Whitehaven Coal is the company leading the way in what could one day be seen as the equivalent of the Charge of Light Brigade, as recorded in the poem of that name:
Cannons to the right of them,
Cannons to the left of them,
Cannons in front of them ...
Into the valley of death rode the 600
With variations, that is what Alfred, Lord Tennyson, penned in 1854, in an epic about the bravery and futility of war.
No one is going to say precisely the same thing about coal companies expanding at a time of falling prices. Nevertheless there is a touch of a Light Brigade charge in the way some companies are seeking to grow in a business climate that gets more difficult by the day.
If anyone doubts the outlook is not cloudy take a look at how the problems of Europe are spreading around the world. Better yet, listen to BHP Billiton chairman Jac Nasser who this week slammed the business environment in Australia.
More on Nasser’s warnings later.
First a look at Whitehaven. Its share price has fallen 23% over the past 30 days as investors wonder about the timing of its multiple expansion moves.
Having merged with Aston Resources in a handsomely priced $5 billion deal, Whitehaven is topping up its takeover ambitions with a more modest $142 million bid for Coalworks.
When complete, the expanded Whitehaven will be a significant Australian coal business. Big enough, perhaps, to rub shoulders with the biggest of the international companies active in the Australian coal industry.
Clive Palmer is another coal investor with high ambitions. He has shrugged off concern about coal demand and the need to raise billions of dollars in development capital, which has slowed the timetable of his China First project in Queensland.
There are, however, problems hanging over the ambitions of Whitehaven, Palmer, and other players in the coal business that are determined to grow in a market that is looking to be well supplied, and with a price trending down.
Last week, for example, as Whitehaven moved on Coalworks, thermal coal prices shipped out of South Africa hit a 19-month low of $US97.21 a tonne. Meanwhile in China the price paid by power stations was reported by Bloomberg to have dropped for the first time in three years.
The US also is playing a part in the changing coal equation, with miners in that country keen to boost their exports as power stations switch from coal to cheap natural gas.
Nasser’s outburst was the icing on the multi-layered cake-of-trouble seen by The Hog.
What the BHP chairman said was tantamount to a threat to start withdrawing capital from the Australian resources sector, including coal, at a time when more courageous managers are talking about putting money in.
It is possible Nasser is wrong and that the problems confronting Australian mining will be resolved amicably. It would, however, be verging on the heroic to think that a well-established downward trend will be reversed quickly.
What Nasser – a man with deep international management experience in charge of a company with a big coal division – sees is a country where investment is being actively discouraged by its tax and industrial relations policies.
“If Australia doesn’t get both of these policy levers right, industrial relations and taxation, we will not drive improvements in economic prosperity that we would expect for our country,” Nasser said.
Decoded, and matched with Nasser’s warning that BHP Billiton’s $US80 billion expansion budget is about to be heavily pruned, and a dramatic difference can be seen between his cautious view of the outlook and the daring growth plans of Whitehaven, Palmer and others.
It is, of course, possible that miners on expansion drives are making the right moves, if only to achieve the benefits of size and unit cost of production reductions that come with it.
However, it would also be unwise to ignore the stark warnings coming from the coal market and people such as Nasser with his experience in reading business-climate signals.
