Whitehaven Coal: Price offsets transient pressures

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

21 January 2022, 12:30 PM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• We think today’s price weakness includes an over-reaction to downgraded FY22 physicals and cost guidance.
• Our base case valuation remains at (login to view), as FY22-23 pricing upgrades offset reduced guidance.
• Physical market feedback suggests ongoing coal price strength above consensus forecasts into 2022. Our valuation in a bullish pricing scenario is (login to view).
• Our target price of (login to view) includes a premium to reflect upside coal price risk.

2Q production, FY22 guidance downgrades

Lowered FY22 sales guidance ($17.2-17.8m) was ~2% below our prior forecasts. The ~10% or A$7.50/t step-up in guided costs likely drove today’s weakness, and was 10% above our forecasts.

Analysis

We actually upgrade FY22-23 EBITDA by 6-26% as far higher coal prices forecast absorb these impacts (+10-15%). These have also combined with WHC guidance for dramatically improved 2H realisations (2H: net positive vs GC NEWC, 1H average -16%) as Narrabri returns to cutting fresh coal.

Higher cost guidance is concerning but does include forces that should prove transient including COVID absenteeism (A$1-2/t), wet weather impacts (A$2/t) and subsequent demurrage (A$2/t). WHC also conservatively assumes COVID impacts persist for the entire 2H, far longer than NSW medical guidance.

NEWC thermal coal has bounced back over US$200/t which is US$67/t or 45% above the December consensus for the Mar-Q. We assume NEWC at US$175 for the quarter, implying material upside to our own and consensus expectations.

How long can record prices last? Market participants admit it is difficult to form a medium-term view on price but a perfect storm of drivers looks likely to persist well into 2022. These include:

1. Resurgent post-pandemic industrial demand;
2. Highly constrained seaborne supply; and
3. Very tight LNG markets.

Forecast and valuation update

Base-case DCF based valuation remains at (login to view). We continue to exclude any value for Vickery or Winchester. Beyond FY22 we have conservatively lifted cost assumptions to reflect broader inflationary pressures which WHC does see (diesel, tight labour).

WHC’s valuation is very sensitive to the duration for which record prices persist. On page 4 we show valuation/ cashflow sensitivities to a bullish price scenario.

Our base case forecasts a net cash position of $240m by end FY22 excluding any dividends. Management is coy, but we do expect a modest 10cps dividend at the 1H result on February 17 to reflect the strong outlook. We expect higher dividends in the 2H and a bullish price scenario clearly offers dividend upside potential.

Investment view

WHC offers 19%/56% upside to our base/bull case pricing scenarios respectively. We demonstrate clear upside linked to sustained coal prices above expectations.

WHC is accumulating roughly 27cps in free cash per quarter on our conservative price assumptions.

The market has a history of over-reacting to short-term disappointment and we think today’s weakness presents a buying opportunity as these issues pass.

Price catalyst

Directional, NEWC coal price moves, but also recognition of rapid cash accumulation the longer high prises persist.

Risks

Narrabri’s operating risks will remain elevated in LW110 in our view.

Production disruption, infrastructure availability, commodity price and FX volatility.

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

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