I saw that $60/ton prediction and just assumed that at least one person in the Treasury was smoking illegal substances :)

Those assumptions do make a bit of a mockery of the budget. The assumptions baked in are for the following prices by Mar 2023:

Iron Ore US$55/t FOB

Met Coal US$130/t FOB

Thermal Coal US$60/t FOB

The budget paper assumes the price will "glide down" to those levels over the next two quarters. If you were a passenger on the coal descent I'm not sure you'd be using such benign language. They include a sensitivity analysis which allows for the possibility that the decline might take an extra quarter to complete (so June 2023).

They say they do it because those prices represent "long term fundamental price-levels". The iron ore one is possible (if unlikely), the met coal one is extremely unlikely, but the thermal coal one is fanciful - it's below the cost of production for most of the companies I've looked at. If you are a cynic you might say they do it to give the budget a buffer. When I was a FC half the job during budget time was figuring out where the finance business partners were trying to stuff the hollow logs to make it easier for themselves to hit their numbers.

@Chagsy like you I did buy a bit of coal (WHC and NHC) in my real life portfolio earlier this year. At the time I thought I was late but it's doubled since then. It's one of my very few wins this year but you're right about feeling like you need to hold your nose when you do it. I'm not sure watching it go up makes me feel any better about the trade either. At the end of the day I think most of us want to see coal gone as soon as possible but in the interim it has a role and if we can minimise the damage by burning less dirty coal (I hate the term clean coal) then that's not so bad, is it?...It is isn't it?

The good news about the current coal price is it will accelerate the move to more sustainable options.

Full disclosure I've taken the profits out of WHC recently but kept my original investment running.

Budget price assumptions are conservative, simply because its nice to take credit for "outperforming" but difficult to have to explain a shortfall which leads to painful consequences: services expenditure cuts, tax rises or more national debt to balance the books.

You do the same in investment planning in long life assets, running a range of price screening values and sensivities, and making sure your balance sheet can withstand the low case scenario for a few years.

I have not invested in coal, not for any ethical reason. Whether you hold the shares or someone else, makes no difference to the coal that will be produced. If investors shun the stocks, they'll eventually become attractive to private investors. You are right in that sustained hgh prices will speed the demise of coal. Divesting coal. oil and gas. assets is not a solution to climate change. It just hands the problem to someone else. So, I would sleep perfectly well at night holding a coal stock, even though I believe we need to do more to address the climate crisis. In fact, I 'd rather they were held by best in class operators, with publicly transparent accountability to shareholders, than a dodgey private operator.... not saying private operators are dodgey, but I know from experience in oil and gas that some of the private players operate to lower standards and I assume it to be the same elsewhere.

imo I think making the comparison between coal and tobacco is a long long long bow! in terms of coal forecasts as with any commodity the usual way to estimate price is establish teh marginal cost of production add a cost of capital and estimate the shorter term S/d dynamics that would fluctaute the price around the marginal cost of produciotn. i suspect that is where treasury is coming from. however it can sometimes take years for that price to reassert itself but with commodities it usually does. on a 5 year view Treasury are probably right. "the best cure for high prices are high prices" has been the mantra since time began on commodities.

Point taken. It was more an observation regarding the stigma. Both are industries that operate in fields that are deeply unpopular and have almost lost their social licence. The pool of investors is hence reduced so shares may trade at a discount

The similarities probably begin and end there. Other than the fact that 1/2 the world will be deeply reluctant to approve new mines. And even if they do, activists will manage to delay the start of operations through fair means or foul. So the usual cure for high prices perhaps isn’t as freely available.

lastly, the lag time to new coal mines coming on line is likely significant.

if ASX listed oak producers generate free cash ~10% of MC every month at current coal prices, and coal prices don’t moderate for a few years…..

Just gotta hope they return all that cash to shareholders. Like tobacco companies have done.

Not enough “oak producers” these days!

