As has been the case so often of late, protestors are stopping the trucks of Whitehaven Coal Limited (ASX: WHC) this morning, granting contractors what is best described as an extended, (and compulsory) morning smoko. While Whitehaven shareholders and citizens may oppose the civil disobedience taking place, investors would err in ignoring it. Furthermore, I think diversified companies such as AGL Energy Ltd (ASX: AGK) are a far safer way to profit from coal (more on that below).
If and when Whitehaven does build its new coal mine, it may be sitting on a significantly overvalued asset. At the recent World Economic Forum in Davos, the World Bank President, Jim Yong Kim argued:
"The good news is that there is action we all can take to turn economies around so they're investing in what is clean and healthy and there are innovations that will bring future growth, jobs and competitiveness. Through policy reforms, we can divest and tax that which we don't want, the carbon that threatens development gains over the last 20 years."
Whitehaven is under pressure to have the Maules Creek expansion up and running by 2015, as the project has already been delayed. These delays have been costly to the company, due to "take or pay" coal haulage agreements. According to the FY 2013 annual report, "take or pay obligations in FY 2013 caused an increase in production costs across the company of about $3/t on a free-on-board (FOB) basis. Total take or pay costs in FY 2014 are expected to be about $3/t of coal production for the year."
This is bad news for the company, as coal prices look weak due to excess production from the United States, and the movement against building new coal power plants.
ANU Researcher Tom Swann points out that "restrictions on new coal generation investments have now been announced by US, Scandinavian, European and UK development banks." Wallace Global Fund's executive director recently said that: "The magnitude of the climate crisis requires that we no longer conduct business as usual." Yet Whitehaven Coal is pinning its hopes on business as usual.
A far better way to profit from coal would be to invest in AGL Energy. AGL owns older coal generation capacity and therefore benefits from a low coal price. However, the company also invests heavily in renewable energy, and is proposing to build the largest solar array and the largest windfarm in Australia. This means that looking ahead 10 years or more, AGL will likely have a large amount of power generation capacity with low operating costs. This will allow the company to undercut competitors who must buy larger amounts of coal or gas, in order to fuel their generators.
Foolish takeaway
Right now would seem to be an inopportune time to be pumping large amounts of capital into ramping-up coal production. However, companies like Whitehaven will keep coal prices low for companies like AGL Energy. In the long term, the latter company should benefit from far-sighted planning. For many, climate change is the issue, but for investors, it's simple self-interest.
