Next month, Chinese lawmakers will deliberate and pass the country’s 12th Fifth Year Plan (FYP) outlining a series of economic development initiatives shaped by the Chinese Government. From as far back as November of 2009, Chinese officials have been discussing how they plan to amend the FYP to encompass the increasing needs of its energy-consuming citizens.
China’s FYP plans to focus on increasing the use of non-fossil fuels, while cleaning up their “dirty” energy consumption in the future. Currently about 70% of China’s energy consumption is generated by coal and while this number is expected to decrease by 7% by the year 2015, according to an official of the National Energy Administration, many analysts believe that the transition to clean energy will not negatively affect the vast majority of coal producers anytime soon as coal will still constitute the largest portion of China’s energy consumption and will do so for many years.
China holds an estimated 114.5 billion short tons of recoverable coal reserves, about 13% of the world’s total reserves, which is the third-largest in the world.
China coal companies are focused on the government’s mandate of consolidation within the industry. Following an executive meeting of China’s State Council, or Cabinet, on August 25, 2010, China’s Premier Wen Jiabao reiterated the need for the country’s coal mine enterprises to continue with mergers and acquisitions for the healthy development of the industry. The Chinese government is aiding state-owned companies and private coal mine operators in initiating roll-ups of smaller inefficient mines in an effort to modern the country’s coal mining industry and address safety concerns. In June, government officials issued a temporary halt to all coal mining activities at SinoCoking Coal and Coke Chemical Industries, Inc.’s (NASDAQ:SCOK) Hongchang Mine in Henan province in order to conduct safety reviews. The mine has been idle since.
According to Reuters, the Chinese government has spent the last three years cutting the total number of Chinese coal mines to about 1,000 in 2010 from 2,600 a year earlier.
U.S.-based operator of coal mines and washing facilities in Yunnan and Guizhou provinces, L & L Energy, Inc. (NASDAQ: LLEN), stated in their recent preliminary first quarter earnings call that the company is receiving assistance from the Chinese government in identifying and performing due diligence on potential acquisition targets. The company recently hinted that it might abandon the planned acquisition of Shunda Mining Company due to concerns over its safety record. Puda Coal, Inc. (NYSE Amex: PUDA), a coal mine operator in Shanxi Province, announced last month that the company was appointed by the provincial government as a consolidator of eight thermal coal mines which recently received government approval for expanding production capacity.
The successful consolidation of Chinese mines is producing safer mines for workers and owners, but also higher profits for the consolidators. L & L Energy has seen profits grow 43.3% on average since spinning off its non-coal related business in 2009. Insiders have followed the trend as the stock’s largest holder outside of management, T Squared Investments LLC, has nearly tripled its position in LLEN since 2009 to 2.97 million shares as of July 31, 2010. Currently trading at a price to earnings ratio under 8x, and with full year 2011 guidance of $218 million in revenues and $46 million in net income, the stock trades at forward P/E of just 5x.
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