Coal sector aglow with selling and speculation

So what happened to spook investors in listed coal stocks on Thursday?

On the face of it there were two bits of news that could have been the cause of the sharp sell-off: a trading halt until Monday sought by the Chinese-controlled Yancoal, or the announcement of sharp rises in electricity prices, especially in NSW and Queensland, on the back of the surge in energy prices in late February.

Thursday’s falls came after shares in Yancoal and the smaller Terracom both caught the eye of some investors earlier in the week with new 52-week highs.

Yancoal shares closed $6.08 on Wednesday after touching a year high of $6.19 earlier that day, with the halt taking them out of action for the Thursday session.

Terracom shares closed down 7.6% on Thursday at 73 cents after touching a year high of 80.1 cents in the first minutes of trading the same day and a previous high on Wednesday of 80 cents.

Whitehaven shares fell 10% at one stage on Thursday to a low for the day of $4.72 before recovering some of the loss to end at $5.04, down 4.7%.

And New Hope, which issued a strong quarterly report yesterday, saw a big drop – the shares were down more than 12% at one stage to a day’s low of $3.58. But, like Terracom and Whitehaven, the big early losses were cut in later trading and New Hope shares finished $3.78, for a loss of 7.8%.

In its quarterly report, New Hope revealed that it is rolling in cash and profits because of the big price rises.

New Hope said the three months to April it earned a pre-tax profit of $A358.6m for the quarter “following further strengthening of coal prices”, taking its 9-month pre-tax profit to a record $A913 million.

A big price drop doesn’t make much sense when earnings are soaring – and will crash through the $A1 billion level by the time the books for 2021-22 are ruled off at the end of July.

At the same time the futures price of thermal coal on the Newcastle ICE index fell on Wednesday night with the key August contract losing nearly $US30 a tonne to a still high $US313 a tonne. And the front month June contract remained above $US400 a tonne at $US404 a tonne.

News of the power price rise and the part higher thermal coal prices played in the increases might have also worried some investors with fears of a windfall profits tax (which has become a big issue in Britain).

Surprisingly, the prices of coal and other carbon companies have hardly moved in the wake of the ALP election win and the strong showing by the Greens and pro-climate change independents. Perhaps it is too early for any really significant pressure on prices.

Or was the sector weakness a reaction to the news of mergers and acquisition speculation and the trading halt request from Yancoal?

According to the release accompanying the halt request, the company is planning to make a statement relating to a potential market transaction. The trading halt will remain in place until Monday 30 May, or when the announcement is made, whichever comes first.

The Australian Financial Review and other business media outlets speculated that Yancoal may be subject to a potential bid by its Chinese parent company, Yankuang.

Yancoal ownership comprises Yankuang with 63%, China Cinda Asset Management with 16%, and Glencore with 6%.

But there is an intriguing counter argument – that the Chinese shareholders in Yancoal might be looking to take advantage of the high prices for coal and Yancoal’s high share price by selling off some of their shareholdings, not buying the outstanding equities (at record prices?)

If these Yancoal shares are being placed into the local market, that could lessen the demand for shares in other coal miners, and therefore explain Thursday’s price weakness.