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Whitehaven Coal Poised For Strong FY20

Australia | Oct 23 2019

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

Several brokers consider Whitehaven Coal without peer, having successfully managed a downturn in the coal price and maintained a strong production outlook.

-Price premiums for the company's products have lifted
-Whitehaven Coal able to withstand a prolonged market downturn
-Approval of Vickery the next major catalyst


By Eva Brocklehurst

A build-up in inventory at Maules Creek allowed Whitehaven Coal ((WHC)) to ensure strong managed sales in the September quarter, despite softer production. Meanwhile, Narrabri staged a recovery, having been beset by longwall challenges and technical issues in the past 18 months.

Price premiums for the company's products lifted and should feature going forward, Wilsons asserts, despite the depressed prices in the current market. Management has maintained guidance for coal sales of 20-21mt and total run of mine production of 22-23.5mt.

Brokers were pleased with the thermal (energy) price realisation as the company achieved the September quarter price of US$73/t, a 7% premium to the Newcastle benchmark. Newcastle thermal coal prices have corrected by around -50% from their peak above US$120/t.

A seasonal lift in thermal prices is anticipated by Wilsons, as Asia stockpiles coal towards the end of the year. Morgans finds the tepid coal market was the main handbrake on the equity and agrees encouraging signals are emerging.

While there is no escaping the market headwinds, Credit Suisse is comfortable the company can withstand a prolonged market downturn and suggests the company's balance sheet and organic growth options remain appealing for those able to invest in thermal coal and happy to take a longer-term view.

The next longwall change at Narrabri is occurring in the December quarter and is expected to take eight weeks. The company has amassed inventory levels of around 1mt at Narrabri, Bell Potter points out, to manage the continuity of coal sales over the period.

Maules Creek

Sales in the quarter were split 80% thermal, 20% metallurgical (coking) coal but Maules Creek is expected to move metallurgical coal back towards a 30% portion, as the Braymont seam is accessed again.

The commencement of in-pit dumping can reduce costs at Maules Creek, Wilsons ascertains, while production rates and yield should rise strongly. Combined with normal rates of production at Narrabri this makes for a future scenario which has not been the case since the first half of FY18. Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, maintains an Overweight call with a $5.20 target.


The potential approval of Vickery is the major catalyst, Morgans suggests. Whitehaven Coal expects the NSW government planning recommendation and associated draft conditions will be delivered at the end of 2019 with the Independent Planning Commission hearing in early 2020.

Overall, capital cost guidance for FY20 is $222-252m, including $150m on growth projects. Of this around $40-50m has been allocated to Vickery. A detailed mine plan is expected to be finalised for Winchester South by the end of the year.

Macquarie notes the company's confidence about approvals for Vickery and Winchester South means the production profile will likely increase to 45mtpa from 23mtpa over the next 10 years. Whitehaven Coal has also reached an agreement to acquire 7.5% of Narrabri that will increase its ownership to 77.5%.

Bell Potter considers the company's growth profile without peer, with projects that can add up to 15mtpa in managed coal production over the next eight years, and the business is highly leveraged to any recovery in the coal price. The broker, also not one of the seven, has a Buy rating and $4.80 target.

Morgans believes the company has weathered the 2019 correction in the coal price well, helped by a premium product, with some of the industry's best assets in Narrabri and Maules Creek, and stable production and reasonable costs support visibility for FY20.

The broker considers the stock to cheap at a -24% discount to net present value and has been waiting for a market catalyst to buy it more assertively. Anticipated strength from the northern winter season combined with signs of improvement in Chinese imports is now enough to get the broker excited.

The database has five Buy ratings, one Hold and one Sell (Ord Minnett, yet to comment on the quarterly). The consensus target is $3.90, signalling 14.2% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.5% and 3.5% respectively.

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