Treasure Chest: Whitehaven Versus Stanmore

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

FNArena’s Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Danielle Ecuyer

Whose Idea Is It?

Morgans

The subject:

A combination of historically low met coal prices, excess Chinese steel exports, and negative investor sentiment plausibly marks a cyclical low for both coal and stock prices, presenting an attractive entry point for patient investors.

More info:

Commodity markets are often influenced by general sentiment, but fundamental supply and demand dynamics remain important.

Morgans believes recent weakness in coal equities such as Whitehaven Coal ((WHC)), New Hope ((NHC)), and Stanmore Resources ((SMR)) has overly reflected negative sentiment rather than deteriorating market fundamentals.

These stocks have already lifted off their 52-week lows following the broader April 2025 market sell-off.

National Australia Bank’s latest Minerals & Energy Outlook notes hard coking coal was one of few commodities to rally after President Trump’s tariff announcement on April 2.

NAB maintains a cautious outlook on metallurgical coal due to weak steel demand and potential curbs on Chinese steel exports, alongside ongoing property sector deleveraging.

Thermal coal also faces a subdued long-term outlook from energy transition pressures and global growth concerns, although rising electricity demand from AI-driven data centres could provide some offset.

On NAB’s forecasts metallurgical coal prices are projected to average US$180/t in 2025 and US$165/t in 2026. Thermal coal is forecast to average US$98/t in 2025 and US$85/t in 2026.

Goldman Sachs also sees near-term oversupply dominating the met coal market due to higher exports from key regions in combination with softer import demand from China and India.

However, under-investment in new supply, operational constraints, and rising medium-term Indian demand support a structural recovery towards US$220/t.

Morgans argues investor apathy has left coal shares in the ‘too hard basket’, but the broker also highlights such oversold conditions often present opportunity for patient investors. 

Drawing on the McCloskey benchmark premium hard coking coal price near US$220/t, about 20% above spot levels and 30% above March quarter lows of US$168/t, the broker believes prices have reached unsustainably low levels for producers to remain cash-positive and incentivise new investment in supply.

Recent asset sales, such as Whitehaven’s US$1.08bn divestment of a 30% Blackwater stake and Illawarra JV sell-downs, were transacted at substantial premiums to the broker’s valuation at a coal price of US$220/t, signalling confidence in future pricing and scarcity of quality supply.

Lower coal prices have also pushed listed miners into conservative capital management, ending for now, at least,  the sector’s reputation for high payout ratios, dividend yields and resulting in reduced capex spending, which detracts from supply expansion.

The broader macro backdrop remains challenged, particularly from a surge in low-cost Chinese steel exports (around 110mt in 2024, equivalent to the world’s second largest steel producer from India), but Morgans is watching for signs of coal supply disruption and/or steel production cuts that could tighten the market.

Despite a relatively resilient quarterly performance from Australian suppliers, in the face of adverse wet weather conditions, earnings forecasts and share price targets have been reset at lower levels.

Morgans highlights target prices for Whitehaven, Stanmore, and New Hope are now below respective estimated net present values, reflecting the magnitude of uncertainty around the outlook for the coal price.

When it comes to stock picking, the broker’s focus centres around being able to “weather” the cycle with sufficient scale and balance sheet strength. Whitehaven is the preferred ‘quality’ pick for Morgans, with Stanmore offering “standout” value.

FNArena daily monitored brokers have a consensus target price on Whitehaven of $6.657, suggesting potential 22%-plus upside.

Within that context, the bifurcation in views is evident. Citi, Bell Potter, and Ord Minnett remain positive on the strength of the company’s balance sheet.

Bell Potter believes a capital allocation review will favour dividends and possibly an expanded share buyback.

Ord Minnett also highlights the expected underlying cash flow generation for Whitehaven. This analyst stresses an attractive valuation at circa 10% free cash flow yield (including leases) compared to peers.

Daily monitored brokers have five Buy-equivalent ratings and two Hold-equivalent ratings.

Shares in Stanmore Resources are trading at a deep discount of -47% below the FNArena daily monitored consensus target price of $2.95.

While not a steadfast indicator for investors, the discount most likely reflects balance sheet concerns, with net debt rising to US$146m at the end of the March quarter from US$26m at December-end.

Citi highlights the potential for the steep discount to narrow on good news. The three daily monitored brokers of Morgans, Ord Minnett, and Citi all have Buy-equivalent ratings.

Ord Minnett viewed the company’s March quarter report positively, with sales and production beating expectations despite adverse wet weather. Like Whitehaven, management has guided to further cost-cutting and a reduction in capex, aimed at positioning the company for any recovery in coal markets.

Non-daily monitored broker Petra Capital emphasises Stanmore has embraced cost-saving initiatives and is optimising production in the face of weak coal prices.

The reduction in cash costs and capex by -4% and -24%, respectively, as guided by management, should improve free cash flow generation.

The balance sheet is expected to strengthen as a build-up in working capital is unwound, with US$55m in cash received in April, lowering net debt to US$91m and pushing available liquidity to US$444m.

Petra forecasts the company can maintain an ongoing fully franked dividend yield in the range of 8%-9%, based on forecast DPS of US9.7c and US11.2c for 2025 and 2026, respectively, with the shares trading at a cheap valuation.

By comparison, consensus DPS estimates stand at US3c and US5c, which lays bare the bifurcation in expected cash flow generation and payout ratios.

Petra’s target price sits at $4.97, compared to consensus at $2.95, with Morgans at $3.35 and Ord Minnett at $2.40.

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