Whitehaven Coal: Upside price scenarios unfolding

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
06 October 2021, 9:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Spot thermal coal prices continue to far exceed our expectations.
  • Physical market feedback suggests that upside risk to our (conservative) base case coal price forecasts will persist into 2022. Our base case valuation adjusts to (login to view), and our valuation under a bullish pricing scenario comparable in duration to the 2017-18 period is (login to view).
  • Our revised target of (login to view) is now set at the mid-point between our base and bullish case valuations, to recognise ongoing upside risks in physical markets.

Event

Realisation of far higher NEWC coal prices than expected.

Analysis

Physical markets: Activity in the NEWC paper market has shot through ~US$230/t but so far this appears to be trader-driven to hedge long/short positions.

Spot physical trades in the last 1-2 weeks look limited, but recent trades at around US$200/t have exceeded our prior (conservative) forecast for Q4CY21 by a whopping ~US$60/t.

How long can record prices last? Market participants admit it is difficult to form a medium term view on price. A perfect storm of price drivers looks to have strong potential to persist well into 2022.

These include; 1) resurgent post-pandemic demand; 2) critical domestic shortages in China; 3) fuel shortages in Europe; and 4) very tight LNG markets/ pricing.

Key suppliers including Indonesia and South Africa appear to have little capacity to lift supply, and the same applies to Australia where we also see some supply discipline.

Forecast and valuation update

Net ~8-46% upgrades to FY22-24F EBITDA driven primarily by higher coal price assumptions, and higher semi-soft price realisations in a stronger met market.

Base-case DCF based valuation revises to (login to view). At such elevated margins (group FY22F @ A$88/t or 46%), WHC’s valuation is very sensitive to the duration for which record prices persist.

On page 4 we show WHC’s valuation and cashflow sensitivities to a bullish price scenario comparable in shape/ duration to the 2017-18 period.

Given upside risks to coal pricing, we now set our target at the mid-point between our base and bullish case NPV scenarios. We continue to exclude any value for Vickery or Winchester.

Our base case forecasts net debt to reduce by $740m in FY22 to ~$70m (~2% gearing, ~0.1x leverage) inclusive of modest dividends (4.5% yield). Under bullish pricing, we forecast net cash during the 3QFY22.

Investment view

We demonstrate clear upside in WHC linked to a period of very tight energy markets sustaining coal prices above expectations. WHC is trading on a FY22F FCF yield of ~26% and we see upside to our current dividend forecasts.

At its FY21 result, WHC’s intention was to bank 12-18 months of cashflow before re-considering greenfields growth, also supporting short term upside to returns.

Price Catalysts

WHC reports its 1Q report on 14 October. If potentially sluggish volumes disappoint (Maules 2H skew) then weakness may present an opportunity to buy the dip.

Market recognition of WHC’s valuation disconnect is now taking shape the longer coal prices stay near record levels.

Potential medium term recognition of strategic value in WHC’s growth projects.

Risks

Narrabri’s operating risks will remain elevated in LW10, in our view.

Production disruption from a key asset(s), infrastructure availability, commodity price and FX volatility.

ESG investing trends potentially driving a permanent discount to fair value.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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