Better Times Ahead for New Hope?

This story features NEW HOPE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: NHC

New Hope Corp suffered from much lower coal prices in the first half, but on increasing production and falling costs, are there clearer skies ahead?

-New Hope earnings drop -58% on a -58% drop in coal prices
-Production guidance maintained, requiring a substantially increased second half
-Increased production will lower costs
-Near-term outlook for thermal coal prices not so rosy

By Greg Peel

New Hope Corp ((NHC)) had provided key first half metrics with its fourth quarter update, so brokers were not surprised when yesterday’s official result noted a -47% year on year decline in revenue and -58% decline in earnings, due to an average thermal coal price of $197/t being down -58%, only partially offset by increased coal sales and lower costs.

Cash flows were weaker than expected but the company’s cash position of $394m is still solid, albeit down -34% on last year.

Brokers had varied expectations for the dividend nonetheless, which at 17c landed at the high end of the range of forecasts.

New Hope has retained FY24 production guidance of 8.3mt at Bengalla (80%-owned) and 1.0mt at New Acland (100%-owned), in line with broker expectations, but a 25% increase in production in the second half from the first is required to achieve guidance.

Higher volumes are required to support second half cost reductions.

Key Differentiator

Morgans has crunched the numbers to arrive an an estimate of a $76/t cost at Bengalla, which is materially below thermal coal peer Whitehaven Coal’s ((WHC)) guidance midpoint of $108/t.

Bengalla’s ramp-up to 13.4mtpa production appears to be on track, and if Morgans’ forecast 15-20% increase in second half production is achieved, New Hope could well see costs coming in at the low end of its $72-81/t guidance range, as management has suggested.

Macquarie is forecasting $75/t.

New Hope’s $99/t coal cash margin in the first half was aided by a $16/t contribution from coal price hedges, Morgans notes. The second half will see a further contribution, but this will diminish in the coming twelve months.

The Japanese Power Utilities (JPU) reference price, which sets longer-term contract prices paid by key customer Japan, will reset lower in April. Morgans assumes a fall to US$160/t from US$199/t in FY23.

Morgans forecasts Bengalla’s second half margins to contract to 50% from 56% in the first half, but declares “If this is what trough margins look like in the current cycle then we’ll take them every day of the week”.

Growth

New Hope mined and sold first coal from its New Acland stage 3 expansion in the half, which is guided to ramp up to 5mtpa production by FY27.

One reason the company is preferring to stick with dividends over buybacks is due to legal uncertainty over New Acland stage 3, Ord Minnett notes. Environmental groups continue to oppose the mine.

The broker does not expect such groups to prevail but believes New Hope’s capital management policy is sensible until the issue is resolved.

After close-of-books for the first half, New Hope participated in Malabar Resources’ capital raise, increasing its stake to 19.9%. Malabar’s Maxwell metalogical coal project in NSW produces around 6mtpa, and capital raised leaves the project fully funded.

With a mine life of around two decades and unit costs at the bottom end of the industry cost curve, Maxwell underground met coal mine provides modest diversification for New Hope (from thermal coal), Ord Minnett suggests.

The project should be fully ramped up in 2028 or 2029, and produces a majority high quality semi-soft met coal, the broker notes, with the remainder being high-energy, low-ash thermal coal.

The Outlook

Traders see recent pricing steady in the US$125-130/t range as being well-balanced with a reasonably solid floor provided by Chinese demand for lower energy coal. Near-term upside risk does look limited nonetheless, Morgans suggests, given customers look well stocked after another mild winter, and due to better NSW supply.

Reliance on Chinese demand for 5,500kCal product does keep the broker cautious, believing an upswing is less likely in the coming months.

Ord Minnett believes demand for New Hope’s and Whitehaven’s high quality thermal coal is likely to remain robust in South East Asia, as it meets energy needs at lower emissions compared to lower quality coals, such as those from Indonesia.

On the supply side, new Western supply is likely to be constrained by ESG considerations and onerous regulatory hurdles, the broker suggests, which benefits existing producers. In turn, this could lead to long-term or midcycle thermal coal prices being higher than Ord Minnett’s current assumption of around US$100/t from 2027.

While cautious in the near term, Morgans strongly believes physical coal markets will see future cycles of “super pricing”, well above consensus expectations, supporting periods of elevated cash flows and shareholder returns.

A forecast fully franked yield of 7-8% through the down-cycle is solid compensation, Morgans suggests, as investors await the next upswing.

Morgans retains a Hold on New Hope, as it is trading near the broker’s fair value estimate.

Citi is on Neutral for the same reason, and so too Ord Minnett (Hold).

Macquarie suggests New Hope’s FY24 volume increase is offset by a weaker thermal coal outlook. Given free cash flow headwinds and a premium valuation to peers, the broker sticks with Underperform.

While Macquarie sees the restart of New Acland as a positive, this broker continues to see risks to the ramp-up.

None of the four brokers monitored daily by FNArena covering the stock has changed its target price in the wake of the result, which is a consensus $4.84.

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