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What future for coal mining in Australia?

Mining behemoth Glencore Xstrata (LSE: GLEN) has decided to put on hold plans to develop the enormous Wandoan coal project, having earlier this year also shelved plans to develop the Balaclava coal project.

Sharp-eyed investors will note that the change in government has done little to stop companies shelving greenfield projects. Indeed, at a London briefing to shareholders Glencore CEO Ivan Glasenberg said “We are fearful of greenfield projects.” However, diversified mining companies such as BHP Billiton (ASX: BHP) and Glencore have an advantage over undiversified coal miners: they can easily weather poor coal prices for years.

The political tide may have turned against acting to mitigate climate change for now, but the issue won’t go away. It seems likely that the world will inch slowly towards phasing out the most (environmentally) inefficient forms of power generation. More detrimental to coal miners, however, is the fact that local communities are increasingly intolerant of the destruction of their local environment and the loss local amenity.

In this excellent article, Fool analyst Scott Phillips wrote, “While we argue over subsidies to car companies and steel businesses, we’re allowing the Great Barrier Reef to become degraded.” And he is not the only one concerned about Australia losing this important economic asset. Activist groups such as GetUp are deliberately targeting the greenfield coalmines proposed for Queensland because they are the number one threat to the reef, and all the jobs that depend on it. Along with Australian labour laws, these facts make it difficult for coal miners to compete with low-cost Chinese and Indian producers.

The economics, however, will not wait for the politicians. Lower prices for coal have necessitated cost cutting at most Australian coal mines, in order to preserve profit margins. The dominant strategy (at the moment) is for miners to try to ramp up production at already operating mines, and delay development of new sites. This strategy makes sense for individual companies, but is unlikely to lead to a higher coal price in the short term.

Long-term investors in companies such as Yancoal (ASX: YAL) and Whitehaven Coal (ASX: WHC) are taking significant risks with their capital. In the last 12 months, the share prices for those two companies are down over 50% and 30% respectively. They lack the protection diversification brings.

Foolish takeaway

At some point it will become apparent that not all the Australian coal tenements currently assigned a market value by various stock exchanges can or will be developed. Investors simply do not know which tenements will ultimately be developed and which will not. For this reason, investors should be wary of buying shares in undiversified coal mining companies.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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