Stanford Says No to Coal, Pats Itself on the Back
Stanford University's announcement that it won't invest directly in coal-related companies will be watched closely by professional and individual investors alike. Unfortunately, this decision misses the point.
Substantial social injury
Stanford's investment goal is to make money. However, its investment charter states that if trustees determine "corporate policies or practices create substantial social injury," they can include this factor in their investment decisions. Coal, it seems, creates substantial social injury and is now forbidden.
However, "Replacing other fossil fuels with renewable energy sources also is a desirable goal ... but fewer alternatives are readily available for these other energy sources on the massive scale that will be required." Unfortunately, the numbers suggest that we can't replace coal, either.
That's the rub
Over the next 20 years, the U.S. Energy Information Administration expects coal to account for roughly a third of the global power market. What, exactly, does Stanford think will pick up that slack? Natural gas can't, nuclear can't, and renewables can't.
There's also the question of "substantial social injury." Carbon is today's hot topic, but what about access to medical care, clean water, computers, even electric lighting? Cheap, reliable, and abundant coal makes all of that possible in rich and poor countries alike. How big is this social injury? The International Energy Agency says, "1.3 billion people are without access to electricity." That's 18% of the world's population.
Mohamed El-Erian of PIMCO fame called Stanford's decision a "compromise approach." He noted in a Bloomberg op-ed piece that Stanford is taking a stand by "withholding capital from fossil-fuel companies." It isn't.
For example, Yanzhou Coal Mining is a giant Chinese coal company listed on the New York Stock Exchange. It's most definitely on the no-fly list. But Yanzhou is already public; it raised capital already. The shares that are trading in the secondary market are being bought and sold by other people. Yanzhou doesn't see a penny of the money that changes hands.
Unless Yanzhou plans to issue more shares, the only impact that Stanford can have on the company's stock is, perhaps, reducing the average trading volume (around 200,000 shares a day). Moreover, since Yanzhou is based in China, even the social pressure that Stanford can exert is highly unlikely to do anything.
Yanzhou's coal volumes have increased from just under 64 billion tonnes in 2011 to nearly 104 billion tonnes last year. Revenues jumped around 20% over that span. Yanzhou isn't stopping because of Stanford, doesn't need Stanford's money or permission, and honestly has no choice but to mine more coal if it wants to help provide the electricity needed to lift more people out of poverty in China.
Who might feel the heat?
Stanford might have an impact on the domestic coal market, but on the debt side more than the equity side. That's because heavily indebted coal miners like Walter Energy are trying to ensure their survival by refinancing their obligations.
However, a recent bond issue by better-situated Cloud Peak Energy suggests that Stanford's impact will take a backseat to corporate performance. Walter, which is largely a met coal miner, is struggling and will continue to do so until pricing for steel making coal improves. Debt makes up around 80% of its capital structure. It had to pay between 9% and 11% when it issued new bonds earlier this year to extend its maturities.
Cloud Peak, which only mines thermal coal in the Powder River Basin, was able to issue bonds with a 6.4% yield to replace bonds yielding 8.3%. Cloud Peak estimates that it lowered its annual interest payments by $12 million. Walter likely raised its annual interest costs by over twice that number. The difference? Cloud Peak's market is improving right now and the company has remained profitable throughout the coal downturn, with the exception of a weather-related loss in the first quarter.
Fix it, don't hate on it
There's no question that coal is a dirty fuel. The easy answer is to say "no." The right answer, however, is to accept that we can't power the world without coal. That means investing now in clean coal technology. That, in the end, would do far more to right "social injury" than jumping the anti-coal bandwagon.
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The article Stanford Says No to Coal, Pats Itself on the Back originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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