Time to Invest in the Coal and Grass Industries?

If someone had told you 20 years ago that marijuana companies in 2017 would enjoy broad mainstream support, while coal companies were thrown under the bus, would you have believed them?

I sure wouldn’t.

Nonetheless, that’s where we find ourselves today.

Now, that doesn’t mean you should avoid all coal stocks. Unless, of course, your ethics outweigh your greed…a condition that doesn’t afflict your editor. Nor does it mean that every marijuana stock will be profitable at today’s prices.

But select stocks in both the coal and grass industries will almost certainly continue to deliver healthy gains this year. The trick, as always, is finding the right ones. I’ll get back on how you can do that shortly.

First, let’s take a look at coal.

As a quick geology tutorial, there are broadly two types of coal: coking coal and thermal coal. Coking coal is used to produce steel and iron. Thermal coal produces heat…and runs many of our power plants.

Thermal coal, in particular, is taking a drubbing from mainstream investors and lenders concerned about its impact on climate change.

As reported by the AFR:

Commonwealth Bank has emerged as the No. 1 target for activists after Westpac revealed plans to restrict lending to coal miners…after Westpac released a climate change policy statement and action plan that placed strict conditions on its future lending activities.

The changes will have the bank cease lending to new coal mines and restrict lending to mines that yield only higher-quality coal, effectively ruling out the prospect of Westpac funding Adani’s controversial Carmichael coal mine in Queensland.’

Does this spell the end of Adani’s ambitions with their Carmichael mine? Not likely.

When one investor or lender closes the door, you can expect another to come knocking. That may still be Commonwealth Bank. Or it may be ANZ or NAB.

If none of the big banks approve the loan — be it for ethical or risk assessment reasons — you can expect a fund manager to step in. Taurus Funds Management is one such fund manager. Taurus often lends to miners having trouble securing funding from mainstream banks.

As the saying goes, ‘One man’s trash is another man’s treasure.’

And if you take a look at coal’s performance over the past year, it’s looking a lot more like treasure than trash.

Seven-year chart of thermal coal, priced from the Australian Newcastle Port

Source: Bloomberg

Click to enlarge

As you can see, after hitting a low of $65.70 on 29 April last year, thermal coal peeked at $139.43 per tonne on 31 October. It’s since retraced to $106.72, about 14% above the seven-year average.

Not surprisingly, many of the coal miners have seen their share prices soar. With a market cap of $1.4 billion, New Hope Corporation Ltd [ASX:NHC] is one of Australia’s largest coal plays. It’s currently trading at $1.71 per share. That’s up 41% from its 2016 lows.

Does this look like the kind of industry you should be shying away from? Or does it look like it’s time to take a punt on the best coal miners?

Here’s what our in-house resource expert, Jason Stevenson, told me this morning:

I’m definitely bullish on thermal coal from a medium to long term outlook. It remains the cheapest, readily available energy source. Nations aren’t going to stop using coal tomorrow, despite the environmental activists and the move towards cleaner energy.

50% of China’s energy needs come from coal. That’s not going to change anytime soon, even with its focus on nuclear and greener alternatives. The question is whether thermal coal is a good short term investment. As the majority aren’t that interested in the sector, I’ve started to look at it more closely as an opportunity.

Over at Resource Speculator, Jason is always on the lookout for the best contrarian investment opportunities. His recent focus has been on companies providing the little-known metals needed to fuel the booming battery revolution. Two of these tips are up 78% and 100% since his recommendation. You can find out more here.

The ‘holy grail’ of investments

Now let’s look at the other part of our coal and grass investment scheme.

Pot was once labelled an illegal ‘gateway’ drug. One that fries your brain. Yet it is now promoted as a promising treatment for a range of diseases…from epilepsy to cancer. Indeed, marijuana has enjoyed a huge PR boon.

Motivated by legalisation movements in the US — for both medicinal and recreational use — Australia is starting to take note. Recreational use remains illegal Down Under. But the government has moved to ease restrictions on imports to treat specific illnesses. And cannabis can now be grown domestically — with strict regulations — to supply a predicted surge in demand.

That’s seen some locally-listed ‘pot stocks’ skyrocket.

And it’s drawn the interest of the world’s top performing hedge fund, Tribeca Investment Partners.

According to Bloomberg:

Tribeca Investment Partners Pty, owner of the world’s best-performing hedge fund last year, has found its next stock pick: a tiny grower of cannabis. The Sydney-based money manager has bought shares in the initial public offering of Cann Group…

Tribeca is buying into an Australia medicinal cannabis firm for the first time after successful wagers on stocks in this sector in North America, helping it beat more than 10,000 funds last year to claim the crown as the world’s best-performing hedge fund. Cann raised A$13.5 million ($10 million) to expand its crops and further its genetics and plant breeding program and is due to list on the Sydney exchange this month.

Ben Cleary, who co-manages the Tribeca Global Natural Resources Fund, described the cannabis sector as ‘…a “holy grail” of investments where there are strict regulations, a growing consumer base and high margins. While it’s a nascent industry in Australia compared with the U.S. and Canada, stocks doing business in the industry are trouncing returns in the broader equity market.’

So did pot stocks really ‘trounce’ the returns you can get elsewhere? Have a look at the chart below. It shows the returns delivered by listed pot stocks (white line), compared to returns from the ASX 200 (blue line).

Source: Bloomberg

Click to enlarge

Ben’s not exaggerating. Aussie pot stocks delivered some seriously index-trouncing returns this year.

And it’s not just companies growing marijuana or researching medicinal applications that are likely to benefit from the global shift in attitude towards cannabis.

As Bloomberg reports:

The Hydroponics Co. Ltd., which makes lighting rigs and glasshouses that help grow cannabis plants, is raising money for an initial public offering next month. The A$8 million share sale is almost three times oversubscribed, according to the company’s chairman Alan Beasley.

Sam Volkering has been atop this story for months now over at Australian Small-Cap Investigator. He’s labelled it ‘marijuana mania’. And he’s tipped some of the best performing pot stocks on the ASX. One recommendation is up 128.8% since February. Another is up 55.3% since March. A third pot stock is only up 0.8%, and remains an active buy recommendation.

But that’s just the tip of the iceberg, according to Sam. He’s predicting a massive bull run ahead for the Aussie market. And he’s got several small-cap stocks in mind that should shoot the lights out as the market surges. Get all the details here.


Bernd Struben,
Managing Editor, Money Morning

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