Successful Refinancing Key To Whitehaven Coal

This story features WHITEHAVEN COAL LIMITED. For more info SHARE ANALYSIS: WHC

–Liquidity concerns mount in 2015
-Support as Maules Creek de-risked
-Improved coal price still crucial
-Refinancing debt remains key

 

By Eva Brocklehurst

Whitehaven Coal ((WHC)) continues to impress with its agility in ramping up production at its flagship Maules Creek mine but, for brokers, the company's debt levels are a niggling concern. As coal prices slumped last year many brokers were unable to gloss over the increasingly urgent need for the company to find a refinancing solution.

Whitehaven has indicated it is looking to restructure its debt through high yield bonds but this market is now challenging, on JP Morgan's observation. The company's debt is expected to peak at $1.02 billion by the end of the year and servicing this is more difficult at current coal prices. The stock is trading at a substantial discount to valuation but risks around weak coal prices and the ability to manage debt means JP Morgan believes it will be unlikely to trade at full value. The broker forecasts the interest cover of earnings will be just 1.6 times by December.

On the other hand, Morgan Stanley continues to find value in the equity, given operating costs are below the Australian dollar thermal coal price and there is volume leverage forthcoming from Maules Creek. A refinancing of the debt in the March quarter could be what is needed as a near-term catalyst for the stock. Given Maules Creek is operational, the likelihood of a resolution to the debt issue is now higher in Morgan Stanley's view, while a planned early delivery of the first half financial on January 30 may allow discussions with the banks to proceed.

Citi is concerned about liquidity. Although there is some head room on the back of forecasts, at spot prices, minimal cash flow is being generated. The stock represents a highly leveraged way to play higher coal prices and a lower Australian dollar, in the broker's view, if that is what investors want. Citi has downgraded thermal coal price forecasts for 2015-16 and, as a result, Whitehaven's earnings forecasts. Offsetting this somewhat, the company is a beneficiary of a depreciating Australian dollar. The broker forecasts a liquidity buffer of around $200m for the completion of Maules Creek ahead of time and under budget. 2016 will be crunch time in terms of liquidity, in Citi's view.

Coal sales were strong in the December quarter, reflecting a running down of inventory in order to release cash, particularly as Narrabri mine was out for the production count for a period because of a longwall change. UBS observes the company received a premium thermal coal price in the quarter at US$66.07/t, which compares to the average NEWC index for the quarter of US$63.81/t FOB. This came about as a result of some 12-month fixed price contracts in Korea, which give rise to a premium as the spot price falls.

Most of the company's open pit mines performed better than expected. Maules Creek is now 87% complete and expected to achieve a run rate of 6mtpa by March 2015. Deutsche Bank highlights the first coal from Maules Creek in the December quarter as a major milestone and considers the project is now significantly de-risked. The focus turns to ramping up and the remaining capex requirements at Maules Creek … and the balance sheet. The broker expects cash flow from the first 18 months of sales from Maules Creek will alleviate some of the remaining capex burden, create more flexibility and allow more refinancing options.

Deutsche Bank considers Whitehaven Coal is a volume and cost reduction story, although improvement in the coal price remains an important part of valuation and recommendations. The broker retains a Buy rating, one of five on the FNArena database. The other three ratings are Hold. The consensus target price is $1.81, suggesting 50.1% upside to the last share price. Targets range from $1.32 (UBS) to $2.35 (Morgans).

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