Whitehaven Coal In A Purple Patch

Australia | Feb 20 2018

Strong economic conditions across Asia have supported coal prices and the main issue for brokers is what Whitehaven Coal will decide regarding its enhanced cash flow.

-If spot prices hold up there may be more upgrades to earnings and cash flow to follow
-Concerns regarding future funding commitments, given potential sale process for Queensland coal assets
-Plethora of options exist, including selling stake in Vickery and re-gearing


By Eva Brocklehurst

Buoyant coal prices have enhanced profitability for Whitehaven Coal ((WHC)), countering increased operating costs at its flagship Narrabri mine in the first half and ensuring rapid de-gearing.

The company is nearing a net cash position and the critical issue for brokers is what decisions will be made regarding cash flow, if current coal prices hold up. More detail on the dividend strategy is anticipated at the FY18 result.

Life of mine costs for Narrabri have increased by around $2/t but the near term impact has not been specified. Costs for FY18 are expected be slightly higher than guidance of $59-$60/t although no major changes have been flagged.

Earnings in the half were lower than Macquarie expected because of the higher cost of purchased coal, and slightly higher mining costs. Dividends were in line with the top of the pay-out ratio. As the broker observes, even with a miss on operating costs, coal prices above US$100/t can offset a lot of operating challenges.

Coal prices are elevated and Credit Suisse is aware of the apprehension that prevails regarding investing in a pure-play coal company at this point in the cycle. Still, if spot prices hold up and remain above forecasts, there may be more upgrades to earnings and cash flow.

Citi expects coal prices to decline through 2018 while cost pressures are likely to remain elevated, given restricted production at Narrabri and increased costs at Maules Creek. Hence, the broker opts for a Sell rating.

Morgans suggests strength in thermal coal prices upwards of US$100/t and a substantially de-risked valuation for Vickery are implied in the share price. The scarcity of large, liquid ASX-listed pure coal exposures means the broker maintains a Hold rating at elevated prices.

Queensland Coal Assets

Citi observes, with around $1bn in debt facilities, the company has the balance sheet capacity to grow through M&A, suspecting too that the company is "kicking the tyres" on the Rio Tinto's ((RIO)) coking coal assets in Queensland.

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