager at Bowen Basin Hire, which rents out pumping equipment, said the pump capacity is only part of the issue as many mines simply lack the water storage capacity to clear pits.
  • "You can't just run the water into the creek, you have to store it somewhere and many places are running out," Ryan said.

Disclosure: I am long ANR and MEE in Covestor models.