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The economics of climate change: where to invest in a lower carbon world

Electric vehicles such as the Hyundai Kona rely on lithium in batteries.

The Reserve Bank of Australia (RBA) has raised climate change as a key risk for the economy, but it has also talked about the benefits to natural gas exporters and lithium miners involved in the production of cleaner energy, for which demand is rapidly rising.

RBA Assistant Governor Guy Debelle said climate change “presents significant risks and opportunities” for the Australian economy.

He singled out natural gas producers and lithium exporters and potentially benefitting from the move to lower carbon emissions globally. China, in particular, has introduced environmental policies which favour cleaner energy sources.

“As China transitions away from coal, natural gas is expected to account for a larger share of its energy mix, and Australia is well placed to help meet this increase in demand,” Debelle said in a recent speech, Climate Change and the Economy.

“More generally, Australia is also benefiting from the increased demand for battery inputs (especially lithium) and other metals that are used intensively in renewable generation,” he said.

Several Australian lithium miners and liquefied natural gas (LNG) producers could stand to benefit from this global movement towards cleaner energy.

As Australia’s largest LNG producer, Woodside Petroleum is an obvious beneficiary.

Gas is the cleanest burning hydrocarbon. LNG has carbon emissions up to 25% lower than diesel and 30% lower than heavy fuel oil and emits almost no sulfur or particulates.

We feel that the fundamentals are solid for Woodside and believe it is undervalued.

Woodside is currently trading relatively low on their range, at around $35, as compared to their 52-week high of $39.38. We have a target price on it of $36.

The company has a strong balance sheet. Woodside recently delivered a 27.6% growth in net profit to US$1.36 billion ($1.91 billion) for the full 2018 financial year ending 31 December 2018, while its operating revenue jumped 31.8% to a whopping US$5.24 billion ($7.37 billion).

Woodside Petroleum’s full financial year has been underpinned by the start-up of major LNG projects, higher realised prices and production. This has resulted in a boosted dividend to shareholders.

With the declared final dividend, Woodside Petroleum will have distributed a total payout of US$1.44 per share, an increase of 47% relative to the 2017 financial year.

Woodside welcomes the global movement towards cleaner energy and government action on climate change.

Woodside’s chief executive Peter Coleman has been calling for more decisive action from government, warning of the “risk of inaction”, saying that natural gas contributes by displacing higher emissions fuels and complementing renewable power.

The company is also interested in the potential for hydrogen power.

In June 2018, Woodside signed non-binding memoranda of understanding with Korea Gas Corporation to co-operate on hydrogen opportunities, and with Pusan National University in South Korea to jointly explore technology applications across the hydrogen value chain, so it may end up supplying old customers with energy in new ways.

Separately, a lithium miner that we like is given its link with renewable energy is Orocobre, which we believe is undervalued.

We have a target price on it of $4.50 and is currently trading around $3.40, almost half the price it was in May last year when it struck a high of $6.40.

Lithium stocks were hammered in the last year by falling lithium prices, but they have since partially rebounded this year.

Lithium is essential for the production of rechargeable lithium batteries, which power electric cars, computers and many other goods, so the lithium price is likely to keep rising over the longer term given burgeoning demand for the mineral.

Orocobre has continued to bolster its position as a mainstream, profitable, low cost producer of lithium carbonate.

On the back of results across the second quarter of the 2018-19 financial year, Orocobre reported total half-year production and sales of 6075 and 5253 tonnes, respectively, which were both ahead of initial internal projections by the company of 6000 and 5000 tonnes respectively.

Importantly, listed companies need to take action to support cleaner energy as part of their environmental, social and governance (ESG) responsibilities.

ESG adherence measures the sustainability and ethical impact of a company’s operations and can impact on the financial performance of companies as it is relevant to risk.

Written by Michael Kodari

Michael Kodari

Michael Kodari is the founder and CEO of Kosec (Kodari Securities). He has a strong background in funds management and stockbroking, and is a well-known philanthropist.

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  1. The author is mistaken about the environmental benefits of natural gas (methane or CH4).
    Natural gas still produces carbon dioxide (CO2) and it still contributes to global greenhouse emissions.
    The more LNG that Australia exports, the worse it gets.

    See here: https://www.abc.net.au/news/2018-06-21/gorgon-gas-plant-wiping-out-a-year-of-solar-emission-savings/9890386
    See here: https://www.climaterealityproject.org/blog/3-big-myths-about-natural-gas-and-our-climate

    There are many scientific reports and articles about the long-term effects of natural gas.

    Gas producers like Woodside contribute to the myths about natural gas.
    The RBA should also get their facts straight about “opportunities for Australia” before promoting fossil fuel businesses.

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