Production issues look to be in hand
We've previously noted that Narrabri's production issues (weighting on the face) were of serious concern, given the mine comprises +25% of the value of Whitehaven Coal's (WHC) operating assets. The recent downgrade of approximately 5% to FY19 saleable production guidance disappointed. However, WHC avoided punishment, we think because the scheduling issues at Maules looked simple, and temporary, while Narrabri is showing signs it is resolving its more complicated issues that inhibited 2018 production, which raised concerns around long term productivity.
WHC has also kept its unit cost guidance flat versus lower production, implying WHC is through the worst of recent coal inflation as its operations re-balance to their current operating schedules. WHC is managing its assets well, and we expect the market will take comfort from the resolution of Narrabri's issues, which we think have contributed to recent weakness.
Logic says market issues should normalise
The bigger issue for WHC of late has been the sharp price correction in thermal coal prices into the low US$80/t range. With imported (high ash, lower energy) thermal coal now materially cheaper than domestic coal in China, we think the resumption of Chinese imports should occur for economic reasons, provided that perceived political intervention doesn't persist. The key question is when, which we can't answer with conviction, but we do note that coal markets have navigated several episodes of Chinese intervention via the use of unofficial and non-tariff trade barriers in the last 4-5 years. Meanwhile, positive supply/demand drivers for premium quality coals remain unchanged.
We think that investors will readily return once China uncertainty abates.
Poised for a shift in investor momentum?
We think the resolution of WHC's operating issues will begin to attract the return of momentum investors capable of taking an early view on the eventual resolution of coal market issues. Peak margins of the cycle are clearly behind us but WHC simply looks too cheap offering 26% of capital upside and a 10% yield in the coming 12 months. We also think that market interest in the capital management upside story will rebuild into the 2H dividend.
WHC is our preferred coal buy for:
- its current excessive discount to valuation;
- its exposure to premium quality coals; and
- its long listed track record.
For investors with a higher risk tolerance, we think its time to accumulate. We retain our Add recommendation.
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