Thomas White Global Investing
Canada
Canada Stamp
December 10, 2010
A Postcard from the Americas
Canada: Coal Demand Surges to a New Peak

Excavation at open cast coal mine

Canada has a long history of coal mining. Coal has been mined in the country since 1639.

Recently, JSW Energy, an Indian power company, announced that it was taking over Canada-based CIC Energy Group. At around the same time, U.S.-based Walter Energy was seeking more time to negotiate a $3.24 billion takeover deal with Western Coal – based in Vancouver. This sudden spurt of interest in Canadian coal mine owners may be rather hard to understand given that Canada is not really the top coal producer in the world. That distinction lies with China. The U.S. ranks first in the world with the largest coal reserves, while neighboring Canada commands the number five slot. So what is making Canada tick?

Canada may have only around 4% of the world’s coal reserves, but it is estimated that the country’s 10 billion tons of coal reserves may last for another 100 years. This provides an immense economic cushioning for the “True North Strong and Free.” To put that in perspective, that is more energy reserves than Canada’s oil and natural gas deposits combined. What’s more, the Canadian government estimates that there are ‘190 billion tons of estimated resources of coal-in-place.’

Importantly, while Canada doesn’t rank high as a coal producer, it remains a ‘significant exporter of metallurgical coal’, an essential resource for most steel mills. THAT is the key, really. Besides, Canada’s coal projects are relatively undeveloped which make them attractive to miners and steel makers looking for captive reserves. Especially with emerging economies like China and India showing a voracious appetite for steel to bolster their growth, there is little doubt that coal is set to be the black gold of this decade and beyond for Canada.

Interest in other Canadian mining companies like Grande Cache Coal Corporation and Cline Mining is also rising. In particular, attention is focused on steelmaking coal, especially after steel demand in economic behemoth, China, has risen by 10% this year. World steel demand is expected to touch 1.34 billion tons next year. Walter Energy is keen on Western Canadian Coal precisely because the Canadian company produces mainly metallurgical coal for steelmaking. A Walter-Western union itself could potentially form one of the world’s biggest providers of metallurgical coal. And Grande Cache and Cline Mining are estimated to have around 750 million tons of steel making coal. Canada’s 22 coal mines are owned by just 8 publicly traded companies, but the country exports coal to more than 50 countries. Interestingly, its largest trading partner is Japan, followed by South Korea. This is why hungry economies like India and China may want to stake their claims.

And that is why JSW Energy and Walter Energy are so interested in Canadian mines. With the world still in the grip of an uncertain economic recovery, it remains to be seen how long this M&A speculation will last. Still, Canada perhaps has plenty to look forward to. Even as economic cycles come and go, the coal industry fundamentals remain strong. Countries like India, Brazil, China and Russia will continue to grow, requiring just what Canada is willing to supply. The reason why Canada’s coal is the new black gold standard.

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