New Hopes For A Thermal Coal Revival

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

-Rise in price needed for Bengalla leverage
-Decision on Acland stage 3 needed in 2016
-Brokers remain sceptical on Bridgeport
 

By Eva Brocklehurst

New Hope Corp ((NHC)) is hoping for an increase in thermal coal demand and pricing to generate meaningful returns on its newly acquired asset, Bengalla, and its planned extension to the Acland coal mine in Queensland.

The addition of the 40% stake in Bengalla, NSW, acquired from Rio Tinto ((RIO)) with four months contribution to the half year results, is immediately accretive but hard to fully value in the current coal price environment, Morgans maintains. Rising coal prices are needed for the additional market leverage to be realised.

The company reported a small profit in the first half after two consecutive halves of losses. Operating cash flow was above Morgans' forecasts in the half but the dividend was lower. Smaller dividends appear sensible given capital requirements, and the broker infers that the company is protecting its $12-13/t cash margin, yet is likely to slip closer to break even at the profit line in the second half, inclusive of a positive contribution from Bengalla.

Meanwhile, proceedings in the courts for the revised Acland stage 3 project have commenced and recommendations are due in the June quarter, with possible approvals by the September quarter. The broker envisages a risk that the tenuous balance of power in Queensland politics may defer any decisions until much later. The market is pricing in little value for mining at Acland to continue beyond 2018, when current coal reserves are notionally exhausted, the broker observes.

Morgans assumes a steady recovery in thermal coal pricing up to a long-term incentive price of US$65/tonne and that Acland is approved to extend its mine life to 2029. Nevertheless, there is risk to valuation, the broker acknowledges, if these outcomes do not unfold. The company has until late 2016 to obtain final approvals for the extension before it needs to start implementing steps towards reducing production or closure.

Bridgeport is still struggling and reported a small loss in the first half. Morgans remains concerned about he capital being deployed in this area which is required to create critical mass.

Morgans believes the stock offers value into the next coal cycle but cautions that it suits patient investors. The company expects a draft decision on below-rail charges will be delivered shortly with the potential to remove up to $2-3/t in costs, the broker believes, which is highly material relative to the tight cash margin.

Underlying profit was $15m in the half versus $34.2m in the prior corresponding half, primarily driven by lower coal prices which more than offset the beneficial FX moves, Credit Suisse notes. The broker notes the Bengalla acquisition paves the way for a material increase in attributable tonnage sold, as well as sales revenue in the second half.

The broker takes heart in the company's comment that Asian seaborne thermal coal markets are starting to stabilise. Supply-side responses to the weak price environment are under way. Australian export growth has eased and exports from Indonesia appear to have peaked while US exports have fallen away. Credit Suisse also notes demand for high quality Australian thermal coal remains firm from traditional importers such as Japan, Korea and Taiwan.

Macquarie is not so sure. The broker contends that New Hope's future growth appears to rely on a bullish view of thermal coal that is well beyond the broker's forecasts. The broker had initially considered the acquisition of Bengalla as transformational, but with the thermal coal industry moving into structural decline and prices weak, the cost of the transaction now seems expensive.

As the company was unable to secure management rights for Bengalla, the broker is less positive on its ability to influence costs and operating practices. The company is considering further acquisitions of small producing assets in the oil sector, on expectations for a recovery in oil prices and with the Bridgeport facility able to support more production.

Again, Macquarie is sceptical, cautious about sinking further money into a business that has never generated a return for New Hope. All up, the broker suspects the company is banking on a sizeable increase in demand, which remains a hope at best.

There are one Buy, one Hold and one Sell rating on FNArena's database for New Hope. The consensus target is $1.38, suggesting 7.6% upside to the last share price. Targets range from $1.00 to $1.68.
 

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