BULL POINTS:
■ Set to gain from coal-supply problems
■ Close to main markets
■ Blue-chip clients
■ Coal pricing becoming more flexible
BEAR POINTS:
■ High-cost producer
■ Currency risks
If, like us, you are bullish about the short-term prospects for the price of metallurgical coal, then you should run the rule over New World Resources (NWR) - an eastern European coal producer, which looks ideally positioned to benefit from the shortage that has emerged for this key industrial input.
NWR produces metallurgical and thermal coal for steel makers and power generators in central and eastern Europe. It owns the largest coal mining company in the Czech Republic as well as Europe's biggest producer of foundry coke. NWR has proven reserves of 407m tonnes of mixed thermal/coking coal, with current production split 50/50 between the two, although the company says that 2011 output will be slanted towards coke.
The nearness of NWR's principal operations to its customers reduces its cost of freight, a key determinant in steel production. This allows it to do business with some of the biggest names in European steel production, such as Arcelor Mittal, CEZ, US Steel and Verbund; although the company's Czech base does expose it to currency movements against the Czech koruna, which obviously introduces an element of risk.
IC TIP RATING | |
---|---|
Tip style | Speculative |
Risk rating | High |
Timescale | Short term |
Meanwhile, on other side of the world, floods in Queensland continue to disrupt the export of Australian coal. This has driven up prices for coking coal as stockpiles are run down. This disruption to an already-tight world export market provides an opportunity for NWR to secure higher prices through 2011, particularly if the damage to Queensland's infrastructure makes it impossible for the state’s miners to respond easily to their growing export backlog.
ORD PRICE: | 931p | MARKET VALUE: | £2.46bn | |
TOUCH: | 929-931p | 12-MONTH HIGH: | 1,093p | LOW: 586p |
DIVIDEND YIELD: | 6.7% | PE RATIO: | 6 | |
NET ASSET VALUE: | 229p | NET DEBT: | 57% |
Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€m) | Earnings per share (¢) | Dividend per share (¢) |
---|---|---|---|---|
2007 | 1.37 | 240 | 76 | nil |
2008 | 1.81 | 459 | 129 | 46 |
2009 | 1.12 | -58 | -26 | nil |
2010* | 1.61 | 232 | 69 | 31 |
2011* | 1.92 | 604 | 184 | 74 |
% change | +19 | +160 | +167 | +139 |
Normal market size: 7,000 Matched bargain trading Beta: 2.2 *Bank of America Merrill Lynch forecasts £1= €1.19 |
NWR sells its thermal coal on a calendar-year basis, and it has already agreed to sell its 2011 output at €71 a tonne (a 13 per cent increase on 2010). More important, in 2010, it decided to change the basis on which it sells its coking coal, a more expensive commodity, so it could benefit from rising prices. It will be re-negotiating its pricing contracts for 80 per cent of its hard coking coal at the end of March, by which time it should be in a strong position to secure premium prices for this year. Coal prices - though not set through a spot market in the same manner as, say, copper - are becoming increasingly sensitive to supply/demand factors.
Most hard coking coal is traded between Australia and the big Asian economies, especially China. This trade largely determines the current benchmark prices for coking coal/coke, and will have a big influence on NWR's price negotiations come March.