Australia | Jul 16 2020
Coal markets remain difficult. Hence, Whitehaven Coal is being cautious about capital allocation, and expansion projects are unlikely to get going until well into 2021.
-Unlikely to be in positive earnings territory until FY23
-Cautious outlook for expansion projects
-Production in FY21 likely weighted to the first half
By Eva Brocklehurst
Several expansion projects need to progress along with a recovery in coal prices to provide Whitehaven Coal ((WHC)) with impetus in FY21. Yet coal markets remain difficult and pricing is soft, affected by weak demand, pandemic restrictions and uncertainty surrounding China's import quota.
Shipments have lagged production and inventory rose significantly in the June quarter. Wilsons suggests consensus expectations heading into the June quarter were so low that just achieving key guidance parameters is considered a strong finish.
Whitehaven Coal has experienced a deferral of metallurgical coal shipments as steel producers encounter soft demand, and while there has been some supply-side response from the US, Canadian and Colombian exporters, more is required.
Morgans points out that around 30% of Australian thermal coal supply is cash negative at current prices. Moreover, customers hold abnormally high inventory through the traditionally weaker shoulder season.
While production cuts have been made, predominantly overseas, the broker suggests inventory will take some time to work through. More severe reductions in supply are required to cheap to trigger a genuine price response back towards US$60/t, in the broker's view.
Credit Suisse expects strong production numbers will continue into FY21, but does not anticipate the company will be in positive earnings territory until FY23 and assumes no dividends until then as well.
The LNG glut continues to influence thermal coal prices, while softer electricity demand as a result of the pandemic has added to the pressure. A modest recovery in prices is expected in 2021 but there is a risk LNG is oversupplied into 2022.
There is also the risk developed nations continue to reduce coal usage. Credit Suisse maintains a long-term forecast of US$75/t for thermal coal, predicated on a view that current prices are unsustainable rather than from any conviction about improved demand.
Macquarie agrees there is significant downside risk at current prices and a loss scenario is likely for Whitehaven Coal in FY21-23. Realised pricing was US$59/t for thermal coal and US$76/t for metallurgical coal in the quarter. Realised coking coal prices were -12% below Macquarie's forecasts, reflecting reduced PCI sales from Narrabri as shipments to India were deferred because of pandemic restrictions.
This was the one blot on the company's copybook in the June quarter, Citi asserts, noting the company intends to resume such sales as soon as India's steel mills ramp back up.
Whitehaven Coal is waiting for market conditions to improve to make investment decisions on Narrabri stage 3, Vickery and Winchester South. The company has been cautious about capital allocation and Macquarie suspects no final investment decision on the expansion projects will occur in 2020.
Morgans believes the market will welcome the cautious approach to expansions, such as Vickery, as the inferred preference is for de-gearing. The broker expects the thermal coal side will be soft until there are material reductions in industry supply.
The NSW Independent Planning Commission is due to make a final determination on Vickery in August. Goldman Sachs suspects, if the extension receives approval in August, it may go to the board for approval in the first half of 2021.
If the thermal coal market improves. The price of thermal coal is the sticking point and the broker suspects Whitehaven Coal will probably have to defer all growth projects well into FY22.
A record run of mine production was achieved in the June quarter at 8.2mt with sales of 5.7mt. This was largely driven by Narrabri and to a lesser extent Maules Creek. Narrabri had no issues and was traversing a known fault.
UBS expects some improvements in FY21 as the company has largely recovered from drought and dust issues as well as labour shortages at Maules Creek. Maules Creek is back at full roster and in-pit dumping has commenced, which will lower waste haulage costs.
Morgans envisages compelling upside in the stock for value investors through the cycle while Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has become more bullish on Whitehaven Coal and has an Overweight rating and $4.00 target.
A more normal production year is expected in FY21, with a weighting of production to the first half because of the upcoming longwall change out at Narrabri. Bushfire and drought comparables will also be cycled over the second and third quarters.
Goldman Sachs, also not one of the seven, retains a Neutral rating and assesses the stock is currently pricing in a flat rate for thermal coal of US$60/t. Moreover, valuation support is offset by the weak outlook for cash flow at spot prices.
Bell Potter believes the growth opportunities abound, should markets recover, and this supports a Buy rating. The broker, not one of the seven, has a target of $2.30, which excludes the two major growth projects and reflects the current weakness in coal markets.
The database has five Buy ratings, one Hold (Ord Minnett, yet to comment on the update) and one Sell (Macquarie). The consensus target is $2.19, suggesting 45.2% upside to the last share price.
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