The coal sector has been under pressure in the current environment. On one hand the seaborne market which has the primary avenue for coal has suffered from lower than expected demand from major importing nations in Asia, predominately led China. Mature markets on the other hand has been a marketable shift away from coal, notably towards natural gas in the US.
Whitehaven share price has lagged the broader market. Comparing WHC against the ASX 200 index chart shows the risks in investing in miners in a sector that is undergoing fundamental change.
Our view is that while the overall market for coal demand is shrinking (replaced with LNG and Natural Gas taking lion of the market share). It will continue to play a critical piece in the energy mix especially in the developing markets. Coal’s cost competitiveness is primary driven by the economics even with inclusion of any potential carbon tax.
This is within the context that there is a large portion of the domestic producers in China that are losing at today’s prices. This cannot last forever, however it can last beyond that most investors are expecting.
If you are investing in a coal miner, then it is important to focus on the producers that are at the lowest quartile of the cost curve with a long mine life.
We have been following Whitehaven for a number of years. Coal is an important part of BHP and RIO asset portfolio but WHC is one of the best pure play on the coal sector not only on the ASX 300 but globally.
Whitehaven commissioned its largest asset, Maules Creek which as 30 year mine life. It is expected to ramp up to full production by 2019 from 13 mtpa to 19 mtpa.
The highest risk for the business post exploration is the mine construction phase which can face cost blowouts and delay in commissioning. WHC has mostly passed this hurdle with production ramping up now. Thermal coal from Maules Creek achieves a premium to Newcastle benchmark.
Critical factors hampering the share price are the debt on the balance sheet and the continual coal price weakness. The ramp up of Maules Creek production will support cashflow where the total debt on issue likely to have peaked.
Shareholders should not expect dividend growth anytime soon. Even as dividend start to grow again it will most likely to be without franking credit due to historical losses.
Key Asset Summary
In aggregate, WHC achieved average margin of $15/t in the second half of 2015 from $10/t with expected cost per tonne to fall another $1/t – $2/t.
Debt on balance sheet is high due to capital expenditure for Maules Creek. Going forward as operating cashflow increase from higher production, it will meaningfully decrease. Coupled with potential growth option conditional on coal price recovery there are a number of sources for the cash generated by the business.
While we do see scope for dividend increase, we are comfortable with immediate use of cash in deleveraging the balance sheet and fund addon growth capacity.
Thermal Coal Price
It seem there is no end to the decline in the thermal coal price since its peak in 2011. Given significant portion of the industry are producing at a loss at these levels we are confident that the price is closer to the bottom than the top.
We are cautious in the near term on WHC until the price recovery can be confirmed.
- Recovery in coal prices leading to margin expansion
- Stock will rerate as total debt is repaid down
WHC Dividend Dates 2017
The company has not declared any dividends