Now in this update, we are going to mention Coal. When most investors hear coal, they run for the hills and dismiss coal as something the world no longer needs. First, however, it is essential to distinguish between Thermal coal used for power generation and Metallurgical coal used to produce steel.
The world still needs steel for buildings, infrastructure, ships, trains, cars, wind turbines, etc. Now it is technically possible to make steel using hydrogen, but just because something can (technically) be done, doesn’t mean it’s economical to do so.
The point I am trying to make is that thermal coal will still be used for decades unless there is a massive breakthrough in how steel is produced. Even if a breakthrough occurs, the economic cost of converting existing steel production to hydrogen or another process will be enormous. So thermal coal will still be in demand.
Now onto what has been happening with AHQ. The company has overcome several challenges, such as;
- Finding and retaining the right staff
- Covid omicron outbreak
- Supply chain problems delivery of large dump truck fleet
We can report that the company has overcome all of the above issues and is ramping up production just as the coal price spiked following Russia’s invasion of Ukraine.
Coal sales for the quarter ending 31st December 2021 68kt generating US$8Million in revenue in the September quarter revenue was only US$1.7Million. A substantial increase.
Coal sales for the March quarter are forecast to be 133kt. This will enable revenue to more than triple from the previous quarter.
In May 2021, in anticipation of production starting at the New Elk mine, AHQ contracted to supply 280kt of coal to an Asian customer. The first cargo of 63,543 metric tones shipped in October 2021, with three more shipments to be delivered in the second half of 2022. The remaining three cargoes will not achieve a sale price around the current spot price of high vol A coal of US$388/t. So once the three cargoes are delivered, expect revenue to increase even more even if production does not increase.
Commodity markets have continued to tighten in 2022 due to the Russian/Ukraine conflict, low stockpiles, global shipping challenges, and, most notably, the underinvestment by mining companies in expanding existing production and the regulatory hurdles to bring new mines into production. So elevated prices for coal will likely be with us for some time.
The main risks from now on are production problems and China. As with any mining company increasing production caries risk but with new equipment in place and the recent appointment of a new CEO, Mr. Jonathan Romcke, who for most of his career worked in coal in NSW with BHP, Oakridge, and Xstrata, the pieces are in place the managed this risk.
The most significant risk is China which is the world’s biggest steel producer by a long way. Covid is taking hold, and harsh lockdowns are being imposed. If the lockdowns continue for an extended period, it could lead to a contraction in growth and reduced demand for steel. But using the Western government playbook when lockdowns end, expect government stimulus to support the economy.
We have been patient with the open position as we have waited for challenges to be overcome, and our patience is starting to pay off. The next six months could transform the company into a revenue and profit-generating machine.
TRADE ACTION
Be patient and wait for more news flow.