Are new coal mines a path to wealth?

Is it wise to bet on growing demand for coal?

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The battle over the expansion of the coal industry is heating up in Australia. On January 31, the Great Barrier Reef Marine Park Authority will make a decision regarding the Abbot Point coal port. The coal port is fundamental to the growth plans of rail operator Aurizon Holdings Ltd (ASX: AZJ), but conservationists are strongly opposed to the move.

In December 2013, Aurizon announced an impairment of $47 million, because of the termination of its Surat Basin Rail Joint Venture with Glencore. The termination of the project results from the decision by Glencore Xstrata to put the Wandoan Coal project on hold. To be fair, this does not seemed to have bothered the market; Aurizon shares are up almost 25% over the last 12 months.

However, the Abbot Point port is highly controversial. Construction will require dredging, which opponents claim could cause significant damage to the Great Barrier Reef. When dredging was required for the construction of an export terminal in Gladstone, a leaking bund wall allowed dredge spoilage to enter Gladstone harbour. In January, Environment Minister Greg Hunt confirmed he had ordered an inquiry into the mishap. According to Deloitte Access Economics, the Great Barrier Reef added $5.68 billion to the Australian economy in 2011-2012 and generated almost 69,000 full-time equivalent jobs: it’s not surprising that many believe protecting the reef should be a priority.

Meanwhile, WHITEHAVEN COAL LIMITED (ASX: WHC) faces continuing environmental and community opposition to its Maules Creek expansion project. The company is currently attempting to clear an area of Leard State Forest in preparation for first coal, which they claim will now arrive in early 2015. Kokoda veteran Bill Ryan, age 91, summed up his opposition succinctly: “We can’t afford this with global warming,” he said. Bill travelled from Sydney to support the blockade at Leard State Forest. The forest allegedly contains a number of endangered species, as well as sites of cultural significance to the Gomeroi, the traditional owners of the land. There are also concerns the new mine would impact local farming by significantly dropping the water table.

Signs out of China suggest that increasing coal capacity at the expense of Leard State Forest might not be the best idea, anyway. Bloomberg reports that China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal industry. This isn’t surprising, since a 3 billion-yuan trust product is facing default as the result of a collapsed coal miner. In any event, China is unlikely to increase imports anytime soon. To quote Tristan Edis of Climate Spectator, China: “Has consolidated its own coal mining sector into bigger, safer and lower cost mines that reduce the need for imports from overseas.”

Foolish takeaway

In 2013 Goldman Sachs declared:  “We believe that thermal coal’s current position atop the fuel mix for global power generation will be gradually eroded… most thermal coal growth projects will struggle to earn a positive return for their owners.” Hostility to change may extend the coal era, but the recent proliferation of renewable energy should send a signal to investors. I don’t believe it is wise to allocate capital to new coal mines (or the infrastructure that would support them), as these investments might outlive their utility to society. There are certainly far more profitable investments available on the ASX, if you know where to look.

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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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