ASX coal shares may not seem like an obvious idea for strong performance from here.
Remember, coal has already seen a strong run amid the global search for energy after Russia's invasion of Ukraine.
With Europe essentially no longer buying/receiving much Russian gas, countries are now looking for alternative sources. Australian coal is in big demand for some Asian countries as they look to keep their households and businesses powered.
But, after such a strong run of the coal price and the share prices of ASX coal miners, has the easy money been made?
In 2022, the New Hope Corporation Limited (ASX: NHC) share price has risen 130%, the Whitehaven Coal Ltd (ASX: WHC) share price has gone up 180% and the Yancoal Australia Ltd (ASX: YAL) share price has risen around 90%.
Emanuel Datt, principal of Datt Capital, believes that coal miners are still an opportunity.
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Why ASX coal shares could still be an opportunity
Datt is so bullish on coal that the largest exposure in the portfolio is actually thermal coal.
Here are his thoughts on the sector:
Effectively, the thesis behind thermal coal standard is a critical and cheap energy source in a world today that is highly energy constrained after the Russian-Ukraine war and knock-on sanctions. With our positions, we have an earnest on the quality of the product but also the jurisdiction and the location of the production assets itself. Thermal coal also has the benefit, or what we think will be the benefit of, pretty likely to be higher energy prices throughout the winter months in the northern hemisphere. But also, we will benefit from US dollar exposure and thermal coal has recently had almost one-to-one correlation with US dollar strength of late.
Don't forget that the northern hemisphere experiences winter at the time that Australia has summer. So, he seems to be suggesting that the next few months could be particularly good for coal names.
But how long could coal be a good investment?
I'm not sure there are many people that would say coal usage and the outlook would be stronger in 2040 compared to today. However, perhaps that's partly why ASX coal share prices have managed to do so well – there was a lot of pessimism baked into the price at the start of 2022.
In answering a question about the longer-term outlook about coal, considering the cyclical nature of resources, he said:
Well, I can tell you one thing with certainty is that we cannot predict what prices will be in say 12 months and further out from 12 months. However, we can definitely assign a probability of price ranges by analysing supply and demand globally. And we also have to consider other age factors such as coal quality, jurisdictional risk, logistical risk and other, I guess, more niche factors.
But, he did point out that markets are pricing "high-quality" businesses with long-life assets at only two times, or less than two times, forward-looking after-tax free cash flow. He called coal "an incredible opportunity" and that ASX coal shares could be "incredibly cheap" even if energy prices fall.
