Whitehaven Coal: Cash machine

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

21 April 2022, 7:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• 3Q sales were more resilient to NSW wet weather than we had forecast and we upgrade our 2H volume and price assumptions generating EPS/NPV upgrades.
• Base case NPV lifts to (login to view) with a 8.5% yield. Spot coal prices above our forecasts see capital and dividend risks asymmetrically skewed to the upside.
• Physical market feedback suggests that a confluence of forces will keep price conditions tight through 2022. Price strength duration is key here and our valuation in a bullish pricing scenario is (login to view).

Resilient 3Q, FY22 guidance maintained

3Q production was stronger than we’d feared. Hunter Valley export logistics slowed with wet weather but not excessively so, seeing FY22 guidance reaffirmed. Lower than expected thermal price realisations (-13%) reflects the lag associated with far higher than expected prices.

Shrinkage in the Low CV sales fraction to 4% confirms fresh coal cutting at Narrabri and harder washing to premium spec elsewhere.

Analysis

Slight buyback accretion: Whitehaven Coal (ASX:WHC) is ~17% through its $400m buyback (~$67m for 16.8m shares, avg. $4.00ps) which has been ~2% NPV accretive to date. We’ve been surprised at the pace so far but suspect it is succeeding in its aims to smooth volatility, endorse the strong outlook and build a higher quality register.

Franking credits become available from the 1H23 result, suggesting the buyback will remain key in 2022, but it now feels more like a ‘month-to-month’ board decision given price appreciation.

Capital discipline: WHC recently affirmed it has no appetite to sanction major growth capex (Vickery) in the coming 12 months and likely longer.

Production/ development discipline has been a feature among major producers and a material contributor to pricing. A host of potential asset divestments (BMA, Anglo, South32) also encourages incumbent owners to retain dry powder.

Clear dividend upside: Let’s assume WHC retains ~$300m of net cash through the cycle for balance sheet stability and M&A optionality as alluded. On our base case forecasts, WHC would generate +$1.5bn (+$1.50ps) of surplus cash above this level to the end of FY23, pre any dividend payments or buybacks.

In our bull case pricing scenario this surplus would extend to $1.9bn ($1.88ps). Our dividend forecasts (a further 72cps to end FY23) therefore look conservative, even when considering a further $332m (33cps) can still be deployed via the buyback.

Forecast and valuation update

We apply higher 2H22 volumes (17.4Mt FY22 Sales) and coal prices, but retain costs above guidance at ~$85/t. We recently lifted our long-term price to US$80/t to reflect;

1. Avg 5-10 year NEWC pricing of US$88-102/t;
2. Rising production costs; and
3. The forces driving expected prolonged supply tightness in low-ash/ high energy coal (ESG, permitting/ financing hurdles, board risk aversion, development discipline).

Our price curve sits 5-8% ahead of consensus forecasts which have risen sharply in the last month, and which have scope to ratchet higher in our view.

Base-case DCF valuation adjusts to (login to view) and excludes any value for Vickery or Winchester. WHC’s valuation is very sensitive to the duration for which record prices persist. Our bull case valuation is (login to view).

Investment view

WHC offers ~9%/38% upside to our base/bull case pricing scenarios (excluding growth assets) with clear upside risk to both NPV/dividends linked to coal prices trading above consensus.

We sense recent energy market dynamics have awakened a wider investor set to the importance of thermal coal in the global energy transition and to WHC’s compelling outlook.

Price catalysts

Directional NEWC coal price moves; Positioning for/ recognition of rapid cash accumulation and dividend upside in time.

Risks

Narrabri LW110 operating risks, production disruption, cost inflation, commodity price and FX volatility. ESG driven industry headwinds (financing, insurance).

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