Coal of Africa (LSE: CZA) today rose by 41.18% after it announced this morning that it had been awarded mining rights by the South African government for it’s flagship project:
Coal of Africa Limited (“CoAL” or “the Company”) is pleased to announce the granting by the South African Department of Mineral Resources (“DMR”) of a New Order Mining Right (“NOMR”) in terms of the Mineral and Petroleum Resources Development Act (Act 28 of 2002) for its flagship Makhado hard coking and thermal coal project in Limpopo Province. The DMR also granted the Section 11 approval transferring the right from CoAL to its wholly owned subsidiary Baobab Mining & Exploration (Pty) Ltd (“Baobab”), which will be the project development company.
Here’s what that looks like on a daily chart:
If you look closely at the price action from April attentive investors would have been alerted to something ‘big’ from the larger up in price from the lows as well as the large volume spike in May.
In any event Coal of Africa completed a feasibility study on the Makhado Project during 2013 and anticipates developing the colliery to produce 2.3 million tonnes per annum of hard coking coal and a further 3.2 million tonnes per annum of thermal coal over a 16 year life of mine. The project can produce hard coking coal that has been benchmarked by independent consultants. Tests confirmed that the coal can be successfully beneficiated to produce high strength coke for the steel manufacturing industry.
That is a long term project that will provide investors with clear visibility of earnings for some time to come which is the probable reason for today’s price rise.
Whichever way you look at it and as this report highlights the price of coal is in a bear market:
Prices for metallurgical or coking coal have slumped to just $US110 a tonne from more than $US300 a tonne in 2011 while the price of thermal coal has been cut in half to $US62 a tonne over the same timeframe
Also Williams’ report states that ‘Rio Tinto’s new coal boss Jean-Sébastien Jacques, says it will likely take three or four years before there is “a light at the end of the tunnel” for the depressed thermal coal price’ and that ‘China’s recent pledges for greener sources of energy as it deals with rising pollution’ is to blame for the depressed levels.
Williams points towards China’s absolute cap – introduced last year – on its coal use for the first time ensuring annual consumption growth will not exceed 1.5 per cent over the next seven years.
My view is that bear markets whether in coal or in any other market do not last forever.
The fact that Coal of Africa have already started discussions with potential customers together with 26 month timeline for the first production of 5.5 Mtpa of saleable product means that the expected end of the bear market in coal prices (end of 2016) will be a distant memory for this first phase of production.