Cash or coal?

4Q23 PRODUCTION

Need To Know

• After repurchasing $949m of shares in FY23, WHC still has $2.65bn cash.
• Average coal prices ended the year on a strong note; WHC average price received was A$445/t.
• WHC should return more cash to shareholders rather than make acquisitions, in our view.

Investment Implications

With $2.65bn in the bank and having repurchased almost $1bn of shares in FY23, WHC is flush with firepower to make acquisitions. But is this the best way forward?

4Q23 production results showed WHC produced 5.1mt taking ROM production for FY23 to 18.2mt within its guidance range. Drier weather certainly helped to lift production back towards normal levels although the longwall move at Narrabri (WHC 77.5%) reduced underground production for the period.

WHC produces mostly high-CV thermal coal for which the benchmark Newcastle price (gC NEWC 6000 CV) averaged US$161/t for the quarter, 35% below the March quarter average of US$248/t. When prices are changing, WHC’s received price usually lags the changes depending on the timing of shipping and other factors. In a stable price environment, the company normally attracts a 10% price premium to the benchmark. For the full year, WHC’s average received coal price was A$445/t compared to A$325/t in FY22.

Buyback. Across FY22 and FY23, WHC has repurchased 196m shares at an average price of $6.69 per share. This has returned just over $2bn to shareholders in that time. The second buyback announced in October 2022 was for 240m shares to be repurchased. So far, only ~120m shares have been repurchased of that tranche. WHC cannot recommence share repurchases before it releases its FY23 results on 24 August.

Acquisitions. There is press speculation, partially confirmed by WHC CEO Paul Flynn, that the company might consider acquiring BHP’s Daunia coal mine which is adjacent to WHC’s Winchester South metallurgical coal mine. It is too early to know if this is a realistic acquisition for WHC.

Alternatively, WHC has its own Vickery expansion project underway and the extension underground project at Narrabri to keep the company busy and growing. 

Investment View

The temptation to put the cash pile to work through an acquisition is understandable and should be considered by WHC’s Board. We think the best use of the cash is to complete the current share buyback program. In an uncertain market where coal prices are returning to more normal levels rather than the super-normal peaks of the last two years, WHC should be careful before making an acquisition.

We note that financing is becoming an issue of concern for WHC with the non-renewal of a $1bn undrawn finance facility. WHC will retain cash on its balance to support the operation of the business. The company also has a $0.8bn tax payment to make by December 2023.

WHC is certainly in a strong financial position but is facing increasingly difficult strategic issues such as the reluctance by mainstream banks to finance coal projects. But there is still steady demand for the high thermal value coal that WHC produces. We see the risks as evenly balanced for now.

Figure 1: Record coal prices in FY23