Coal is about to make the mother of all comebacks.
No amount of environmental protests can stop it.
There are two reasons: #1 Oil is running out, #2 our nuclear power capability will take decades before it’s ready to meet high energy demand,
In the meantime we’re faced with an ever widening energy gap. The power cuts across the UK two days ago proved that.
But there is an answer to all this: Coal. And one stock will benefit massively as a result.
Before I explain, let me recap quickly...
On Tuesday evening Cleveland, Cheshire, Lincolnshire and parts of London were left in the dark as a mysterious power outage crippled the network.
Hospitals were plunged into darkness... people got stuck in lifts, panicking as they waited hours to be rescued... traffic lights failed causing chaos on city centre roads.
This was no minor local event — and it’s only now that we get some answers. Just as I suspected, it was down to a cataclysmic infrastructure crash.
What caused UK to blackout
The breakdown of our electricity supply appears to have been caused by failures at National Grid.
System frequency across the UK network fell to a level well below the statutory limit — and this caused the system to shut down.
For all you physicists out there, the normal system frequency for the national grid is 50Hz. As electricity cannot be stored, the instantaneous generation must match the demand being taken from the system. If the instantaneous demand is higher than the generation, the system frequency will fall. This is what happened yesterday.
Conversely, if the instantaneous generation is higher than the demand, the frequency will rise.
System frequency will therefore vary around the 50Hz target and National Grid has statutory obligations to maintain the frequency within +/- 0.5Hz around this level... in other words it is their job to match electricity supply with demand. However, National Grid says it normally operates within more stringent ‘operational limits’ which are set at +/- 0.2Hz.
Why coal will make a big comeback
With power generation coming offline simultaneously at two power plants, a little bird has told me that system frequency actually fell to 48.8Hz. The fault, therefore, lies with National Grid — its systems and its management.
It’s further proof that the UK’s energy strategy is in tatters. There is a looming energy gap this company has to fill and it is going to be very expensive to put right.
There has been some movement, but it’s just not enough.
January’s announcement about new nuclear power stations on existing sites implied that Britain would continue to generate around 20% of its energy requirements from nuclear.
But Gordon Brown said yesterday: "We want to do more to diversify our supply of energy and that’s why I think we are pretty clear that we will have to do more than simply replace existing nuclear capability. We will be more ambitious for our plans for nuclear in the future."
So he is hinting at an expansion in nuclear energy — but these decisions should have been made years ago. With the oil price soaring, I believe there is no other choice than letting coal fill the gap.
For now, coal is the only viable alternative to oil
This brings us to the thorny problem of the greens.
Our verdant chums do not like coal. It is dirty and messy.... but it is cheap. We can therefore expect a flurry of legal activity from the likes of Greenpeace when new coal plants are announced.
That’s why they have to be announced NOW... and we should reopen our old coal mines as well.
Make no mistake. Coal will fill the energy gap here in the UK — and I believe it will elsewhere too. Globally, there are not enough nuclear engineers or technicians to go around, so the industry is going to take many years to re-skill and get all the planned global nuclear power stations up and running.
When oil is expensive, countries seek alternatives. Coal is the easiest - and only - answer. And I believe one company is set to benefit terrifically...
A steady royalty stream... healthy dividends... and a proven growth strategy
This company currently generates revenue from two sources: BHP Billiton’s Crinum underground coking coal mine and Rio Tinto’s Kestrel open cut operation, both in Queensland, Australia.
The royalty attributable to the firm is calculated as a 50% share of a 7% royalty on the gross sales value of the coal exported from private ground at these operations, with the cash paid transferred on a quarterly basis.
They use these royalty streams to invest in early-stage mining companies with a view to generating more royalty payments.
The board has proved this strategy works... between 2002 and 2006 the group achieved an astounding 76% compound annual growth rate on its investments - and this was before the recent surge in coal prices and the consequent up-tick in quarterly royalty payments from BHP and Rio.
Not only that, it also pays a dividend. A payment of 4.35p per share was approved in April, which will be issued on 1st August... totally unique for a company listed on the London Stock Exchange.
With coal prices rising, a solid management team and an impressive track record of investing royalty payments, I’m urging my Smart Commodities UK readers to load up quick-sharp.
If you’d like immediate details of this clever play on the "return of coal", simply review my newsletter for three months with no obligation to continue. You can read more details here.
Regards,
Garry White
Editor
Smart Commodities UK
