Coal demand high and prices rising

Over the past two years the global demand for steel has increased dramatically due to the growth of industrialization in China and other Asian economies. The increase in demand for steel has created an increase in demand for coal. The increase in global demand for coal which is used in not only in the production of steel but also for the production of electricity used in steel production has forced coal prices to historically high levels.

The price of metallurgical coal has doubled over the past year as demand continues to out pace supply on a global basis. The ability to bring new supply to market is restricted by a number of factors. The cost and extended time frame required to find and develop a new mine makes it difficult to bring new supply to market fast enough to meet the increase in demand. The ability to deliver coal to market is also being restricted by the infrastructure currently in place. There is a limited amount of rail capacity available for use in transporting the tonnage of coal required to meet current demand and many rail lines are running at maximum capacity at this time.

The surge in demand over the past two years is not just a short term situation, the change in China from an agricultural economy to an industrial economy is a long term and potentially sustainable for many years into the future. The supply demand imbalance is likely to become more pronounced before it is resolved, keeping prices high over the long term.

Canada has one of the largest metallurgical coal producers in the world operating in South Eastern British Columbia. The Elk Valley Coal Partnership which is 60% owned by Fording Canadian Coal Trust (FDG.UN-TSX, $112.00, 403-264-1063, www.fording.ca) and 40% owned by Teck Cominco (TEK.SV.B-TSX, $39.44, 604-687-1117, www.teckcominco.com) operates five mines in the area which produce 27 million tonnes of coal annually.

The Fording Canadian Coal Trust is an open ended mutual fund trust, the unit holders recently approved a restructuring to change the trust to a flow through structure allowing the tax burden to flow through to the investors creating a more tax efficient structure. The units currently pay a quarterly distribution of $1.30 per unit for a current yield of 4.65%. The trust has been able to increase the distributions over the past three years and appears to have the ability to continue this trend in the future.

Fording recently released first quarter results and reported net income of $65 million verses $11 million for first quarter 2004. The cash available for distribution was $1.46 per unit which translates into a payout ratio of 89%.

Fording recently negotiated new coal contracts for the year with prices up substantially from the previous year. The new price of $125.00 per tonne came into effect on April 1st and is double the contracted price for 2004. The increase in price along with the potential for increased production should create the opportunity for a banner year at Fording.

The unit price has fallen back from the recent high of $130 reached at the beginning of March. Over the past month the price has been consolidating around $110.00 give or takes $5.00 and with the potential for increased profits and higher distributions going forward should breakout to the upside for a move to new highs.

The strong underlying fundamentals make the Fording Canadian Coal Trust attractive at current levels, initial target price $140.00 stop on close at $90.00.

The strong demand for coal, positions another BC based income trust in an attractive position. The Westshore Terminals Income Fund (WTE.UN-TSX, $11.55, 604946-4491, www.westshore.com) operates the Roberts Bank coal port in Delta BC.

Westshore Terminals operates the busiest coal port in North America the terminal operates on a through put basis and Westshore receives a handling fee from its customers which is based on volume and type of coal shipped. Over the past seven years Westshore has shipped 21 million tonnes of coal annually the current capacity is 26 million tonnes per year.

The largest volumes are shipped to Japan, Europe and South Korea, China has become increasingly important going from zero to 8% of the total capacity in only 2 years.

Westshore recently released first quarter results reporting revenue of $31.7 million up 35% from the $23.4 million reported for the first quarter of 2004. The terminal shipped 5.7 million tonnes up from 5.1 million tonnes in the same quarter a year ago.

Westshore Terminals income fund does not have any long term debt and currently pays out approximately 92% of available cash in the form of quarterly distribution of $0.20 per unit. The current yield is 6.9% most of which is taxable as income for Canadian investors.

The company is well positioned to benefit from the economic expansion under way in Asia. The global increase in demand for coal will create a long term opportunity for Westshore to increase revenue and over time increase the distributions to unit holders.

The units have settled back from their March 2005 high of $15.00 and have been trading between $11.00 and $12.00 over the past couple of months. The units appear attractively priced at current levels and have good potential for capital growth and increased distributions in the future. Initial target price $15.00 stop on close at $9.90.