Coal and Mining
Coal remains an intriguing investment opportunity due to its role in energy production and emerging markets' continued reliance on it.
Hey everyone 👋,
I've been thinking a lot about contrarian investments lately - you know, those opportunities that might raise eyebrows at dinner parties.
Today, I want to talk about one that's particularly controversial: coal and mining.
Now, before you close this tab, hear me out. While coal isn't winning any popularity contests in our climate-conscious world, understanding its investment landscape in 2024 reveals some interesting dynamics that every informed investor should at least be aware of.
And investing in a coal mining company doesn’t necessarily mean you only invest in coal; many mining companies have (rightly) been forced to diversify into other mining opportunities, too.
As always, this is not financial advice.
Today, I'll cover:
- The State of the Coal Market
- Why consider coal investments in 2024
- Investment approaches and how to get started
- Risks to consider
- Investment strategy considerations
- Looking ahead
The State of the Coal Market
Let's address the elephant in the room - coal is facing significant headwinds as the world transitions to renewable energy. However, the reality of global energy demands tells a more complex story.
As of 2024, coal still accounts for about 36% of global electricity generation. Despite aggressive green energy initiatives, developing economies in Asia, particularly India and Southeast Asian countries, continue to rely heavily on coal for their growing energy needs.
The market has responded to this in interesting ways. While many Western investors are divesting from coal, creating potential value opportunities, demand in Asia remains robust. This has led to a situation where coal prices, though volatile, have shown surprising resilience.
Here’s the market cap of the world’s largest coal mining company, China Shenua Energy from 2008 to present:
You can see that following a plateau, in recent years, their stock has started to tick upwards - despite a global push away from coal as a source of energy.
Why Consider Coal Investments in 2024?
1. Supply-Demand Dynamics
Despite global efforts to phase out coal, the supply side has been contracting faster than demand in many regions.
Major banks have restricted funding for new coal projects, leading to limited new supply coming online. This supply constraint, combined with steady demand from developing economies, creates interesting price dynamics.
2. Value Opportunity
Many coal assets are currently priced at significant discounts due to ESG concerns. This means you might find companies trading at very low P/E ratios despite generating substantial cash flow. Some coal miners are offering dividend yields above 10%, reflecting both the risk premium and the market's pessimistic outlook.
3. Energy Security Concerns
Recent geopolitical events have reminded countries of the importance of energy security. Several nations are maintaining coal capacity as a backup power source, even as they build out renewable infrastructure. This "insurance policy" role could support coal demand longer than many expect.
Investment Approaches
There are several ways to gain exposure to the coal sector:
Direct Company Investment
One of the easiest ways to invest in coal is to invest in a coal producing company. Here’s a snapshot of some of the world’s leading coal companies. They include:
These companies have a combined market cap of over $500 billion - sure, this is less than major tech companies but still substantial.
Factors to consider when investing in a coal / mining company
Look for established coal mining companies with:
- Strong balance sheets
- Low production costs
- Diversified customer base
- Clear ESG transition strategies
Diversified Mining Companies
If you’re not too comfortable with polluting the planet as an investment opportunity (I don’t blame you!) Major mining conglomerates that include coal in their portfolio offer a more balanced approach. They provide coal exposure while maintaining diversification across other commodities.
Coal and mining ETFs
ETFs tracking the coal sector offer broader exposure and better liquidity than individual stocks. However, be aware that many of these funds have relatively high expense ratios due to the sector's specialized nature.
There are far too many coal / mining ETFs to include here but some examples of Coal and mining ETFs include:
VanEck Global Mining UCITS ETF (Ticker: GDIG)
This ETF offers exposure to a varied set of metals by investing in companies involved in their extraction and processing. While not exclusively focused on coal, it includes mining companies that may have coal operations.
Key details:
- Total Net Assets: $1.1 billion
- Expense Ratio: 0.50%
- Inception Date: April 18, 2018
ETFS DAXglobal Coal Mining GO UCITS ETF (ISIN: IE00B3CNHF18)
This ETF specifically tracks the DAXglobal® Coal index, which focuses on coal mining and coal mining equipment companies. However, it’s important to note the fund’s small size ($3 million) which makes it pretty volatile and risky.
iShares Gold Producers UCITS ETF
While not strictly related to coal, this ETF provides exposure to companies involved in gold mining and production. The fund aims to track the performance of the S&P Commodity Producers Gold Index, which consists of companies engaged in gold exploration and production.
The largest positions in the fund include:
- Agnico Eagle Mines Ltd: 9.95%
- Wheaton Precious Metals Corp: 9.57%
- Barrick Gold Corp: 8.86%
- Newmont Corp: 8.38%
- Franco-Nevada Corp: 7.84%
Risks to Consider
OK, now before we finish, let's be real about the risks - they're significant. Here’s some key risks to consider if you’re thinking about taking the plunge and investing in coal or mining.
⚖️Regulatory Risk
Environmental regulations continue to tighten globally. Carbon pricing schemes and restrictions on coal use could impact profitability dramatically.
🌎Transition Risk
The speed of renewable energy adoption could accelerate, potentially stranding coal assets before their expected end of life.
‼️Reputational Risk
Investment in coal might face criticism from stakeholders and could conflict with ESG investment mandates.
📈Market Risk
Coal prices are notoriously volatile, affected by weather patterns, economic growth, and policy changes.
Investment Strategy
If you're considering coal investments, here's a pragmatic approach that might be worth considering.
- Time Horizon: Think medium-term (3-5 years) rather than long-term; as the world gets greener, it’s unlikely that this will continue to be a potential investment opportunity.
- Position Sizing: Keep it as a small portion of your portfolio (typically <5%)
- Geographic Focus: Consider companies serving markets with stable demand profiles
- Quality Focus: Prioritize companies with:some text
- Low debt levels
- Strong cash flow generation
- Clear cost advantages
- Professional management teams
Looking Ahead
While coal's long-term decline seems inevitable, the path there isn't likely to be linear. The transition period could create opportunities for investors willing to navigate the complexities and risks of this controversial sector.
Remember, successful investing often means being willing to look where others won't. However, this needs to be balanced with careful risk management and a clear understanding of your investment timeline.
As always, make sure any investment in coal aligns with your overall investment strategy and risk tolerance. The sector's volatility means it's not suitable for everyone, and position sizing becomes crucial.
Until next time, Jason
DISCLAIMER: None of this is financial advice. This article is strictly for educational purposes