Check on China: China Natural Resources Inc.

Shannon Roxborough | May 01, 2008 6:20am EDT | Comment

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Fossil fuels' days may be numbered, as nations across the globe make a push toward cleaner "green" energy alternatives, but oil, coal and natural gas will continue to provide the bulk of the world's electricity, heat and transportation fuels for the foreseeable future.

While China's alternative energy market is growing fast in an effort to meet Beijing's target of having 10% of its energy needs met by renewables (including solar, wind, hydro, biomass and wind power) by 2010, coal dominates the domestic energy market, supplying 75% of the country's power needs. Chinese coal companies are profiting handsomely from soaring coal prices. According to a China Galaxy Securities Research report, the average earnings growth of coal companies in the first quarter is projected to be 40% to 50%, while 2008 growth is expected to come in around 40%.

Which brings us to China Natural Resources Inc. (Nasdaq:CHNR). China Natural Resources was incorporated in 1986 to seek out and invest in small Chinese companies. Since then, it has been involved in various ventures, including running Silver Moon, an online Traditional Chinese Medicine news and information resource, a supermarket in Zhuhai (in the Guangdong province), and timber operations (Xilian Timber Mill and Hainan Weilin Timber Limited). In 2004, the company acquired iSense Limited, through which it provided advertising, marketing and public relations services to clients in Mainland China and Hong Kong until selling the company in 2006.

Since then, the company has decided to invest in and focus on the mining industry. In February 2006, China Natural Resources acquired Feishang Mining Holdings Limited, an operation engaged in mining of zinc, iron and other minerals. Feishang operates two mines in the Anhui Province, a mineral-rich region in the northwestern reaches of the Yangtze River Delta. In February 2008, China Natural Resources announced that it sealed a deal to acquire Mark Faith Technology Development, a company which controls Bayannaoer City Feishang Copper Company Limited ("Feishang Copper"), a copper smelting and refining operation in Inner Mongolia. Feishang Copper, which began trial production in May 2007, is expected to begin commercial production in July 2008, after receiving the go-ahead from government officials.

In order to get a piece of the action in the booming coal market, China Natural Resources inked a deal with coal producer Jiangxi Province Coal Group in February 2008 to form the Guizhou Puzheng Mining Company, a joint venture (64% owned by China Natural Resources) that plans to explore and mine coal and other minerals in the Guizhou Province along with other regions in China.

Coal prices, which have doubled since December, are expected to continue to rise, amid shortages caused by China's voracious demand, which has outpaced miners' ability to supply the mineral. Publicly traded coal producers in China are boosting revenues in the current coal boom, and while it appears to be the perfect time for China Natural Resources to invest in coal, not everyone is convinced.

Last week, HSBC mining analyst Sarah Mak said the Chinese government's concerns about soaring inflation could end coal-mining outfits' current wave of success if Beijing, which lifted price controls on coal in 2002, moves to ease coal prices.

Conversely, coal analysts at Cinda Securities in Beijing, and Thomas Wrigglesworth, the Hong Kong-based head of metals-and-mining research with Citigroup, are more optimistic. While they acknowledge there is a risk of the Chinese government intervening with price caps on coal, both expect soaring demand and the push to increase coal production to keep prices up over the shorter term.

Nick Perry, an analyst with Schaeffer's Research, said that while China Natural Resources' shares have shown "extremely volatility" in the last few months and volatility can sometimes provide opportunities, a lack of sentiment information and analyst coverage makes the stock "a bit of a mystery."

That said, the stock's wide price swings, from $7 a share last May to $50.39 this past October and back down to $16 in November and back up to as high as $28.25 in December before again falling to the $15 range in January (shares again rose to as high as $28.95 at the end of February), speaks volumes.

While the short-term outlook for the Middle Kingdom’s coal business is good — barring a sharp economic slowdown in China or a significant drop in oil prices — considering its volatile stock, buying China Natural Resources shares is not for the faint of heart. Investors should exercise a fair amount of caution and adopt a "wait and see" approach until the company develops somewhat of a track record and creates a more stable, predictable environment for investment.

CHNR shares closed at $21.30 on Wednesday.