Treasure Chest | Jul 02 2020
Whitehaven Coal is a quality Australian coal producer but under pressure as coal prices are very low. Is it time to buy the stock?
-Australian coal exporters need to cut supply
-Flexibility in the timing of Vickery development
-Is Whitehaven Coal a value play?
By Eva Brocklehurst
Coal prices are very low and Whitehaven Coal ((WHC)) is likely to be loss-making in FY21. Most Australian thermal coal producers are barely expected to cover cash costs at the current spot price of US$52/t. Prime hard coking coal may be around US$114/t, Citi points out, but spot semi-soft prices are just US$59/t.
Thermal coal prices are affected by weak gas prices and factors relating to the pandemic, while metallurgical (coking) prices have been impacted by soft steel demand as global production ex China is down -13%.
While China has held its ground for much of 2020, imports are now near last year's annual levels and ports are imposing restrictions again. At current prices, the broker points out, it makes no sense for Hunter Valley producers to wash thermal coal and they cannot divert semi-soft into thermal markets as India still struggles with the impact of lockdowns.
The US remains the swing supplier and its exports of both thermal and metallurgical coal have reduced sharply. With China stepping out of the market, Citi believes major coal exporters, including Australia, will still need to cut supply to balance the market and support prices.
Wilsons asserts Whitehaven Coal's management should be reducing costs, controlling capital expenditure and preserving cash. Although mine production rates have picked up in both Maules Creek and Narrabri, the broker trims sales forecasts for FY20 to 17.5mt, at the lower end of guidance, and reduces its second half dividend estimate to just 1c for a full-year pay-out of 2.5c.
Citi forecasts earnings of $62m in FY21 for Whitehaven Coal, which compares with $830m in FY19, and this would allow the business to break even at the net profit level. No dividends are expected. Net profit is expected to recover in FY22 on improved volumes for thermal coal, at a forecast price of US$69/t.
Depending on coal markets, the broker expects Whitehaven Coal to retain flexibility around the timing of capital expenditure at Vickery.
Wilsons points out, with committed capital of $2bn for growth projects over the coming four years, the company is somewhat constrained despite ample debt facilities. That said, the broker still expects Vickery will proceed but capital constraints will determine how it is funded, and whether this comes ahead of the Winchester development.
Meanwhile, Morgan Stanley is of the view that the market is more than compensated for the issues surrounding Narrabri and Maules Creek and Vickery is a worthy expansion project.
Citi believes this is the best time to invest in cyclical mining stocks as risk appetite is low and the shares are trading at a deep discount to valuation. Excluding value for Vickery and Winchester South, the life-of-mine valuation would be $2.42 compared with the current share price of $1.40. The broker reduces the target to $1.75 and upgrades to Buy from Neutral.
Wilsons anticipates investors can expect a more normal production year in FY21 and more normalised trading markets, and the development program should mean significant production and earnings growth is available in coming years.
The broker, not one of the seven monitored daily on the FNArena database, maintains an Overweight rating and $4.75 target and believes investors should focus on the year ahead and the rapid expansion that is unfolding. Wilsons concedes the imminent removal from the ASX100 may weigh on the stock in the near term but asserts that, as production issues recede, earnings multiples over the next year are attractive.
The main issue facing Whitehaven Coal, in Citi's view, centres on its long-life thermal assets. Equity investors in public markets are now unwilling to pay full value for these assets because of the uncertainty surrounding the future use of coal in a carbon constrained world.
While demand will continue for some years to come, thermal coal production may not be a growth industry for Australia, although the broker anticipates the country will continue to export around 200mtpa.
While those with quality thermal coal projects in areas of less-productive farming country and distant from population centres may have room to expand output, whether Whitehaven Coal can ever obtain full value for its potential Citi considers is another matter.
The database has five Buy ratings, one Hold and one Sell (Macquarie) for Whitehaven Coal. The consensus target is $2.46, suggesting 71.8% upside to the last share price
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