In 2010, China is expected to import about 130 million metric tons of coal, and that number could grow to 162 million metric tons in 2011. The country is trying to reduce its dependence on coal, but the rapidly growing economy won’t slow down enough for cleaner energy to catch up. There are two ways to deal with that, and a pair of Chinese miners have each decided to try one.

Puda Coal Inc. (AMEX: PUDA) has announced a secondary public offering of 7.85 million shares priced at $12/share. The offering is being led by Macquarie Capital and Brean Murray, Carret & Co. as joint lead managers and bookrunners, which have an over-allotment option purchase an additional 1.15 million shares. Expected net proceeds of about $88.3 million will be used “to fund previously announced coal mine acquisitions and their consolidation and construction.” This approach could be called the ‘bigger-dig’ solution.

Datong Coal Mining Group has decided on a different route. It has entered a “cooperation agreement” with China Recycling Energy Corp. (NASDAQ: CREG) under which the companies will offer “energy solution services, energy audits, energy conservation plans, project investments and operation management” services to customers. In addition, the companies will integrate China Recycling’s top-gas recovery turbine technology to capture the energy in the waste streams of big coal users like power, cement, and steel plants.

The waste streams consist primarily of heat, which the company’s turbines capture and use to generate electricity. China Recycling also makes a waste gas power generation system that uses the waste stream from coal mining and oil refining to generate electricity. The electricity then can be used to reduced the demand from heavy users like steel and cement plants, reducing overall demand for electricity and lowering costs for the steel and cement makers. Lower demand also means less coal needs to be mined.

Datong’s agreement with China Recycling is not a huge deal yet, but it demonstrates a willingness by a coal producer to consider something that is not just a bigger dig. Chinese coal mining giants China Shenhua Energy Co. Ltd. (OTC: CSUAY) and China Coal Energy Co. (OTC: CCOZY), both holdings of the Market Vectors Coal ETF (NYSE: KOL), are also preparing major expansions of their mining efforts.

The bigger-dig companies may have chosen the wrong time to expand. The rising cost of electrical power has led the government to cap contract coal prices for 2011 at 2010 levels. Spot prices are not affected by the cap, which seems like it might help coal producers. It won’t though, because the lower contract pricing will hold spot prices down too.

Puda shares are down more than -15% today on more than 9 times normal volume. Investors really don’t like secondary share offerings. In contrast, China Recycling shares are up by about 15% on light volume.

Paul Ausick

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