The coal sector continues to demand our attention, following continued record high global usage of the energy, along with record prices which have created an explosive M&A environment. Our team is preparing to identify our next featured company which is advancing a coal deposit for its goal of production.


Here is a brief excerpt from our last in-depth look at the coal sector:


Simplification and the timing of obvious sector runs is our business and how we've delivered winning investment opportunities over the years. Our next commodity of focus (and sector specific commodity) which we believe will outperform many of its counterparts in the coming years, is coal.


We believe the below list captures more than we could ever put into words to make you aware of coal's importance. Below are countries which rely heavily on coal to provide electricity.


Coal in Electricity Generation



The USA, China, India and Germany derive almost half, if not closer to three quarters, of their electricity from coal. Those 4 countries make up more than half the world's population and close to 50% of the world's GDP.


EIA (Energy Information Administration) has forecasted that global coal consumption in the electric power sector will grow by 6 percent in 2010, due to the result of higher electricity consumption.


How can this be with all the renewable energy efforts across the globe?


Coal is the cheapest source of energy that exists; it is convenient, found all over the planet and the vast majority of the world has the available technology and capital to mine it. The second part to the answer is that no one could have predicted the speed at which the emerging markets have risen and the demand for cheap energy which has come along with that growth.


Before we talk about the global demand trends for coal and the amazing growth set to occur within this sector, let's refresh on what types of coal exist and the primary uses.


Coal has many important uses worldwide; the most common being electricity generation, steel production and cement manufacturing. Roughly 5.9 billion tonnes of hard coal was used worldwide in 2009. There was 909 million tonnes of brown coal used that year.


Our team at Pinnacle expects a very strong M&A (merger and acquisition) market for coal in the coming decade. China recently revealed a 3.8 billion tonne increase in coal demand by 2015. Remember that the entire worldwide consumption was 5.9 billion tonnes of hard coal in 2009, along with 909 million tonnes of brown coal. China alone has plans to increase global consumption by more than 50% in 4 years!


This is a staggering statistic and one that can't be overlooked by investors.


Global coal consumption has grown faster than any other energy source since 2000.



The reason global coal consumption has surpassed all other sources of energy since 2000 can be summed up in two words: Emerging Markets. The emerging markets have exploded in economic production and are attributing for more and more of the globe's GDP total each year. To emerging market nations, such as India, China and Brazil, coal represents the only near-term, feasible, economically sound way to provide energy to its growing cities and citizens. It's not rocket science. Even the United States currently derives roughly 50% of its electricity from coal. It is cheap and available; put simply, no renewable energy can compete with coal.


China is at the heart of global coal demand. China is also scared that it won't have enough coal or enough energy to fuel its expanding economy. The good news for coal investors and a trend we plan on taking advantage of, is that it's becoming evident China will pay anything to quench its energy demand.


Earlier this month, a member from the Chinese State Media reported that the government was worried it might run out of coal. We have to re-iterate that China reported in late 2010 it plans to increase its coal consumption by 3.8 billion tonnes within the next 4 years. The entire world consumed 5.9 billion tonnes in 2009. China alone has plans to increase global consumption by over 50% in the near-term. This is a crucial fact that can't be overlooked by investors. When opportunities present themselves, we must capitalize.


The state-run media company reported that Beijing is considering capping domestic coal output in the years between 2011-2015. Officials are worried miners are running down reserves too quickly to meet the needs of China's rapidly expanding economy. Global players are stepping up and companies around the globe are scrambling to prove up resources and take advantage of this super cycle in coal energy demand. Buyouts will be rampant.


Famous financier, Nat Rothschild's paid $3 billion through his company, Vallar, for Indonesian coal assets back in November. He is teaming up with Indonesia's powerful Bakrie family to create a London-listed coal mining group.


There are three companies involved: Vallar, Bumi Resources and Berau Coal Energy. Berau is Indonesia's largest coal producer and Bumi the fifth-largest.


At the time of the deal, the new company's proposed CEO, Ari Hudaya, stated, "It is a very exciting time to be a mining company in Indonesia. The fundamentals of the metals and mining sector are compelling, given the strength of demand from China and India, and we are ideally located to capitalise on that growing demand."


This was a massive buyout that sparked our interest and really got us looking into the Indonesian coal sector. Our team has spent the last 3 months evaluating different regions and hot spots in Indonesia, while at the same time searching for a management team that has defined a resource before having it bought out. After all, the purpose when investing in junior resource companies is to find the next producer or takeover candidate. And what better place to look than a region that is known for it, and a management team that has accomplished such a feat. Track records are the most important fact we look at when evaluating a management team.


Mining in Indonesia is very different from mining in North America. 'Red tape' is a foreign concept and with the right connections, projects are often fast-tracked much quicker than in North America. The government in Indonesia has recently passed very favourable laws enabling and promoting mining companies to set up shop and go to work in a big way.


In late November Thai energy major PTT announced a deal to buy Australia's Straits Resources for $550 million. Straits assets are either in Asia or easily shippable to Asian markets. This is a trend early in its growth curve. Hence our timing into this market.


The Central Electricity Authority in India has reported that 40% of its coal-fired power plants are now running on "critical" levels of coal stockpiles.

Indonesia's GDP is forecast to grow 6.4 per cent in 2011 (thanks heavily to mining exports). China is the largest producer of coal, India the third, whilst Indonesia is a major exporter. China and India are among the largest coal consumers in the world. Our team has identified Indonesia as the most probable market to quell China's fear that it will run out of coal.


According to Steelguru, coal production (in Indonesia) is set to increase 23 per cent this year to 340 million tonnes. Steelguru didn't pull these numbers out of nowhere. Indonensia has been picking up the slack around asia on the coal production front for years. Have a look at this chart of Indonesia's coal production over the years.


(source: IEA Energy Statistics)

Supriatna Suhala the Executive Director of Indonesian Coal Mining Association recently stated, "We predict that we'll see soaring demand for coal in emerging market economies in 2011. "Japan, India, China and South Korea would remain the largest importers of Indonesia's coal."


Our team is confident emerging markets GDP numbers will continue to impress, led predominantly by China. We know that coal has to remain the leading provider of electricity to these nations for the short to medium-term. There is no alternative. This will lead to a very robust junior coal market filled with takeovers galore. Indonesia is favourably located just to the south of both China and India, two countries expected to lead the heightened import demand for coal. We will be sending you our exclusive research report on our first Featured Company of 2011 in just a few days.


All the best with your investments,