King Coal back in portfolio building

Dubai: "Coal is King, and he's back in the building," concludes Stan Lock, trader at Brewin Dolphin. The original question though was more like: "With oil and gas prices so high, should investors be selling their gains made over the last year?"

His response is a reminder that, of the two questions traders must answer: What and when to buy; and what and when to sell, the hardest is the selling bit. The sell bit, of course, might depend on your absolute gain. If you were "in" when Lock said so, now is a good time to be out, or take a gain.

Of the two "black golds" the "Elvis" of the commodity industry, oil, is historically high. A $140 per barrel may or not be a "fair price" but it's going to take a while for markets to get used to the price. Elvis singing opera will take some getting used to. With Lock's stock pick's tending to be "Tier 2" companies (not your ExxonMobil, Shell, BP, Total - but your Regal Petro-leum, Bowleven and Oilexco) then the probability for downside volatility should be greater than your "Tier 1" all-weather stocks. Enter coal as the new King, "move over Elvis, move over gold" says Lock implying that, from the trader's short term perspective, coal is a better "gold" than the real gold.

So what's so special about coal? A quick Google-walk would tell you: 25 per cent of all the world's energy is derived from coal. 40 per cent of worldwide electricity and 50 per cent of US electricity is coal powered. 92 per cent of coal is used to make electricity and from that 70 per cent of the world's steel production is coal based. With two of the future's biggest producers (India and China) likely to be net importers of coal; is it no wonder that brokers on the black-stuff see a golden tinge? "There is no way around coal for keeping the lights on" quips one stock broker report.

"Coal is now the fuel of choice for investors," says Lock, when pressed on what the new "must-have portfolio stocks" are. But it is a price-based play. In my defence, we did the green, tree-thing, last week. This week's black-stuff suffers poor karma from environmentalists. I still remember the guy with the horse and cart delivering the coal - he coughed a lot.

The price thing brings smiles and not coughs. At the end of last year the average per tonne coal price was at $98. Citicorp estimate $100 per tonne for 2008 and metallurgical coal at $200 per tonne. Merrill's in March anticipated that coal prices would rise by 200 per cent, and Macquarie's Bank uttering's were also bullish. The big brands are backing a coal price surge.

Back to Lock. Lock "tipped" two coal stocks around a year or so ago. Two picks illustrate recent history: Cambrian Mining and Western Canadian. They are similar stories, Canadian companies listed on the AIM, London's second market (Western Canadian is also listed in Toronto). Lock's tactics, like his oil choices, remain at the volatile "second string" end, looking for the knock-out gain.

If you had purchased Cambrian Mining in January 2007 and sold at the worst point in December 2007, you would have been looking at a minus 30 per cent loss. After a highly stagnant 1980s and 1990s, Lock was one of those venturing out into investing (gambling?) on a coal-comeback. It didn't happen in 2007. What a difference a quarter makes. From January 2008, the lid has lifted with prices rising to plus 180 per cent a year-to-date figure quoted on their website as plus 324 per cent. Western Canadian enjoys a similar history: nothing positive in 2007, and a rise from Canadian $1 to around Canadian $11 in the first half of this year.

Sounds like the boat being missed? This is where Lock's positioning as "the second man in" comes into play. He can boast being one of the first into coal one year ago, with the results only coming through now. He is happier with the "second push" position. On this he takes the view "Coal could be a long play and not jut a short term play for portfolios. I still recommend Cambrian Mining and Western Canadian for the short term, but coal as an asset for the longer term. The boat hasn't been missed, there are too many boats waiting to be loaded off the coast of Australia that demonstrate this," says Lock.

- The writer is chairman of Mondial Financial Partners.