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Capacity Increase Ahead for New Hope

Australia | Mar 23 2023


While coal prices have started to retreat after a strong rally, New Hope Corp’s capital expenditure plans should see the company boost production. 

-New Hope Corp delivers an in-line interim result given key metrics were pre-reported
-First half rally has quickly retreated, but market commentary suggests tightness will remain
-Dividend payment proved the key miss of the result, despite issuance of a special

By Danielle Austin

While a coal price rally has proven short-term, opportunity remains on the horizon for New Hope Corp ((NHC)) by way of project expansion. 

The company is mobilising additional truck capacity at its Bengalla asset over the second half in a bid to recover production lost to the impacts of adverse weather, and looks to reach a production capacity of 13.4m tonnes, from a current 12.5m tonnes, by September 2024. 

Meanwhile, first mining at the New Acland asset should begin late in the fiscal year and production will be ramped up to cover three pits and decrease single pit risk. First coal shipment from the asset is expected in the first quarter of FY24, with full production reached in FY25. 

Costs at Bengalla are expected to increase to $65.40 per tonne, as the company faces inflationary impact and additional labour to meet its ramp-up targets, with New Hope planning to invest $200m at the project to ramp up capacity, while capital spend for the New Acland project is projected to reach $384m over the current and next fiscal years. Analysts expect capital expenditure investment to unlock material value for the company in the longer term. 

While buoyant coal prices, which rose an impressive 142% year-on-year in the period, were a key driver of New Hope’s interim result, thermal coal pricing has already retreated in the early second half. Price recovery looks to remain a key catalyst for the stock in the near- to medium-term, with market commentary appearing to suggest a tight market should keep prices elevated. 

Citi (Neutral, target price $4.80) notes performance of Australian coal prices, whether positive or negative, remains a key risk to its outlook on New Hope. The broker's valuation reflects the company’s position as a mature coal mine operator through its 80% stake in its flagship Bengalla asset, alongside cash cost management that should support the company through cycles.  

The company reported first half revenue of $1,582m and earnings of $1,038m. Free cash flow increased 100% year-on-year and the period closed out with $1,071m cash in hand. 

Dividend payments and capital management 

The company’s first half dividend has disappointed consensus expectations, with New Hope issuing a 30 cents per share fully franked final dividend, and a 10 cents per share special dividend. As noted by Credit Suisse (Outperform, target price $5.70), the disappointing dividend could suggest a resumption of the company’s share buyback is in the future. 

The broker pointed out New Hope switched capital management tracks after executing just $31.3m of its $300m share buyback, to focus on the now complete repurchasing of $75.8m convertible notes.

The combined dividend payment was a -23% miss to Macquarie’s expectations. Taking into account New Hope’s interim result, convertible note repurchase and buyback, Macquarie (Outperform, target price $6.00) has dropped its earnings per share forecasts for the current fiscal year, but does lift expectations for the following years.

Ord Minnett (Hold, target price $6.30) feels New Hope’s current share price, and discount to its valuation, reflects an aversion to investing in coal mining. Its recent valuation decline was in response to the recently introduced Coal Reservation Scheme, which will require New Hope to sell some coal into the domestic market at capped prices.

The FNArena database shows three Buy or equivalent ratings for New Hope and two Hold, with aa consensus target price of $5.83.

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