The Essential Role of Metallurgical Coal and How to Potentially Profit From It

Source: John Newell 08/08/2024

John Newell of RSD Discovery Group explains why he thinks Colonial Coal International Corp. (CAD:TSXV; CCARF:OTCMKTS) is undervalued and has promising potential.

Colonial Coal International Corp. (CAD:TSXV; CCARF:OTCMKTS)

The construction of modern architectural marvels and the production of various essential materials hinge on one critical component: steel.

At the heart of steel production lies metallurgical coal, an indispensable resource without which the development of modern infrastructure would be unthinkable.

This article delves into the significant role of metallurgical coal in steelmaking, the current market dynamics, and the promising potential of an undervalued company in this sector, Colonial Coal International Corp. (CAD:TSXV; CCARF:OTCMKTS).

The Critical Role of Metallurgical Coal

Metallurgical coal, also known as coking coal, is a vital ingredient in the steel production process. Steel is produced through the smelting of iron ore in blast furnaces, where metallurgical coal is converted into coke.

This coke then acts as both a fuel and a reducing agent, enabling the high temperatures necessary for the chemical reactions that transform iron ore into molten iron. This molten iron is subsequently refined into steel, the backbone of modern construction and manufacturing.

Without metallurgical coal, the production of steel and, by extension, the construction of skyscrapers, bridges, railways, and countless other structures would be impossible. The unique properties of steel, such as its strength, durability, and versatility, make it irreplaceable in numerous applications, from building infrastructure to manufacturing automobiles and household appliances. Between new infrastructure and the rebuilding of the decaying infrastructure in desperate need of repair, steel demand is going to be with us for decades into the future.

Colonial Coal International Corp.: An Undervalued Opportunity

Colonial Coal International Corp. is a pure-play metallurgical coal development company that is significantly undervalued in the current market. Despite owning substantial-high-quality coal resources in British Columbia’s Peace River Coalfield, the company’s market valuation does not reflect its true potential.

It has been stated that if Australian metallurgical coal is a Ten 10 on the quality scale, then British Columbia’s quality is a strong Nine 9, making Colonial’s coking coal some of the best in the world.

Unlocking Colonial Coal’s Potential

Experienced Management Team

Colonial Coal is led by David Austin, an industry veteran with a proven track record. Austin co-founded and built Western Coal Corp., which was sold to Walter Energy for CA$3.3 billion in 2010, and NEMI Northern Energy & Mining Inc., sold to Anglo American for CA$400 million.

When we met, he reminded me of the Robert Frost poem “The Road Not Taken,” as he is a contrarian, cut from the same cloth as Mr. David Dreman and the Honourable Mr. Hugh Jackman O.C., two legendary investment giants who started with contrary ideas and built their tremendous investing successes on their bold trades, that went against the crowd. When everyone was running away from metallurgical coal, David ran towards it and built and sold two coal companies along the way. Colonial Coal is his third venture.

Maximizing value for Colonial Coal, David Austin is supported by an experienced management team whose collective expertise spans decades and encompasses significant achievements in the coal and mining industries. Below are the key members of the management team whose credentials bolster the company’s pursuit of maximum value for its assets and shares:

John Perry is the Chief Operating Officer and Director John Perry has been with Colonial Coal since May 2008, serving as both Chief Operating Officer and a Director. He brings a wealth of experience from his previous roles, but the most important was as Manager of Exploration at Northern Energy & Mining Inc., where David and Perry forged a strong and complementary working relationship. Perry’s extensive background in exploration and development positions him as a vital asset to Colonial Coal’s operations.

Greg Waller is a director and now retired from Teck Resources in 2017 as Senior Vice President of Investor Relations and Strategic Analysis. Over his 33-year tenure at Teck, the largest steelmaking coal producer in North America, Waller gained deep insights into the metallurgical coal business commodity markets in general, as well as the industry participants. As a member of Teck’s senior management team, he played a crucial role in major strategic decisions and was a leading spokesperson for the company. His expertise in investor relations and strategic analysis is invaluable to Colonial Coal.

Partha S. Bhattacharyya — Director Partha S. Bhattacharyya served as Chairman & Managing Director of Coal India Limited (CIL) from 2006 to 2011. CIL is the world’s largest coal-producing company, contributing around 82% of India’s total coal production. Bhattacharyya’s extensive experience includes Bharat Coking Coal Ltd.: Chairman & Managing Director (2003-2006) He is a Fellow of the Institute of Cost and Works Accountants of India and the World Academy of Productivity Science. His knowledge and leadership in large-scale coal operations significantly strengthens Colonial Coal’s board.

