Whitehaven Coal
Recommendation
Interest in coal assets has waned with prices; thermal coal prices are down 30% in 12 months and more than 40% from their peak. The price of metallurgical coal (used to make steel) has similarly fallen. Whitehaven Coal has used the slump to buy; it paid $2.25bn for Aston Resources and is currently bidding for coal junior Coalworks.
The market hasn’t approved; Whitehaven’s share price has tanked 35% since Whitehaven Coal: Too hot to handle? on 16 Aug 10 (Avoid - $6.04). The fall reflects concern that, at a time of falling coal prices, Whitehaven is boosting output. It will invest $1bn over the next two years to lift production from 5m tonnes per annum (mtpa) today to 25mtpa in 2016.
Whitehaven’s production mix will also change. Expansions at Maules Creek, Narrabi and Vickery will increase production of metallurgical coal from about 30% of output to more than 60%. The balance comprises thermal coal. Margins in metallurgical coal are usually fatter, so this is potentially a lucrative transition, but it also exposes Whitehaven to more risk as metallurgical coal prices are tied to global steel production.
Higher risk is mitigated somewhat by high asset quality; Maules Creek and Narrabi, the company’s two largest mines, will be amongst the lowest cost metallurgical coal mines in the industry. But price falls, even if they aren’t lethal, will still hurt. With cheap shale gas forcing US coal production into Asian markets, lower prices are widely anticipated. But no one knows which way coal prices will ultimately go; the energy deficit in Asia suggests higher prices, while the threat of US supply holds it back. The falling share price, however, suggests creeping pessimism. Low expectations are a prerequisite for opportunity and it’s possible one could emerge in Whitehaven. For now, we’re upgrading to HOLD.