Whitehaven Coal is in a sweet spot. Producing high quality thermal coal for export to Asia while coal prices have been forced up by geopolitical events has delivered a bountiful gain to shareholders. WHC has used the prize wisely to eliminate debt, repurchase up to 35% of its shares, and stick to its current portfolio plans. High coal prices are of course welcome, but the real strength of this business is the fundamental long term demand across Asia.
WHC has long life coal assets in the Gunnedah Basin of NSW. Annual production is approximately 20mt, mostly high calorific value thermal coal purchased by and exported to Japan, South Korea and Taiwan among other Asian countries. The company has coal resources totalling over 3.1 billion tonnes.
Coal price running hot. The Russian invasion of Ukraine has disturbed world coal markets leading to elevated coal prices. Approximately 112Mt of high calorific value (HCV) coal in seaborne markets is affected by embargoes and restrictions on Russian coal, according to industry consultants, Wood Mackenzie (Figure 6). WHC has capitalised on this opportunity and delivered its largest ever net profit in FY22 of ~A$1.95 billion and could exceed this in FY23f, primarily due to coal prices.
Capital Management. The profit bonanza brought on by the soaring coal prices allowed WHC to supercharge its shareholder return in FY22. The dividend policy is to distribute 20%-50% of net profit as a mix of dividends and buybacks. Surplus capital can be returned to shareholders through buybacks if returns are more attractive than growth investments. The $1,952 million net profit in FY22 therefore gave rise to $495 million in dividends and $588 million in share buybacks equating to approximately 55% of net profit. This was after repaying $697.8 million of debt and using $124 million for sustaining capex.
After completing the initial 10% buyback in October, WHC commenced a second share buyback targeting 25% of issued capital or up to 240 million shares.
Investment View
A fortuitous golden period of heightened coal prices has provided a windfall for WHC and its shareholders. The extent of the price distortion cannot be known with any certainty, but gravity must eventually normalise prices.
Conversely, WHC’s annual production has long term demand from Asian customers seeking a high quality fuel source for electricity generation.
Consensus earnings forecasts will be prone to large changes depending on the duration of the coal market distortion. The market is anticipating a rapid normalisation of earnings by FY25f (EPS -75% from FY23f to FY25f), but this will be on a much smaller share count depending on how much stock the company decides to repurchase.
Wet weather has disrupted production in 1Q23, sufficiently for the company to lower its FY23 production guidance to 19.0-20.4Mt (from 20.0-22.0Mt). The weather has also increased the expected unit cost of production to A$95-102/t (from A$89-96/t).
Industry commentators Goehring & Rozencwajg point out that China’s climate pledge gives it an incentive to burn as much coal as possible between now and the end of the decade. China is a large coal importer and further increases to its coal-fired power base will add upward pressure to seaborne thermal coal prices.
In its September quarter production report, WHC noted uncertainty around natural gas supply into Europe had appreciably increased gas prices. Consequently, thermal coal had become significantly less expensive than gas on a per gigajoule basis. Russian supplied coal is exiting Asian markets (as contracts come to an end) due to sanctions. This will potentially sustain the very high prices for seaborne thermal coal for most of FY23f as those Asian customers seek alternative supply.
Consensus earnings forecasts are anticipating an even bigger year than FY22, predicated on sustained higher coal prices. The corollary is for another bumper year of returns to shareholders although the mix of dividend and buyback is to be determined.
At the current share price, the market is valuing the company based on a coal price that is approximately 4x its historic average. The key investment risk is therefore when the coal price reverts to a more normal level, on the assumption that the current environment is distorted by the exit of Russian coal from the market.
We note the Chairman recently sold 200k shares. The CEO also sold ~900k shares for tax purposes but he remains heavily invested in the stock with >1m shares and >3m rights.
Assets and resources
WHC owns and operates its mines in the Gunnedah Basin in NSW. It has four mines at Maules Creek, Narrabri, Tarrawonga and Werris Creek. There are two development projects at Vickery (NSW) and Winchester South (Qld). A total workforce of approximately 2,500 is evenly split between employees and contractors. All of WHC’s production is exported from the Port of Newcastle.
Maules Creek and Narrabri are the two most important mines. Maules Creek has approved production of 13Mtpa for more than 30 years. Narrabri is approved for 11Mtpa and has an approved extension to 2044 once work is completed over 2024-27.
Werris Creek will finish production in 2024 while Tarrawonga is expected to finish in 2032.
Vickery will produce ~10Mtpa of primarily thermal coal for more than 20 years once operational after two years of construction. Plans and approvals are expected in FY23.
Winchester South has a similar profile with 10Mtpa production to last over 20 years with a similar development time frame to Vickery.
The production profile therefore is for steady growth, but management has not provided guidance.
Risks To Investment View
Upside Risks
- Coal prices remain elevate due to extended Russian absence in market
- Production improves as La Nina ends
- Inflation, labour and supply chain issue diminish
Downside risks
- Coal prices normalise more quickly than expected
- Inflation persists and labour shortages are not solved
- Deand from customers eases
Recommendation
We commence our coverage of WHC with a Hold recommendation.
Figure 1: WHC share price vs Newcastle thermal coal price index
Figure 2: Significant rise in coal price FY22 vs FY21
Figure 3: FY22 sales volumes
Figure 4: FY22 ebitda factors
Figure 5: Balance sheet in net cash position (A$m)
Figure 6: Global FY22 HCV seaborne exports (MT)
Figure 7: Asia seaborne imports by type (MT)
Figure 8: WHC quarterly production
