Company Overview: Whitehaven Coal Limited is engaged in exploration, project evaluation, project development and coal mining activities in New South Wales' Gunnedah Basin. The Company operates through two segments: Open Cut Operations and Underground Operations. It owns four open cut mines (Maules Creek, Werris Creek, Tarrawonga and Rocglen), one underground mine (Narrabri) and operates a coal handling and processing plant at Gunnedah. The Maules Creek Mine is located over 45 kilometers southeast of Narrabri and approximately 17 kilometers northeast of Boggabri in the Gunnedah Basin of New South Wales, Australia. The Werris Creek Mine is located over four kilometers south of Werris Creek on the Quirindi Road. The Tarrawonga Mine is located approximately 16 kilometers east of Boggabri. The Rocglen Mine is located over 28 kilometers north of Gunnedah on the Wean road. The Narrabri North Mine is located approximately 17 kilometers southeast of Narrabri and over 70 kilometers northwest of Gunnedah.
 

WHC Details

ROM Coal Production Is Expected To Grow Over 40 Mt By 2030: Whitehaven Coal Limited (ASX: WHC) has an engagement in the development and operation of coal mines in New South Wales. As on June 5, 2019, the market capitalisation of WHC stood at ~A$3.92 billion. The Company recently published its 2019 global metals, mining, and steel conference presentation, where it highlighted about its operation at Narrabri U/G mine, Maules Creek, Tarrawonga, Werris Creek, Rocglen and Sunnyside open cut mines. Its run-of-mine (ROM) coal production was reported at around 23 Mt in FY2018, which is expected to grow over 40 Mt by 2030. Further, its project pipeline of Vickery and Winchester South will add saleable coal production over the next 5 to 10 years. Moreover, for FY19, the coal cost guidance for the group is estimated to be A$67/t. On the capital structure front, its senior secured debt facility stands at $1,000 Mn of which $225 Mn were drawn. As on 31 December 2018, its cash on hand was reported at A$89.2 million with net debt of $244.2 Mn. WHC’s ROM and Saleable coal production for the March’19 quarter declined as compared to the previous corresponding period, however looking at Asia’s coal demand scenario, coal production is expected to increase in the next decade.

In its FY19 guidance, the production of coal is expected to decline in order to maintain a balance between the global demand-supply gap, which will help to contain falling coal prices. As per the New Policies Scenario (NPS), The International Energy Agency (IEA) projects coal demand for both steel and electricity generation to increase in the Asia Pacific region by 2040. Moving forward, decent demand for coal in the long run, and increase in infrastructure projects which require metallurgical coal to produce steel, are expected to act as tailwinds for the company.


1HFY19 Financial Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 52.77% of the total shareholding. Farallon Capital Management, L.L.C., and AMCI WH, L.L.C. hold maximum interest in the company at 14.23% and 8.40%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

Key Ratios: Its gross margin, EBITDA margin, and net margin for H1FY19 stand at 57.0%, 43.4%, and 24.1%, which are better than the industry median of 52.5%, 35.9%, and 19.1%, respectively, implying a decent financial performance by the company than its peer group. Its RoE for H1FY19 stands at 8.8%, which is better than the industry median of 6.4%, which depicts that the company has delivered a better return to its equity-holders than its peer group.


Key Ratios (Source: Thomson Reuters)

March’19 Quarterly Production Report: Whitehaven Coal Limited highlighted that its safety performance remains well under the New South Wales (NSW) coal industry average with Group TRIFR (Total Recordable Injury Frequency Rate) of 8.3 at the end of March. The quarterly ROM coal production stood at 4.9 Mt. The saleable coal production was reported at 5.1 Mt for the period.


March’19 Production and Sales Highlights (Source: Company Reports)

WHC highlighted that demand for high-quality coal in its four key markets of Korea, Japan, Taiwan, and India remains strong which is expected to help the Company in achieving long term sustainable growth.Its Winchester South metallurgical coal project in the Bowen Basin is expected to enter an advanced stage. Its costs continued to moderate through the second half and, with the prospect of in-pit dumping at Maules Creek starting in FY2020, the Company is expected to pass the peak of costs at its largest operation.


March’19 Equity Production and Sales Summary (Source: Company Reports)

WHC’s equity coal sales for the March quarter, including purchased coal, stood at 4.893 Mt, which is 16% higher than the previous corresponding period. Its managed coal sales, including sales of purchased coal, stood at 6.042Mt, which is 12% above than the previous corresponding period.

H1FY19 (ended on December 31, 2018) Financial Performance: The company’s sales revenue increased by 11% pcp to $1,270.1 Mn, majorly due to a substantial increase in realised prices to an average of $155/t in H1FY19 up from $124/t in H1FY18. Its underlying EBITDA before significant items increased by 12% pcp to $550.8 Mn.


