Hello Coal Hello GMGI've been saying for several months now that coal exposure to Asia will be an area of significant growth. Late this summer I put through comments from Evy Hambro saying an "Asian Coal Crisis" was building and their huge fund was investing in this sector. In September, it was a similar article from Barron's Magazine. And a few weeks ago a research note from Canaccord analysts which was very bullish on the limited number of coal stocks in Canada - East Energy was not mentioned as very few even know they exist. There are only a handful of coal exploration or production companies to play in Canada. Two examples are GCE.T which has doubled in the past two months and WCI.V which has doubled in the past 6 weeks. EEC is intended as a Q1/08 play for us.
East Energy (EEC.V $0.62)
www.eastenergy.com
I've mentioned EEC a couple times in Sept/Oct as a play on Asian coal but my comments have been extremely guarded until I had an opportunity to speak with the CEO (which I have now completed). My primary concern has been the delay in getting formal joint venture approval for their large coal project in China. Unfortunately even he does not know when this will come. It could be a week, it could be 3 months, or it could be sometime in 2008 - or maybe not at all. This is the risk of doing business in China.
However, in light of this risk which has kept me on the sideline, I am prepared to jump in with both feet - for the following reasons.
1) China Shenhua Energy went public a few weeks ago and jumped 87% on their first trading day (Shanghai Exchange). The company has many energy interests but they are also China's largest coal miner. China's largest oil producer (Petro China) just announced it will sell $5 billion worth of stock next month. China Shenhua raised $9 billion. Basically the Chinese energy and coal plays are in huge demand for the very reasons Hambro and Barrons mentioned months ago.
2) As I previously mentioned, EEC's coal project has the potential to be incredibly valuable. It is coking coal used in the manufacture of steel - critical to China. It commands the highest price of all the coals. Their project at this stage has 311 million tonnes - EEC's 12.74% interest is 40 million tonnes. Coking coal realistically sells for $110 to $150 per tonne.
3) The government needs to make formal approval of their joint venture (which was my main concern to date). However, after speaking to Howard Ratti (East Energy's CEO), they are not dealing with Micky Mouse companies in China. Their partner is China Minmetals (www.minmetals.com.cn). Minmetals is a Chinese Multinational that does almost $17 Billion in annual revenue. Impressive partners for little EEC and both parties are just as eager to get formal approval.
4) The coal basin they are sitting on is estimated at 1.7 Billion tonnes. To their west about 20km is another basin of approx. 1.4 Billion tonnes that is actively being explored by major corporations and the Chinese. The growth and production potential of this region is enormous. The Chinese government is also actively working to put infastructure like rail, etc. in place for development.
So why would such a large corporation (MinMetals) want to work with someone so little as East Energy ??
The simplest answer is management.
Luscar Ltd was the largest coal mining company in Canada before being bought out by Sherritt (with strong backing from the Ontario Teachers Fund). Howard Ratti (East Energy's CEO) was the senior Vice President at Luscar with almost 30 years of hard core mining experience. He has intimate knowledge of all aspects of running large coal mining companies (both profitably and safely) - the Chinese are desperate to get western mining methods and standards in place (especially in the coal industry).
Howard saw the potential to run (and grow) his own coal mining company so jumped on board with East Energy. Along with him came the former VP of Finance for Sherritt and behind the scenes a fellow who retired from Luscar as their VP of Marketing. Along with these key individuals came a highly experienced Chinese National named Dr. Cai, another fellow who served 5yrs as Canada's Ambassador to China and Mongolia (Howard Balloch), and Richard Buski who was a managing partner at Pricewaterhouse in Russia (very strong international experience).
This group is more than capable of building this small company into a serious International Coal Mining concern. Management is key to most of these small and microcap companies and typically this is just as important as their projects.
The company's $8 million in cash ($0.25/share) reduces the need for financing well into 2008 - unless they land something big and require the funds at higher prices. If they get government approval for this current project, the stock will jump significantly. However, they are also looking at more projects throughout China and Canada so they will eventually have strong diversification.
Personally I believe the potential with this management group is exceptional. Whether that comes on the heals of the current coal project, or another. Its the type of stock you tuck away for 3 to 6 months and wait patiently. The stock makes a very nice speculation in the $0.60's.
LONDON (Reuters Nov 1/07)
Record coal prices have plenty more room to rise in their demand-led rally as the fuel is still cheaper in real terms than in the 1980s, those in the industry say, with costs to be passed on to electricity consumers. "We're going back to the prices of the late 1970s/early 1980s in real terms but the difference this time is that demand is surging and we've got a genuine coal shortage," said Jim Lennon, metals and mining analyst at Macquarie Bank.
Both buyers and sellers agree that for the first time in their memory, they could not see where prices would peak. "This market is genuinely tight," a buyer with a large European utility said. It will take probably several years before there is enough new supply to meet demand and in the meantime, it is impossible to predict prices or say where the peak will be reached. Meanwhile, power prices must rise, he added.
"There have been problems this year with production at just about every coal exporting country, which just made the situation worse," one trader said. "All of them - Russia, Indonesia, Colombia, Australia, even South Africa. Production hiccups exacerbated the tightness and helped accelerate price rises but the fundamental driver behind this year's record coal prices has been a shocking rate of demand growth in Asia, analysts said.
One example showed prices hitting a record $130.00 last week and are widely expected to reach $150.00 by the end of December, having begun 2007 at around $65.00 a tonne.