Commodities | 3:47 PM
Higher thermal/met coal prices, lower costs and improving free cash flow are supporting confidence in Whitehaven Coal, despite ongoing operational challenges at Narrabri.
- Middle East tensions reignite thermal coal pricing
- Narrabri disappoints as Queensland mines shine
- Costs lowered even with upside pressure from diesel
- Focus on management's FY27 guidance at the upcoming FY26 result
By Danielle Ecuyer
Rising coal prices
Back in April, after the start of the Middle East war, Wood Mackenzie pointed out a prolonged disruption to Middle East energy supplies was underpinning a rebound in global thermal coal demand.
"In supply shocks of this scale, coal becomes a critical fallback for energy security. Despite decarbonisation commitments across Asia, tightening LNG supply and elevated prices are accelerating fuel switching back to coal."
Although the market turned up its nose at Whitehaven Coal's ((WHC)) June quarter update, what was evident, as highlighted by Morgan Stanley, was the rise in thermal coal prices to US$142/t, some 4.4% above the broker's forecast and 8.4% above consensus.
The Newcastle benchmark rose 14.5% q/q.
Meanwhile, the metallurgical coal price of US$176/t was 1.7% above the analyst's forecast and 8% higher than consensus.
In the fourth quarter, realised pricing rose across both Queensland and New South Wales. Average pricing increased to $222/t from $207/t in the March quarter.
Breaking it down further, UBS highlights Queensland achieved $247/t and New South Wales $197/t, with the revenue mix remaining weighted towards metallurgical coal at 57% of revenue versus 43% thermal coal, which, according to this analyst, offers stronger earnings quality into year end.
How did production stack up?
Digging a little deeper into the update, FY26 run-of-mine production came in at 10.7Mt, a slight miss of -2.7% against Morgan Stanley's forecast but broadly in line with consensus.
Blackwater experienced a strong recovery following the March quarter weather disruptions, producing 4Mt, ahead of forecasts, as did Daunia at 1.7Mt, where favourable mining conditions contributed to a 10% beat against consensus.
As noted by UBS, Queensland FY26 run-of-mine production was at the upper end of guidance.
For New South Wales, run-of-mine production declined -8% q/q due to disappointing longwall performance at Narrabri amid challenging mining conditions.
While management indicated the challenges were temporary in nature, the UBS analyst explains the June quarter was impacted by roof support replacement and cavity recovery activities, which weighed on production.
Despite these operational issues, FY26 New South Wales run-of-mine production of 20.2Mt still finished at the upper end of guidance.
Ord Minnett noted Narrabri achieved only 0.4Mt of sales against its forecast of 1.1Mt.
Looking ahead, Macquarie points to slower mining rates at Narrabri until the 2H27 longwall move, with management indicating full production is expected around FY28.
A nine-week longwall maintenance period is scheduled for Narrabri in 2H27 before the move into Panel 5. After extensive drilling, the Bell Potter analyst highlights management anticipates improved mining conditions following the challenges encountered in Panel 204.
Macquarie now anticipates lower Narrabri production and higher group costs in FY27 before a recovery in both volumes and costs during FY28.
Lower costs, despite higher diesel prices
Positively, FY26 unit costs of $132/t were -5% below consensus, while also coming in at the lower end of FY26 guidance.
Higher diesel prices remain an issue for FY27, with management flagging a possible impact on cost guidance depending on developments in the Middle East war. Notably, the coal producer is juggling cost reductions against higher inflation.
Consensus is currently forecasting FY27 unit costs of $138/t, with Macquarie forecasting $145/t.
Bell Potter pointed to the targeted cost reductions of $60m-$80m being achieved in FY26, with an ongoing focus on "optimisation across all assets and corporate functions".
UBS and Ord Minnett both commended Whitehaven on the lower costs despite higher diesel prices during the June quarter, with the targeted cost savings likely to support free cash flow in the FY26 result.
As also indicated by other analysts, further capex will be required at Daunia as mining moves into the Pandora pit.
Net debt rose to $1.3bn following the second -US$500m deferred payment for the Blackwater and Daunia acquisition. Despite another -US$100m payment due in April 2027, Ord Minnett opines Whitehaven is moving through peak debt.
This broker forecasts free cash flow of around $965m, up $550m y/y in FY26, supported by better fundamentals, cost savings and interest savings of around $60m.
Net debt is forecast to fall to $1bn by the June quarter next year (2027), supporting shareholder returns with a circa 5% yield split between dividends and the share buyback.
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