H1FY19 Financial Metrics (Source: Company Reports)

The operating cash flow for H1FY19 increased by 5% pcp to $445.8 Mn in H1FY19, majorly driven by the increased operating EBITDA result. Investing cash outflows was reported at $80.3 Mn in H1FY19, as growth capital was allocated toward the Winchester South Project in Queensland and expenditure to progress the Environmental Impact Statement required for Government approval for an expanded Vickery mine. Its net debt as on December 31, 2018 was reported at $244.2 Mn, which was reduced by $26.2 Mn as compared to net debt of $270.4 Mn on 1HFY18.


H1FY19 Operating Cash Flow Metrics (Source: Company Reports)

What To Expect: ROM coal guidance for Maules Creek has been reduced modestly due to mine scheduling and its related impact on saleable coal production guidance for the year, which has been revised to the range of 20.5 Mt to 21.0 Mt. Sustained Capital Expenditure guidance includes the first staged payment in FY2019 for the new hydraulic cylinders for Narrabri, while the project capital section features all of the growth projects and includes the June 2019 final payment of US$50 Mn for Winchester South.


FY19 Guidance Summary (Source: Company Reports)

Long Term Growth Outlook: WHC produced 5 Mt of coal in FY2012 growing to over 20 Mt by FY2017 as both Narrabri and Maules Creek ramped up production. The next step up is the Vickery project, which is due to start up in FY2021, depending upon approval timing. Winchester South will follow in about FY2024, depending upon approval timing. It is expected that the production by FY2027 could be over 37 Mt.
 

Production Forecast till 2027 (Source: Company Reports)

Coal Outlook: As per the International Energy Agency’s Global Energy & CO₂ status report issued in March, global coal demand increased by 0.7% or 40Mtce in 2018. In late 2018, the global economic growth slowed, and China introduced several policies aimed at deterring coal imports. China’s policies are targeted to support its domestic coal industry, which has been under pressure from lower domestic coal prices during 2018. Strong enforcement of these restrictions has placed pressure on exports of lower quality coals which were bound for the Chinese market to redirect into other markets such as Japan, Korea, Taiwan and India.

As per the recent analysis by CRU, coal supply into the seaborne market is set to decline gradually over the next 5 years. With new supply limitations and continued growth in demand of coal by Asian countries, the outlook for high-quality thermal coal in the seaborne market remains favourable. The import restrictions by the Chinese government along with the end of the Queensland cyclone season, is expected to increase metallurgical coal supply in the coming months leading to further price weakness. However, WHC confirms that it is not exposed to coal sales into China. Demand for the company’s high-quality coal from customers in Japan and other Asian countries remains strong and continues to underpin a high proportion of the company’s thermal coal sales.


Region Wise- Coal Demand (Source: Company Reports)

Under the New Policies Scenario (NPS), the IEA projects coal demand for both steel and electricity generation to increase by 12% or 491Mtce (575Mt of 6,000 kcal/kg coal) in the Asia Pacific region by 2040. Whitehaven is set to benefit from this growth by supplying high quality thermal coal into Asia and increased volumes of metallurgical coal into India.


South East Asian Generation Capacity (Source: Company Reports)

Under the NPS, the IEA forecasts that South East Asian generation capacity grows from 248 GW in 2017 to 620 GW in 2040. Coal fired electricity generation capacity is projected to grow from 71 GW in 2017 to 175 GW in 2040 requiring an additional 260 Mtpa coal by 2040.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:

Method 1- EV/Sales Multiple Approach (NTM):

EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 2- EV/EBITDA Multiple Approach (NTM):

EV/EBITDA Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: Whitehaven’s shares generated a positive return of 176.46% in the span of five years, while in the span of one-year WHC generated a negative return of 26.21%. It is trading close to its 52 weeks low levels, which also acts as a support level at $3.720, and hence probability to bounce back increases in the near term. It is trading at reasonable PE multiple of 6.57x with an annual dividend yield of 7.59%. On the other hand, the recent slump in coal demand, especially by the import restrictions in the Chinese market, has put a toll on the coal prices. To maintain a balance between demand-supply, WHC is expected to reduce its production for the current year, which will help to control falling coal prices. As per projections, coal demand will increase till the next decade, especially from markets such as Japan, Taiwan, Korea, and India, which will help WHC to gain back the margins. With the decent volume growth visibility, healthy balance sheet, respectable operating margins and return ratios, we have valued the stock using two Relative valuation methods, EV/Sales and EV/EBITDA multiple and arrived at a double-digit upside growth (in %) in the next 12-18 months. Given the backdrop of aforesaid facts, we recommend a “Buy” rating on the stock at the current market price of $3.840 per share (up 0.524% on June 5, 2019). 


WHC Daily Chart (Source: Thomson Reuters)

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