Keeping the lights on

1H23 RESULT

Need To Know

• Higher coal prices lifted revenue by $2.4bn to $3.8bn in the half
• WHC returned $945m to shareholders in buybacks and dividends
• Long term demand for high-CV thermal coal is undiminished
• NSW Government imposes domestic coal reservation on production

A bumper result for WHC was more than anticipated by the market, so that easing coal prices are weighing on the share price. 

Interim result. WHC reported EBITDA of $2,653m based on a record average achieved coal price of A$552/t. This generated operating cash flow of $2,545m from which the company paid $366m in dividends and repurchased stock worth $578m. Since March 2022, WHC has repurchased ~14% of shares on issue and is approved to go to 35%. WHC’s policy is to return between 20-50% of net profit to shareholders through dividends and buybacks. Over the last 18 months, WHC has allocated $1.67bn of capital to be returned to shareholders.

Coal prices. The recovery in Australian production combined with softer thermal coal demand from Europe and Northern Asia has caused higher coal stocks at the end users. This is beginning to ease the record high prices for high-energy coal in early 2023. However, as the JFY23 (Japan) purchase agreements by Japanese utilities with Russian coal producers concludes in April 2023, the interest in high-CV coal remains elevated. WHC already exports nearly 60% of its high-CV coal to Japan. Regardless, the supply of high-CV coal remains tight, and this should support thermal coal prices in 2023, according to the company. Demand for seaborne thermal is expected to remain robust out as far as 2040, according to key global commodity research groups such as Wood Mackenzie and AME with Asian demand (WHC’s customers) increasing over that time frame.

NSW Government domestic coal reserve. The NSW Government has now finalised directions requiring WHC (and other producers) to ‘make certain volumes of thermal coal available for domestic power stations’. These volumes are capped at the lower of 200kt per quarter or 5% of each mine’s expected saleable thermal coal production. 

On that basis, WHC would be required to reserve approximately 255kt per quarter based on the last four quarters. 

The maximum price WHC can receive is A$125/t (for 5,500kcal coal). If the production cost of the delivered coal plus royalties and a ‘reasonable margin’ (undefined) exceeds the price cap, an application can be made to increase the price cap. The scheme will commence in April 2023.

WHC is doing its bit to keep the lights on in NSW.

Investment View

It’s tough being a coalminer. Just in the last few years, thermal coal prices have been affected by the Chinese ban on coal imports, an Indonesian export ban and the Russian invasion of Ukraine, not to mention the wet weather and COVID-19 impacts in Australia. The impacts on supply and demand from these factors have, in aggregate, pushed the coal price very high and WHC has benefitted handsomely.

The share price is primarily linked to coal prices which are headed lower in the short term. Investors with a longer term view can consider the outlook to be quite favourable.

Figure 1: Coal Price (Newcastle) VS Share Price

Figure 2: 1H23 EBITDA A$M