Can Whitehaven Sustain Higher Prices?

Australia | Apr 19 2017

Coal industry dynamics have become more complex for Whitehaven Coal, as it benefits in the near term from the reduced supply in Queensland resulting from Cyclone Debbie.

-Production guidance reiterated, suggesting strong June quarter is needed
-Discount increasing as semi-soft sales are ramping up at Maules Creek
-Price spike in coking coal may be relatively short-lived

 

By Eva Brocklehurst

Semi-soft coking (metallurgical) coal prices are benefiting from the impact of Cyclone Debbie on Queensland production, creating upside to cash flow for Whitehaven Coal ((WHC)), which has mines at Maules Creek and Narrabri in NSW that are unaffected by the weather event.

Yet the company's March quarter production performance was weaker than brokers forecast because the Narrabri longwall move occurred earlier than expected. Output at Narrabri fell -29% in the March quarter as the longwall move constrained mining.

In contrast, Maules Creek hit its 10.5mtpa operating rate target. The company has reiterated FY17 production guidance for 21-22m tonnes of saleable coal, which suggests to brokers a strong June quarter is needed. The company reported prices of US$119/t for metallurgical coal and US$83/t for thermal coal and realised a 2% overall premium on thermal coal sales with Maules Creek at a 9% premium.

Cyclone Debbie

Ord Minnett finds it hard to predict the next quarter's achieved prices, as semi-soft coking prices are benefiting from the impact of Cyclone Debbie on Queensland production. The broker suspects further upside for metallurgical coal markets is limited, following the recent spike, and any weakness could result in near-term pressure on Whitehaven's share price. Nevertheless, the valuation metrics appear attractive enough to tolerate this scenario.

At the end of the March quarter discussions between producers and steel mills stalled as Cyclone Debbie hit the coast of Queensland. The effect of this disruption is still driving the industry while Japanese steel mills are short on inventory. Hence, the company suggests that the June quarter contract is unlikely to be settled before the end of April.

UBS forecasts realised metallurgical coal prices of around US$118/t based on a spot average of US$100/t and a June quarter settlement of US$135/t. The broker acknowledges a risk to the upside for its estimates, noting the company's ultimate aim is to have a majority of its metallurgical coal under contract but conversion from spot is slow because of the current backdrop.

Outlook

The longwall change-over at Narrabri interrupted production by more than Ord Minnett expected, although the move to wider coal faces is almost complete. The stock continues to screen attractively across a range of metrics and the broker believes it is well placed to take advantage of buoyant coal markets.


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