Company Overview: Whitehaven Coal Limited (ASX: WHC) exports high-quality thermal and metallurgical coal from Australia to the world. The company is known for its excellence in project delivery, safe operation, and targeted investment in the local economy and community. WHC operates four mines (three open-cut and one large underground mine) in the Gunnedah Coal Basin of New South Wales (NSW). The company’s vision is to be the benchmark coal investment on the ASX.

WHC Details

Long-term Outlook Supported by Cost Reductions and Improving Coal Market: Whitehaven Coal Limited (ASX: WHC) is a leading Australian producer of premium quality coal. The company’s coal products are used for high efficiency, low emission (HELE) electricity generation; to make steel, and in nickel smelting and other industrial applications. As on 19 May 2021, the company’s market capitalisation stood at ~$1.49 billion. The company’s strategy is focused on acquiring and operating large, lower-cost mines that produce a mix of high-CV thermal coal and premium semi-soft coking coal. In the first half of FY21, the company’s financial performance was impacted by subdued pricing on seaborne coal markets, caused by the COVID-19 pandemic. However, in the past few months, WHC has witnessed a decent rebound in the prices and expects the outlook for coal markets to further improve in the future, supported by increased economic activity and supply constraints. From 2016 to 2020, the company’s revenue and NPAT have increased at a CAGR of 10.27% and 9.99%, respectively.

5-Year Financial Summary (Source: Company Reports)

Looking ahead, the company is focused on improving its operational performance to drive improved productivity and to reduce costs. WHC is also focused on retiring debt against the backdrop of the improving price environment. Due to increased economic activity and rebound in the demand for coal products, WHC expects metallurgical coal sales volumes in 2021 to return to pre-COVID-19 levels. Considering the rebalance of the coal market, improved price environment, and ongoing cost reduction initiatives, the company seems well placed to achieve a stronger outcome in the second half of FY21.

Decent Rise in ROM Production in Q3FY21: For March 2021 quarter, WHC reported total managed coal sales of 4.8Mt, up 7% on pcp, managed own coal sales 4.2Mt, up 7% on pcp, and total equity coal sales of 4.0Mt, up 7% on pcp. Managed run-of-mine (ROM) production stood at 5.5Mt, up 12% on pcp. Despite the impact of the March rain events on production, the company saw consistent ROM production from its largest mine Maules Creek. Over the quarter, the performance at Narrabri underground mine performance was impacted by continued geological challenges, which have caused unscheduled downtime and additional longwall equipment repairs.

Q3FY21 Whitehaven Managed Totals (Source: Company Reports)

H1FY21 Results Highlights: During the first half of FY21, the company reported an EBITDA of $37.2 million, down by 79% on pcp, due to a lower average achieved coal price for H1 FY21 of A$80/t. Cash generated from operations stood at $54.9 million in H1FY21. Revenue from ordinary activities stood at $699.3 million, down by 21% on pcp. Equity ROM coal production for H1FY21 stood at 7.7Mt, up 28% on pcp. Unit cost per tonne decreased by 8% YoY to A$70/t. Equity coal sales, including purchased coal, were 8.7Mt, 3% above pcp, reflecting the underlying increase in ROM coal production. As at 31 December 2020, the company had net debt of $823.1 million.

H1FY21 Results Highlights (Source: Company Reports)

Key Metrics: Gross margin for FY20 stood at 39.7%, down from 54.6% in FY19. EBITDA margin for FY20 stood at 46.5%, down from 59.1% in FY19. 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.

Past 5-year Financial Performance for Year Ending 30 June 2020

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

Top 10 Shareholders: The top 10 shareholders together form around 35.94% 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 6.69% and 5.38%, respectively, as also highlighted in the chart below:

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

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 a maiden JORC Reserves of 350Mt that has increased the WHC’s total Coal Reserves by 26% since August 2020.

Key Risks: 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. The company’s performance may get impacted by general economic activities, changes in industrial production levels, changes in foreign exchange rates, and changes in coal demand.

Change in the Holding of Substantial Shareholder: Recently, one of the company’s substantial shareholders, Lazard Asset Management Pacific Co, reduced its holding in the company from 8.00% to 6.69%. Lazard Asset Management Pacific Co now holds ~69,071,721 ordinary shares of the company.

Outlook: Due to the increased economic activity as well as supply constraints, the coal prices have witnessed decent improvement in the past few months. WHC is optimistic that the metallurgical coal sales volumes in 2021 will return to pre-COVID-19 levels. In order to expand its managed ROM production in the next 10 years, WHC is cautiously advancing its three development projects - Narrabri underground mine stage 3 extension project, Vickery extension project, and Winchester South metallurgical coal project.

Moving forward, the company expects the price of high CV thermal coal to remain strong across the remainder of CY2021. WHC recently revised its FY21 ROM production, managed coal sales and unit cost guidance, mainly due to geological challenges at its Narrabri underground mine, and associated maintenance downtime and loss of production. FY21 managed ROM coal production guidance has been reduced from 21.4Mt – 22.0Mt to 20.6Mt – 21.4Mt. Managed coal sales guidance has also been reduced from 18.5Mt – 19.0Mt to 17.8Mt – 18.3Mt. FY21 unit cost guidance has been increased from A$69/t – A$72/t to A$73/t - A$75/t.

FY21 Revised Guidance (Source: Company Reports)

Valuation Methodology: EV/EBITDA 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 corrected by 13.09% in the past three months and is trading lower than the average 52-weeks’ price level band of $0.830 - $1.990, offering a decent opportunity for accumulation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at some discount to its peer median EV/EBITDA (NTM trading multiple), considering the softer results in H1FY21, impacts of COVID-19 pandemic, and tightening of FY21 guidance. 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 decent operational performance in March 2021 quarter, its high-quality development assets, ongoing cost-reduction initiatives, improved price environment of coal, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.355, down by 6.229% on 19 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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