Unlike other ASX-listed coal companies, emerging developer Montem Resources (ASX: MR1) is optimistic about China’s move from Australia’s coking coal industry to Canada, as it holds its Alberta-based projects in good stead.
Although speculated to be on the cards for months, China’s National Development and Reform Commission (NDRC) reportedly issued an edict a week ago banning coal exports from Australia, estimated to be worth about $14 billion.
The move has been reported as politically motivated, yet China doesn’t appear to be doing itself a favour, since it now has to pay more for coal elsewhere.
However, this is paying off for Canada – where the world’s biggest coal exporter is now seeking alternative supply – with Chinese steel mills reportedly paying at least 50%, and up to 70-100%, more for its mined coal.
One small cap hoping to gain from this transition is ASX junior Montem, which listed a few short months ago with the goal of establishing itself as a coking coal supplier to the global steel industry.
Speaking with Small Caps, Montem chief executive officer and managing director Peter Doyle said, “Canada remains the smartest hedge for steel companies currently reliant on Australian supply”.
“Canada’s hard coking coal is the same premium quality [as Australia] and the cost base is comparable,” he added.
Canadian coal major to boost Chinese coal sales
North America’s biggest metallurgical (coking) coal producer and the world’s second largest exporter of seaborne coking coal, Teck Resources (NYSE: TECK) is hoping to take advantage of the limits on Australian imports that have reportedly stranded some 60 or so ships outside Chinese ports since October.
The Canadian major is currently diverting cargoes to China to capitalise on the opportunity of higher pricing, recently announcing it would restructure its sales book to target about 7.5 million tonnes of coking coal sales from China in 2021.
“If you are a producer of non-Australian coal and you are able to free up tonnes from other customers and contractual commitments, you can do quite well by selling to China,” Teck chief executive officer Don Lindsay said at a webcast Scotiabank mining conference earlier in December.
Growing Chinese investor interest in Canada
The immediate impact for Montem, according to Mr Doyle, is that it confirms the standing of the Canadian industry as a hedge against Australia.
“Longer term, it means Chinese buyers are looking to invest in the Canadian coal industry.”
“The Chinese continue to search for alternate supply to Australia, and their options are limited. We have noticed a marked uptick in enquiries recently, with several state-owned enterprises enquiring about the potential for investment,” he said.
Montem is focused on developing the Tent Mountain mine and the Chinook project, both located in the Crowsnest Pass in southwest Alberta. It also holds three greenfields projects – Isola, 4-Stack and Oldman – in the same region.
Fresh after completing its $8 million initial public offering, the company started drilling at the Chinook Vicary area in September and by November, it had intersected thick coal seams in all 13 holes with mineralisation identified near-surface.
At the Tent Mountain mine, the pre-construction mine design is expected to be finalised by the second quarter of next year with preliminary construction earthworks planned for the second half of 2021, according to Montem’s latest investor presentation.
Australia forecasts drop in coal output
The Australian Government has forecast a sharp fall in coal export revenue this year with Australian coal producers likely needing to cut output if China maintains its import blacklisting.
In its most recent quarterly resources and energy outlook, the Department of Industry said coking coal export revenue is predicted to fall a steep 35% to $22 billion in the 12 months to June 2021, compared to the previous financial year.
This forecast is $1 billion lower than the outlook released in September, with Australian coking coal prices falling suddenly this quarter and volumes expected to be about 5% lower.
“The bottom line for Australian coal producers is lower profitability and the likelihood of production cuts the longer the Chinese restrictions remain in place,” the report read.