The $60 Billion Man: Australian Coal Magnate Puts China First

Back when $6 million was a large sum, Steve Austin was America's $6 Million Man. If you're from my generation, you may even recall pretending that you could run as fast.

The impressively decoupled pace of economic growth in China -- already permanently altering the very structure of global coal markets -- has just anointed coal magnate Clive Palmer as Australia's $60 billion dealmaker with bionic vision.

Scoring a watershed agreement from Chinese utility China Power International Development to supply 30 million tonnes of thermal coal per year for 20 years, Palmer's privately held Resourcehouse has cleared the way for an ambitious $8.9 billion project to export thermal coal from Queensland's Galilee Basin. The aptly named China First mine has been fast-tracked for prompt regulatory approval and will likely commence construction this year to achieve production in 2013.

Squeezing coal into diamonds
All of this suggests a bionic return on investment for Mr. Palmer, whose Resourcehouse paid just $140 million to acquire the underlying coal assets in December 2008. After doubling the regional coal resource to 7.4 billion tonnes -- combining China First with the nearby North Alpha deposit -- that acquisition amounts to less than $0.02 per tonne in the ground. If you want my $0.02, that's an incredible bargain … even considering the substantial development costs involved.

To unlock that 7.4 billion tonnes of coal from the Galilee Basin, the project will construct a 500km railroad line connecting the complex to Abbot Point port in northeast Queensland. Meanwhile, Abbot Point will more than double its capacity, to 50 million tonnes per annum (mtpa) by 2011, and two subsequent tranches of expansion would yield Queensland's largest coal loading facility (at 110 mtpa). A cool $1.25 billion will build a 900 megawatt clean-coal power station, complete with carbon capture-and-storage capability.

The Export-Import Bank of China will provide a chunk of financing, and Resourcehouse has awarded an $8 billion engineering and construction contract to Metallurgical Corporation of China. The latter company will purchase a 10% stake in the China First project, and a $200 million minority stake in Resourcehouse. Those with direct access to foreign equity markets will note that Resourcehouse also plans to raise up to $3 billion in a Hong Kong IPO.

The coal deal heard 'round the world
The sheer size of this transaction, implying some 600 million tonnes of coal, carries global ramifications … confirming the overwhelmingly bullish long-term outlook for Pacific seaborne thermal coal demand. The 20-year lifespan of the contract speaks to the visibility for continued growth in Chinese coal import demand. This, in turn, speaks volumes to the fundamental rationale for anticipating a continued multi-year secular bull market in industrial commodities on the strength of sustainable Pan-Asian demand. For bulk shippers like Diana Shipping (NYSE: DSX  ) that are bracing for the impacts of excess global bulk tonnage capacity, projects like this help to ease some concern.

In the context of the ongoing blitz to expand Queensland's coal production and export capacity to meet emerging demand, China First is not entirely unique. Railroad bottlenecks and maxed-out port facilities contributed to an acute shortfall in Pacific seaborne coal in 2008 that sent global coal prices soaring to record heights. Miners have responded aggressively by investing in regional transportation infrastructure expansions to move their product to market in unhindered volumes.

Accordingly, Swiss miner Xstrata is eyeing the $5.3 billion Wandoan project: an integrated mine, railroad, and port facility complex that would export 30 mtba of thermal coal by about 2014. Rio Tinto (NYSE: RTP  ) is already building the 12.2 mtba Clermont mine next to its aging Blair Athol mine in the Bowen Basin (just east of the Galilee Basin).

BHP Billiton (NYSE: BHP  ) and Peabody Energy (NYSE: BTU  ) are both major stakeholders in a joint venture to build a port facility in Newcastle, New South Wales. The 30 mtpa facility is nearing completion, with plans in the works to then double capacity to 60 mtpa. After gobbling up Australian miner Felix Resources last summer, Yanzhou Coal Mining (NYSE: YZC  ) also owns a slice of this infrastructure pie. I consider Yanzhou shares favorably priced following a steep 25% dive over recent weeks.

Peabody Energy envisions a 20% to 30% increase in its thermal coal exports from Australia for 2010, and foresees 15 million to 17 million tonnes of capacity by 2014. Factoring in a planned 12 million to 15 million tonnes of high-margin metallurgical coal capacity, Peabody offers a rock-solid choice for investors seeking exposure to this reconfiguration of the global coal markets.

Are you detecting a pattern?
The Australian seaborne coal market is in full-blown bull-market mode, and China is removing the veil of uncertainty that has plagued commodity markets with the clearest indications to date that this new demand is here to stay. Last week, I implored Fools to prepare for the met coal surge that was foretold in part by China's 17% investment stake in Teck Resources (NYSE: TCK  ) , and now you see that the thermal coal market stands in a position of similar strength.

For income-loving investors desiring exposure to this strong secular bull market for Australian coal exports, consider a little-known infrastructure stock that yields 6.6%, and has been recommended by three Motley Fool newsletter services. Following a transformational acquisition of Australian infrastructure assets, including a 70% total interest in Queensland's largest coal export facility, Brookfield Infrastructure Partners (NYSE: BIP  ) offers a superb value play on the growth trend in the Pacific seaborne coal trade.

If you believe that China will be a keystone to recovery for countless companies with exposure there, then consider taking the Motley Fool Global Gains newsletter service for a test-drive for 30 days. The Global Gains team watches China carefully as part of its search for exciting and Foolish investment opportunities around the globe.

Brookfield Infrastructure Partners is a Motley Fool Inside Value recommendation, a Global Gains pick, and a Motley Fool Hidden Gems recommendation. The Fool owns shares of Brookfield Infrastructure Partners. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of BHP Billiton, Diana Shipping, and Peabody Energy. The Motley Fool has a sino-centric disclosure policy.


Read/Post Comments (5) | Recommend This Article (26)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2010, at 3:54 PM, jesusfreakinco wrote:

    Chris,

    Good stuff. This article clearly supports Sinclair's premise that China is not tied to the USD. They are spending dollars like drunken sailors.

    JFC

  • Report this Comment On March 17, 2010, at 8:53 PM, megalong wrote:

    Producers. Not BTU or BHP though. NHC.AX, SOL.AX, and other Australian listed energy companies are much cheaper.

  • Report this Comment On March 18, 2010, at 12:48 AM, megalong wrote:

    See also: BPT.AX, COE, AX, CTX.AX, and ORG.AX for Australian oil and gas. In my opinion the best US listed mining play is probably Ausdrill (ASL.AX / AUSDF.PK).

  • Report this Comment On March 18, 2010, at 12:53 AM, megalong wrote:

    ... and one last Australian oil company - STOSF.PK.

  • Report this Comment On March 29, 2010, at 11:55 AM, IBDvalueinvestin wrote:

    L&L Energy (LLEN), & Yanzhou (YZC) are China's Coal producers trading in the US Markets.

    If Coal is in a Secular Bull Market like this $60B dollar man thinks than it will be nearly impossible for these two companies not to make money hand over fist in the nearterm with coal.

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