Ian Downie is a director and has been a Director and Chair of the Audit Committee for Colonial Coal since November 2008. His professional background includes BC Ferry Services Director of Terminal Operations (1999-2007) Given the ever-increasing need for strong corporate governance and operational management, Downie’s experience in these areas enhances the board’s oversight capabilities on many fronts.

Anthony Hammond — Director Anthony Hammond has been a Director of Colonial Coal since November 2008. His extensive experience includes Northern Energy & Mining Inc.: Director (1997-2008, 2009)

Strategic Projects: Huguenot and Flatbed

Colonial Coal’s key assets include the Huguenot and Flatbed projects, both situated in the Peace River Coalfield.

1. Huguenot Project:
   • Contains 277.7 million tonnes of measured and indicated resources and 119 million tonnes of inferred resources.
2. Flatbed Project:
   • Holds 298 million tonnes of inferred coal resources.

Market Position and Valuation

David believes that Colonial Coal is trading significantly below its coal assets in the ground, and based on recent transactions of over US$3.00 per ton, he believes that US$2.50 – US$3.00 per ton is a realistic price for Colonial Coal assets.

To that end, Colonial Coal has hired Citigroup as an advisor to leverage its relationships with global coal and steel companies and to quarterback a potential sale of the company. Colonial currently has approximately 200 million shares outstanding, and for this back-of-the-envelope calculation, let’s say a buyer did come in at a conservative valuation of US$2.50 per ton ($2.50 times 700 million tonnes), the company would receive US$1.75 billion or US$8.75 per share minus the cost of the transaction, taxes, and other expenses, but clearly the shares under this scenario have strong upside for value-oriented, patient investors.

The top shareholders are listed in the table below from Factset:

Infrastructure and Logistics

The projects benefit from excellent infrastructure, including railways and ports that facilitate efficient transportation of coal to key East-Asian markets.

Recent expansions at western Canadian coal ports further enhance these logistical advantages.

Environmental and Regulatory Considerations

Colonial Coal is proactive in its environmental stewardship, conducting rigorous studies and maintaining open communication with local and First Nations communities.

This approach ensures that their projects meet environmental compliance, positioning them favorably in the permitting process.

Future Outlook and Market Dynamics

The global demand for metallurgical coal remains robust, driven by the essential role of steel in construction and manufacturing.

As emerging economies, particularly in Asia, continue to expand their steel production capacities, the demand for high-quality coking coal is expected to grow. Some experts, like BHP executive and CFO Vandita Pant, suggest the coking coal demand could double by 2030.

Potential Transactions and Strategic Moves

Colonial Coal is open to various transaction structures, including upfront payments followed by milestone-based payments contingent on permitting and development progress.

With Citigroup as its advisor, the company is well-positioned to explore strategic partnerships and unlock significant shareholder value.

Technical Picture

The shares previously met and exceeded a target of CA$3.05 before suffering a correction to lows of CA$0.90. Since then, the shares have made a series of higher lows.

With three targets met, the shares appear to be selling off from a short-term overbought condition, presenting a buying opportunity for investors.

Conclusion

Colonial Coal, under the seasoned leadership of David Austin, is poised at a pivotal moment. With substantial-high-quality resources, strategic positioning, and a robust infrastructure network, the company is well-prepared to capitalize on the growing demand for metallurgical coal.

Investors should closely monitor Colonial Coal as it advances its projects and explores strategic partnerships, presenting a compelling opportunity in the metallurgical coal sector. By highlighting the indispensable role of metallurgical coal in modern construction and the significant potential of Colonial Coal, this article underscores the critical intersection of natural resources and industrial development in shaping our environment.

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1. John Newell: I determined which companies would be included in this article based on my research and understanding of the sector.
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John Newell Disclaimer

As always it is important to note that investing in precious metals like silver carries risks, and market conditions can change violently with shock and awe tactics, that we have seen over the past 20 years. Before making any investment decisions, it’s advisable consult with a financial advisor if needed. Also the practice of conducting thorough research and to consider your investment goals and risk tolerance.

( Companies Mentioned: CAD:TSXV; CCARF:OTCMKTS, )