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Is this one sector you should avoid?

Following advice from the Independent Commission Against Corruption, NSW Premier Barry O’Farrell has promised to introduce legislation that will cancel the exploration licences of Cascade Coal. Interestingly, five of the directors of Cascade Coal were also directors of the ASX-listed White Energy (ASX: WEC). Originally, the plan was for White Energy to buy Cascade Coal.

It sure is lucky that the transaction never went ahead, because the acquisition would likely have been an absolute disaster for White Energy’s retail shareholders.

Cascade Coal isn’t the only company that has struggled with disclosure of its links with politicians. In November 2013, a subsidiary of WHITEHAVEN COAL LIMITED (ASX: WHC) was fined for failure to comply with the company’s obligation to report certain political donations under the Environmental Planning and Assessment Act 1979.

According to Corrs Chambers Westgarth partner, Christine Covington, the Whitehaven subsidiary was fined because two directors failed to disclose donations to the National Party. Those directors were entitled to performance shares should ‘first coal’ from Maules Creek be delivered by August 2013. To quote the lawyers: “Delivery of first coal was thus wholly dependent on obtaining approval of the Major Project Application.” That’s why the donations should have been disclosed.

The Maules Creek project is contentious because it requires the partial destruction of the Leard State Forest. Not only has the expansion been unsuccessfully appealed in the Federal Court, but protestors are locking themselves on to the machines used to clear trees and generally hampering the progress of the mine. The police are arresting them, but every day of delay hurts Whitehaven’s bottom line.

Meanwhile, some commentators are celebrating a barely perceptible increase in coal usage in Germany. The Australian claims: “Its been a black Christmas for green thinkers as Germany, the world leader in rooftop solar and pride of the renewable energy revolution has confirmed its rapid return to coal.”

The so-called rapid return to coal is a bit of an exaggeration; so don’t put your money on it by investing in marginal coal producers such as Whitehaven. To quote Tristan Edis, of Business Spectator: “In Germany, coal’s share of power consumption did rise slightly in 2013, from 44 per cent to to 45.5 per cent – but it didn’t come at the expense of renewables which also increased its share from 22.8 per cent to 23.4 per cent.” In fact, the USA is cutting its coal consumption faster than production, leading to lower costs for European coal power plants, which then displace gas-generated power.

Foolish takeaway

Whitehaven is an unattractive investment because it has a marginal project that is the subject of significant opposition. A better option for exposure to coal would be New Hope Corporation Limited (ASX: NHC), although I believe the sector is best avoided. It is impossible to predict commodity prices, but thermal coal is neither scarce nor strategically favourable, making it one of the riskiest commodities to invest in.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.

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