MINING shares with thermal coal assets have been tipped to show the best cash returns when the sector’s half-year reporting season swings round in less than a month’s time, according to a report in the Financial Mail.
While investors have long taken their positions in these shares, it’s perhaps less appreciated that coal offers some defensive characteristics, especially as concerns about a global recession start to ratchet up.
Metal prices have corrected almost across the board, while rising inflation has weighed heavily on mining shares since the end of last year. Both these factors are ameliorated by thermal coal for the companies that have it, the price of which is being influenced by geopolitical stressors in Europe, which is trying to lessen its dependence on Russian gas after the invasion of Ukraine.
China’s Covid lockdown in the second quarter precipitated a mini-recession in its economy. Despite the long-term supply deficits in the metals market, the average price of copper and aluminium fell 30% and 20% respectively. This was despite renewed stimulus and declines in China’s metal inventories.
In contrary motion, global thermal coal pricing has appreciated significantly since February.
Commenting in a trading update, Exxaro Resources, one of South Africa’s largest thermal coal exporters, said the average coal price for the first six months of the year was $270 per ton, nearly twice the average price during the comparative period in 2021. The price support is coming largely from Europe and is reflected in trade flows.
Goldman Sachs says the fuel will attain an average $208/t for the year with a softening likely from about the third quarter — though it’s difficult to be certain, given the influence of world politics. At that average price, Glencore is expected to produce earnings before interest, tax, depreciation and amortisation (ebitda) of $33bn for its 2022 financial year — twice its record ebitda of last year. At spot prices, ebitda will be more than $50bn, a staggering performance and one of the factors behind the 34% improvement in Glencore’s share price over 12 months.
Says Tyler Broda, an analyst for RBC Capital Markets: “We continue to expect that Glencore’s ability to return cash is unsurpassed in the sector and the company remains structurally better positioned than peers through an economic downturn, with coal tightness helping to insulate profitability.”