After this year's huge coal boom, I think the more important question is, which commodity is likely to boom next? As Mathan explains well on The Call here, he thinks we're in the early stages of a uranium boom: https://www.ausbiz.com.au/media/the-call-thursday-13-october?videoId=24712 (see the BOE discussion.)

I've personally taken a big position in BOE (Mathan's uranium fave, owns the Honeymoon uranium project in South Australia) as well as a smaller one in PDN (biggest producer, more liquidity.)

Smoke 'em if you've got 'em @Chagsy :)

I just wanted to add that I think that the ethical dimension to investing is a valid, albeit personal consideration. Each to their own -- but as you say, that's a separate discussion.

For what it's worth, I tend to agree that there's interesting potential in the coal space. It's a bit outside of my wheelhouse, but the lack of investment and structural supply/demand imbalance puts established producers in an interesting spot.

One big consideration for me is the strategic stance of the board and management -- do they seek to return as much cash to shareholders as possible, and really seek to make hay while the sun shines. Or, do they take the windfall and look to plough it into new projects -- ones that could soak up a lot of cash and have uncertain paybacks?

The thing that made tobacco such a great investment was the awareness of the state of the industry, and the decision to minimise capex and maximise buybacks/dividends.

Poor capital management (as always) could really see this opportunity wasted.

@Strawman @Chagsy I am keeping my eye on who some of the bigger coal players are recruiting. Would love to see evidence of good capital managers coming in to potentially implement strategies that we investors see as the logical way forward. That would maybe even add some backing to the case that "managed correctly" there might not be as much ethical concern as it would seem on face value. Ie, if there was a team deliberately trying to manage these operations to a close (whilst making lots of money, sure) then the fact that they are destroying the planet can be put aside to some degree because if we decided that coal use was banned everywhere from next week onwards, society would literally collapse.

@tbra97 A good book I read recently was "How the world really works" by Vaclav Smil - was a Bill Gates summer reading recommendation. He tries to stay away from the political debate, and talks about climate change and more particularly how the transition will work from a scientist's point of view. I found it a compelling read. Fair to say, the transition might take a lot longer than the current narrative is suggesting and we'll be needing fossil fuels for a while yet, like it or not...

In my experience, the only people who matter on this issue are the Chairman and the CEO, and sometimes the CFO. In resource businesses the decision on capital management is not complicated. (I used to support decision-making by these in oil and gas.)

For operating miners it is about extracting maximum value from the current licence and discovered resource. Some allocation of capital may be required to appraise the extent of the deposit within the licence. But the starting point for me, is that there should be no spend on exploration, certainly none in non-producing licences, and no M&A unless it is a directly adjacent developed resource and its about cost reduction synergies in late life. So the main thing I expect to see is sustaining capex to maximise the resource recovery from the existing mine. Everything else should be a dividend stream back to shareholders.

For large resources with a long mine life say, >20 years, then it should definitely be about investment to accelerate production to minimise risk of stranded resource. In that case, you want a track record on the management team of capital project execution. The best way to judge this is to assess the performance of recent capital projects within the organisation. I have studied this a lot in oil and gas, and firms that have a good track record in one region or basin tends to be a predictor of future success. Equally, firms with a history of train wrecks also rarely perform well in future.

For the record, I haven't invested in coal. I didn't see the last 12 months coming. But I have applied similar logic to oil and gas. I have now exited oil and gas holdings some months ago, as I started to weigh price risk to downside. I worry when I read about new big discoveries. By the time they come to FID, which could be 2-5 years, the investment climate in hydrocarbons could be very different (by which I mean availability of capital, not price).

@Chagsy I've listened to it twice on Audible, the first at a steady pace then at 1.25x as a refresher and considering getting a hard copy to pull out over dinner conversations. An excellent read. Have passed on the recommendation to a few people I know might be slipping into a bit of an echo chamber (you know, the kinds of people who repost the same heavily biased screenshot of a headline to support their new-found beliefs)