Institutional Investors Crying out for Coal

As temperatures plummet in the northern hemisphere we are reminded of the need for central heating and the continued importance of coal. The other hook for this piece is news that (the mainly Rothchild owned ) Vallar (LON: VAA) will be merging with Indonesian coal producer Bumi Resources (JAK:BUMI). Just how trendy is it to be “long” coal? In the positive sentiment category are Fushan International Energy (HK:639), China Coal Energy (HK:1898), Hidili Industry, Arch Coal (ACI), Western Coal, Alpha Natural Resources and Straits Asia Resources. Are people hedging this by shorting certain names? In this camp we’ll look at UK Coal (LON:UKC), Coal of Africa, Puda Coal and the coal ETF with the most volume which is Market Vectors Coal ETF (NYSE:KOL). Other stocks we look at include; Billiton’s (LON:BHP), Potash Corp (POT), Rio Tinto (ASX:RIO), Xstrata (LON: XTA) and Anglo American (LON:AAL).

Pretty much every coal company has seen its shares perform very strongly since September and there is long only money behind this. Demand to borrow the Market Vectors ETF, which tracks the coal mining sector (as opposed the price of coal) is strong, presumably showing that hedge funds are also “long” coal and hedging it by shorting the ETF. 6% is on loan and it is rather expensive to borrow given a serious lack of institutional supply.
Before we analyze our screen of coal producers, let’s stop and consider the ramifications of BHP Billiton’s failed hostile takeover Potash Corp. This is BHP’s third failed takeover and the company has announced the resumption of a share buy back but also said that it is still in the hunt for suitable takeover targets. Could BHP’s next target be one of these much smaller coal producers which might make tasty morsels for CEO Marius Kloppers’ hungry machine?

The largest coal specialist is Massey Energy. There was a recent spike in borrowing demand but this looks to be in relation to the December dividend. Institutional investors are neutral in their view.

Over the past week investor sentiment is more positive towards Anglo American than it is for the other big miners BHP, Rio Tinto and Xstrata.

Coal producers with recent positive momentum are Fushan International Energy and China Coal Energy. These stocks qualified under our definition due to falling short interest over the week combined with rising shares held by institutional funds which make their holdings available for lending. The screen used can either be run on Bloomberg’s EQS functionality or using our Excel dashboard.

Other names with extremely high and rising institutional ownership are Hidili Industry, Arch Coal, Western Coal, Alpha Natural Resources, Straits Asia Resources. Institutional ownership amongst funds who lend in Arch Coal stands at a three year high at 33% of total shares. The demand to borrow is under 3% which is fairly low. The same rise has taken place in Hidili Industry. This stock has 11% of its shares in lending programs.

Single names showing recent negative sentiment are Coal of Africa and Puda Coal. Meanwhile, UK Coal seems friendless amongst the long only funds who have been reducing their holdings consistently over the last 12 months.

For users of the Bloomberg terminal, we have attached a brief User Guide which illustrates how to conduct analysis on one of the stocks featured above.

Securities Lending Quarterly Review (Q3 2010): A unique Quarterly Review of global securities lending activity in the major markets around the world by supply, demand and returns. Click here for more information

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