Whitehaven Poised To Weather Coal Gloom

This story features WHITEHAVEN COAL LIMITED. For more info SHARE ANALYSIS: WHC

-High quality deposits
-Debt not such an issue now
-Robust production growth
 

By Eva Brocklehurst

Brokers have been mulling a subdued outlook for coal for some time but remain relatively upbeat regarding Whitehaven Coal ((WHC)). Why? The company's flagship Maules Creek mine was declared commercial at the beginning of this month as rail, road and power construction was finalised. The company is yet to formalise a move up to 13mtpa and this now may occur in two steps rather than one, to reflect a more conservative approach to ramping up because of market conditions.

What Whitehaven has going for it is high quality deposits. Credit Suisse observes the company's Narrabri mine is set to become one of the best longwall operations in Australia. Nevertheless, investor sentiment around coal per se has deteriorated and funds are not easily available to support miners with expansion plans. This is where Whitehaven differs, in Credit Suisse's view, in that it is hard to find a similarly robust production growth story. Hence, given the sharp share price correction and valuation support, the broker upgrades the stock to Outperform from Neutral.

Saleable coal production was up 15% in the June quarter with another strong output from Narrabri. Whitehaven has stated that all operations except Rocglen are generating cash. The company's realised metallurgical (coking) coal price in the quarter was US$75.90/tonne, down 13% on the March quarter but in line with guidance. A realised thermal coal price of US$60.72/t was slightly above the average Newcastle index. The company noted that Chinese thermal coal imports declined over the first half of the year but also flagged 20% reductions to US coal exports, although conceded this was likely to be offset by higher output from Queensland's Bowen Basin.

The company also concedes the metallurgical coal market is currently oversupplied but with the start-up of its Maules Creek mine the proportion of this type of coal – used in steel production – fell to 16% of Whitehaven's output for FY15. A target of 30-40% metallurgical coal is maintained for the longer term.

Despite the attractive valuation, JP Morgan is more circumspect and maintains a Neutral rating, citing weak coal prices and a leveraged balance sheet. Deutsche Bank, too, is cautious while the outlook for thermal coal is subdued. The broker acknowledges an impressive growth profile, with the objective of increasing saleable coal production to above 20mtpa by FY18 and increasing production of higher quality PCI and semi-soft coal. Deutsche Bank believes the stock is more a volume and cost reduction story and the outlook for prices will continue to pressure it for the next few years, offsetting strong production growth and cost reductions.

When it comes to a 12-month view, UBS considers thermal coal is stable but carries long-term downside price risks because of the expansion in unconventional gas supply. On the other hand, metallurgical coal looks more interesting to the broker as North American producers cut production. Despite Whitehaven's coal business being only around 20% metallurgical coal by volume a rise in the price of this product should still benefit the company. The company's performance is tied to the exchange rate in the longer term, the broker notes. An Australian dollar around current levels of US75c in the long term should provide support for coal prices in the local currency.

Brokers were previously worried about the size of the company's debt levels but having successfully renewed its debt facilities the concerns have eased. UBS believes Whitehaven would be able to pay down debt today but because of the tail end of capital spending on Maules Creek, that may not occur until the end of the year. Still, the company is in a strong position compared with other coal companies which are unable to cover even their interest and sustaining capital requirements.

Citi's view is along the lines of Credit Suisse. The broker also upgrades, to Buy from Neutral, based on the share price correction. After securing the new $1.4bn debt facility Whitehaven has enough liquidity to endure lower coal prices for the next two years, in Citi's opinion. At spot prices cash flow generation would be $30m in FY16 and $70m in FY17, tighter but still manageable. Citi forecasts coal prices will recover to US$60/t (thermal) and US$68/t in 2017 as Indian demand improves, driving margin expansion for Whitehaven as the Australian dollar falls below US70c (Citi forecasts US69c in 2016).

FNArena's database has three Buy ratings, four Hold and one Sell (Macquarie). The consensus target is $1.61, suggesting 30.1% upside to the last share price.
 

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