Whitehaven Coal Limited

Company Overview: Whitehaven Coal Limited (ASX: WHC) is a leading Australian producer of premium quality coal with two high-quality, near-term development assets - Vickery, near Gunnedah, and Winchester South, in Queensland’s Bowen Basin. It is a dominant player in Australia’s emerging high-quality coal basin and it currently operates four mines (three open-cut and one large underground mine) in the Gunnedah Coal Basin of New South Wales (NSW). For producing high-quality coal, the company uses open-cut mining methods at Maules Creek, Tarrawonga, and Werris Creek, and underground mining methods at Narrabri.

WHC Details

High-Quality Development Assets Driving Growth for the Business: Whitehaven Coal Limited (ASX: WHC) is mainly involved in exporting high-quality thermal and metallurgical coal from Australia to the rest of the world. WHC operates two high-quality, near-term development assets - Vickery, near Gunnedah, and Winchester South, in Queensland’s Bowen Basin. The company’s strategy is to own and operate large, lower-cost mines producing a mix of high energy thermal coal and premium semi-soft coking coal. WHC’s long-life assets and the human resource-intensive nature of its business puts it in a decent position to continue to provide meaningful opportunities in regional areas. Over the period of 2016 - 2020, the company’s revenue and NPAT have increased at a CAGR of 10.27% and 9.99%, respectively, reflecting the strength of the company’s high-quality development assets.

Five-Year Summary (Source: Company Reports)

In-line with its strict capital allocation framework, WHC is cautiously advancing its three main development projects, namely, Narrabri Underground Mine Stage 3 Extension Project, Vickery Extension Project, and Winchester South Metallurgical Coal Project. By advancing these projects, WHC expects to expand its managed ROM production in the next 10 years. Moreover, these projects will help in further diversifying the company’s product mix, with a greater weighting towards metallurgical coal with low impurities. Looking ahead, the company is focused on improving operational discipline and maintaining a decent balance sheet in order to make sure that it is well-positioned to maximise earnings when coal markets begin to rebalance and recover.

FY20 Results Highlights: For the year ended 30 June 2020, the company reported total revenue of $1,721.6 million and net profit after tax before significant items of $30.0 million. The company’s FY20 results were impacted by the softening of gC Newcastle thermal prices and the impact on run of mine (ROM) production of previously reported labour shortages and dust events at Maules Creek, and the scheduled eight-week Narrabri mine longwall move. Despite facing drought, bushfires, and COVID-19 pandemic during FY20, WHC achieved its revised production and sales guidance, with managed coal production of 20.6 million tonnes and managed coal sales, excluding purchased coal, of 17.5 million tonnes. Operational highlights for the year include the company’s Narrabri underground mine recording its second million tonne month in April 2020. The company’s large open cut operation, Maules Creek, also saw a record quarter of production with 4.2 million tonnes in Q4FY20, evidencing the benefit of improvements made. As of 30 June 2020, the company had a healthy level of liquidity of around ~$470 million, supported by the refinancing of its $1bn senior debt facility. Post FY20, the company has witnessed significant improvement in its operating performance. During the September 2020 quarter, the company delivered on-plan mining performance of coal across all operations, laying a solid foundation to much improved operational results. For the quarter, the company reported total managed coal sales of 6.0Mt, up 13% on pcp. Further, the company reported managed own coal sales of 5.6Mt, up 15% on pcp.

ROM Production and Sales (Source: Company Reports)

Key Metrics: Gross margin and EBITDA margin for FY20 stood at 48.2% and 47.8%, respectively. Current ratio for FY20 stood at 1.39x, higher than 1.25x in FY19, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity multiple stood at 0.32x in FY20, lower than the industry median of 0.40x.

Profitability and Liquidity Profile (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 41.03% of the total shareholding while the top four constitutes the maximum holding. Lazard Asset Management Pacific Company and Prudential Assurance Co., Ltd. are holding a maximum stake in the company at 10.92% and 5.38%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

December 2020 Quarter Highlights: For December 2020 quarter, the company reported total managed run-of-mine (ROM) production of 5.1Mt, up 64% on the previous corresponding period (pcp). Further, the company delivered managed saleable coal production of 3.9Mt, up 15% on pcp. During the quarter, the balCoal Newcastle Index (gC Newc) coal prices rapidly increased from their August low to average US$67/t for the quarter before finishing the quarter above US$80/t, reflecting increased seaborne thermal coal demand as Asian economic recovery accelerates post the initial impact of COVID-19. At the end of December quarter, the company has US$64.18 million in forward A$/US$ exchange contracts for equity coal sales of 1.0Mt.

 Whitehaven Managed Totals – Continuing Operations (Source: Company Reports)

Rise in Total Coal Reserves and Resources: On 16 December 2020, WHC released its maiden Reserves Statement for the Winchester South Project metallurgical coal mine, wherein, it reported that Project JORC Resource is upgraded to 1,100Mt from 530Mt, increasing the total Coal Resources by 12% since August 2020. Moreover, the company notified regarding a maiden JORC Reserves of 350Mt that has increased the Total Whitehaven Coal Limited Coal Reserves by 26% since August 2020.

Key Risk: The company’s financial performance may get impacted by the general economic activities, change in industrial production levels, changes in foreign exchange rates, and changes in coal demand. The company is exposed to the risk associated with the changes in seaborne coal supply, changes in international freight rates and the cost of substitutes for coal. Further, the company is also exposed to operational risk, geology risk, and infrastructure risk.

Outlook: During the latter part of the December 2020 quarter, WHC observed a strong rebound in pricing. Hence, it is now increasingly optimistic that underlying market dynamics are supportive of continued improvement. As a result of consistent and better performance across production and overburden management across its open cut operations, the company has tightened its guidance range. WHC has increased its FY21 managed coal sales (excluding purchased coal) guidance to 19.0 – 20.0Mt, from 18.5 – 20.0Mt. At Maules Creek, FY21 managed ROM production guidance has been increased to 11.8 – 12.4Mt from 11.3 - 12.0Mt, reflecting optimisation of the mine sequencing, productivity improvements and benefits from the early stages of Project STRIVE.

The company continues to witness a growing demand for its quality specific coals within the steel making, industrial and electricity-generating sectors. With strong fundamentals driving Asia’s demand for high-quality coal products, WHC is well position to make the most of emerging opportunities in the region. WHC is expecting to release its H1FY21 results on 17 February 2021.

FY21 Updated Guidance (Source: Company Reports)  

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of WHC has provided a return of 22.85% in the past three months and is trading lower than the average 52-weeks’ price level band of $0.830 - $2.680, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$1.23 and resistance of ~$1.85. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe the company can trade at a slight discount to its peer median EV/Sales (NTM Trading multiple), considering its continued impact from COVID-scenario, decline in ROE, while also taking into account that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Yancoal Australia Ltd (ASX: YAL), Coronado Global Resources Inc (ASX: CRN), New Hope Corporation Ltd (ASX: NHC), etc. Considering the company’s high-quality development assets, its strict capital allocation framework, decent operating performance in H1FY21, improved long-term outlook, current trading levels and valuation, we give a ‘Buy’ recommendation on the stock at the market price of $1.505, down by 0.332% on 10 February 2021. 

WHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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