Three Coal Infrastructure Plays to Watch

Recent events in the coal sector have coal companies scrambling to ensure their infrastructure is up to par. 

Rio Tinto loses out

The importance of road, rail and marine facilities in moving bulk coal was driven home last month with Rio Tinto’s (NYSE:RIO,ASX:RIO,LSE:RIO) $3 billion coal write-down of its Mozambique project, due in large to infrastructure concerns.

The Mozambique government’s rejection of Rio Tinto’s planned barge transport of coal on the Zambezi river on the basis that the river is not suitable for barge navigation has left the company with a project that is, for the most part, worthless accounting-wise.

Infrastructure is becoming a major concern for coal companies with numerous large coal deposits globally “stranded” by lack of transportation.

But much as lack of infrastructure destroys value, development of new transport facilities can also turn worthless coal deposits into viable and valuable projects. Rio Tinto, for example, is now studying options for building a rail line in Mozambique, according to Reuters.

Below is a look at three other coal districts where infrastructure is on the build. Unlocking value from stranded coal deposits for development companies and their investors.

Colombia’s other coal

Colombia is well known for its thermal coal production. The nation put out nearly 86 million metric tons (MT) of coal in 2011. The majority coming from mines in the north, easily shippable on the Caribbean.

But the country also holds vast reserves of coal in its central departments of Santander, Boyaca, Cudinamarca and Antioquia. At the beginning of the 1900s, these areas actually represented the majority of Colombian coal production. But recently the country has languished due to a lack of access to export ports.

Infrastructure development may help to change that. The Colombian government is currently pushing an aggressive infrastructure-building program—one that envisions more than $50 billion being spent across the country by 2021.

As part of the program, roughly $10 billion is slated to fund railways— a critical element for transporting Colombia’s stranded coal reserves to international markets.

Hoping to ride Colombia’s infrastructure wave is junior coal developer New Colombia Resources (OTC PINK:NEWC) who preparing a pre-feasibility study for a rail project to move metallurgical and thermal coal from its La Tabaquera project in central Colombia to ports in the north. The goal is to submit the study to Colombia’s National Infrastructure Agency in the hopes of partnering with government to build the project.

Companies like Ascot Resources (ASX:AZQ) may also benefit from Colombia’s infrastructure build. Ascot’s Titiribi Coal Project southwest of Medellin lies in a prolific coal district. But one that has never had good access to export markets and has seen its coal used mostly for lower-value domestic markets.

Billions of Tons in Bangladesh

The government of Bangladesh is also realizing it needs infrastructure in its coal regions. The country’s northern tip hosts at least five giant coal fields with resources estimated at greater than 3 billion MT. However, infrastructure is a challenge that has left this hefty resource all but undeveloped.

There are calls for that to change.

At a seminar last week to discuss the government’s Power System Master Plan—a roadmap for the nation’s energy needs through to 2030—speakers noted that coal must a major part of Bangladesh’s energy mix.

In a presentation, Dr. M. Tamim—former energy advisor to the national government—said that Bangladesh is running on short on natural gas, and therefore must look to coal to fill at least 50 percent of its energy demand by 2030. He noted that infrastructure development is key to unlocking the country’s coal, including port, rail and inland waterway access.

A push to blaze a trail to Bangladesh’s coal reserves could be good news for GCM Resources (LSE:GCM). The company holds the Phulbari coal project in the north, containing 572 million MT of thermal and metallurgical coal.

A feasibility study by GCM in 2011 largely focused on a mine-mouth power plant to create an end use for Phulbari’s coal. But if the government pushes transport infrastructure in the area, more attractive options for transport and sale may open up.

India’s $1.4 billion plan

India, the world’s second-largest coal importer, is also looking to make a $1.4 billion bet on infrastructure.

Indian Railways will spend the money building a 327 kilometer rail line to the eastern states of Odisha, Jharkhand and Chhattisgarh. Mining-heavy outposts with underdeveloped transport infrastructure.

Coal India hopes the new lines will jumpstart production. Company chairman S. Narsing Rao said that the line could add 300 million MT of annual coal output once functional, according to an interview with Bloomberg this week.

The Indian government is pushing the rail project to ramp up domestic coal production. Officials are worried that coal imports—which cost up to 40 percent more than Indian coal—will bankrupt the country’s power sector.

Although few western producers stand to benefit from this rail development, coal investors should pay close attention its effects on the global market.

India currently imports 70 million MT of thermal coal. A significant chunk of global trade. If new railways do indeed unlock 300 million MT of annual production, these imports might dry up. Leaving sellers scrambling for new markets.

The stated timeline for the new rail project is five years.

 

Securities Disclosure: I, Dave Forest, do not hold equity interest in any companies mentioned in this article.

 

Related reading:

Coal in Colombia

Canadian Government Puts BC Coal Terminal on the Block

India’s Growth Leads Coal Demand Abroad