New Hope Needs Coal Price Catalyst

This story features NEW HOPE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: NHC

Unless thermal coal prices improve and there is some progress on New Acland stage 3, brokers suspect New Hope Corp may struggle to find momentum.

-Genuine cost reduction prospect at Bengalla
-Current operations at Acland now being scaled down
-Strong opportunity to capture upside as coal prices recover
 

By Eva Brocklehurst

The outlook for New Hope Corp ((NHC)) remains highly dependent on a recovery in coal prices and government approvals for its expansion at New Acland. Unless thermal coal prices improve and there is some progress on New Acland stage 3, brokers suspect catalysts will be difficult to find.

In its FY19 results commentary New Hope remarked on the growing threat of seaborne supply from Russia, also alluded to by Whitehaven Coal ((WHC)) recently. This is something the market will need to follow, Credit Suisse advises.

New Hope has a diversified revenue base, with most of its revenue emanating from sales to Japan and Taiwan rather than China. Hence, Macquarie points out, there is less exposure to Chinese thermal coal pricing.

However, reconciling price realisation during a coal correction is made more difficult, Morgans asserts, because of the company's exposure to both the premium Japanese power utility market and higher ash, lower energy markets that are affected by import controls and abnormal discounts.

Bengalla

Bengalla is expected to provide much-needed support for the stock. Bengalla revenue was lower than Macquarie expected in FY19 although the increased stake, now 80%, is a long-term positive for the operations.

The miss on revenue versus the broker's forecasts was largely because of lower realised coal prices and the difference in timing of the increase from 40% to 80% ownership. The company has indicated that Bengalla is in the lower quartile of the cost curve and costs should be reduced further because of sustained higher production.

Management appears excited about the opportunity at Bengalla, Wilsons observes, and this is one of the mines where there is a genuine cost reduction prospect in the near term.

The joint venture with Lenton Burton is proceeding and the company expects first coal in 2022. Slippage in the development timeline, because of delayed infrastructure access, is disappointing for Morgans, which suspects the project is marginal at current prices in the context of its overall contribution to the New Hope business.

New Acland 3

There is no clarity on New Acland stage 3. Delays have meant workers are being made redundant, as the project still requires a mining lease and associated water licenses in order to proceed, and the company was unable to secure this by the end of August.

Current operations are being reduced at New Acland over the next 18 months and a production gap is now envisaged between the ramping down of current operations and commencement of stage 3. Credit Suisse continues to hold the risk weighting for stage 3 at 50% and pushes out first production to the first half of 2021.

New Hope expects production for FY20 at New Acland to be at 60% of that reported in FY19 and Macquarie forecasts saleable production of 2.8mt.

Mining is expected to cease in the second quarter of FY21 and the mine placed on care and maintenance until stage 3 is approved. The market appears to be ascribing no value to non-operating assets, such as New Acland stage 3, which Morgans believes is excessively bearish.

The broker remains comfortable about accumulating the stock through the lows in the coal price and is on the look out for any relaxation of Chinese import controls and ongoing producer responses, as well as any price recovery in spot LNG driven by oil sentiment.

Wilsons calculates New Acland stage 3 is worth $1.20 a share and, having been largely set aside by the market, incorporates a free option for investors.The broker also points out New Hope has lagged the domestic coal sector which has performed strongly over the past two years.

A strong opportunity is therefore in front of investors to capture upside, as risks unwind with a coal price recovery and as the New Acland stage 3 approvals process proceeds.

With more consistent signs around recovery in thermal prices into the end of this year, Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, envisages the risk/reward firmly on the upside and maintains a Buy rating and $3.60 target.

The database has two Buy and two Hold ratings. The consensus target is $2.74, suggesting 11.7% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.9% and 3.9%, respectively.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms