Should you buy these 4 coal mining companies to weather low coal prices?

Cutting costs and expanding production can open up margins and increase revenue.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

News reports of the general slide in the coal industry have been pretty steady over the past year or two. The number of industry jobs lost is up to around 8,000 in Queensland alone.

The outlook is for another three to five years before mining makes a recovery and in the meantime other countries like the US, South Africa and Canada will be adding to the global coal supply.

It has been described by mining organisation experts as a “survival of the fittest”. When things sound that bleak, I like to start looking through the industry to get an idea which companies will make it through and which may struggle.

They may not be immediate “buys”, yet you can see the ones that will come back stronger when the market turns up again.

Both Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) produce coal in Queensland. Rio Tinto’s energy division, which oversees its coal business, only contributes about 10% of total group revenue. Iron ore makes up about half of total revenue, so the recent production expansion program is more than offsetting the decline in coal earnings.

For BHP, the coal composition is about 16% of total revenue. Iron ore is double that and it also has petroleum and copper production. Actually, its metallurgical coal production is up and energy coal is in line with previous results. Thanks to cost savings and higher production, the division’s underlying EBIT was up for the first half of FY2014.

Whitehaven Coal Limited (ASX: WHC), a NSW-based coal producer, has pressed on with its plans to increase production while coal prices are soft. In the first half of FY2014, it produced 48% more and sales volumes climbed from 2.6 million to 4.3 million over the past 12 months ended 31 December 2013.

In FY2013 it had an underlying net loss of about $60 million and its 1H 2014 interim result was an underlying net loss of another $8.9 million. The loss is getting smaller. By the first quarter of calendar year 2015, the company is expecting first coal production at its new Maules Creek mine. As it moves from development to production, capex costs will hopefully decline and free up more earnings.

New Hope Corporation Limited (ASX: NHC) sold about 10% more coal in the first half of FY2014 on the previous corresponding period, yet coal production was down by about 11%. Its interim result was a 67% fall in net profit after tax. This follows a down year in annual profit in FY2013.

Foolish takeaway

The major miners are diversified enough to weather this downturn. The single category producers have to reduce costs substantially and raise production to achieve earnings stability.

As an investor I would sit on the sidelines until coal prices rise enough to create comfortable margins.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »