Shares in mining group Linc Energy (ASX: LNC) plunged over 13% yesterday following reports that it was involved in early discussions to purchase a coal mine jointly owned by BHP Billiton (ASX: BHP) and Mitsubishi Corporation.
Reportedly, the company was in negotiations to purchase the Gregory Crinum coking coal complex located in Queensland. However, investors reacted negatively due to the mine’s poor prospects. Last year, the BHP Billiton Mitsubishi Alliance (often referred to as BMA) closed the Gregory mine as it was no longer profitable based on the diminishing value of coal, high mining costs and the high Australian dollar. Later, BMA hired UBS to sell the mine, along with its Crinum mine, as a package. According to BHP’s annual report, mining in the complex is set to last another four years and contains 8.3 million metric tons of coal.
Linc’s share price has today recovered most of yesterday’s loss after the company responded to the speculation, reassuring investors that it was still divesting its non-core Coal Division assets, and that no binding agreement has been made.
The market’s reaction to the news yesterday, however, also tells a sour tale for BHP’s prospects. Australian coking coal has fallen in price by 18% this year and is sitting at its lowest level since 2009. BHP and other mining companies, such as its main competitor Rio Tinto (ASX: RIO), have all been trying to sell off non-core coal projects, recognising that they must instead significantly cut costs and projects in order to regain long-term sustainability.
According to The Australian, a senior executive at BHP last month stated that his company was not considering any new major coal projects, based on the view that China’s own mines will be able to meet any additional demand for steelmaking coal.
The volatility of the mining industry as a whole is currently far too high to consider investing in companies such as Linc or BHP. Until the volatility begins to subside or share prices fall significantly lower, it is well worth remaining on the sidelines.
Instead, The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
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