Whitehaven Coal Limited

WHC Details

Long Life Mines Provides Growth Opportunities: Whitehaven Coal Limited (ASX: WHC) is the largest independent CV coal producer in Australia, exporting to many countries. The company operates approximately four mines in the Gunnedah Basin of New South Wales (NSW), such as Maules Creek mine, Narrabri mine, Tarrawonga mine and Werris Creek mine. The company has long-life assets, which can operate for more than ~20 years. Maules Creek has a life of more than 35 years and is currently operational at a capacity of 13Mtpa. The second project at Narrabri Stage 3 extension project has a life of more than 25 years and currently operating at 11Mtpa. The third project, Vickery extension project, has a life of more than 20 years and operating at a capacity of 10mtpa, and Winchester south project has a life of more than 25 years and looking to operate at 15mtpa. All the projects having long-life provides visibility for higher revenues. 

NCIG Outage Update: Newcastle Infrastructure Group (NCIG) has recently suspended ship loading at the port of Newcastle due to faults discovered in the shiploader SL1 after it was assessed. NCIG is expecting it to take two weeks to get repaired. NSW state emergency has issued a warning regarding the prediction of floods in the Namoi river. WHC is not expecting any floods on their operation in Gunnedah Basin site, but due to disruption in the transport network, the workforce may be unavailable at the operation site.

Financial Highlights for H1FY21: The company have registered a decline in its revenues in 1HFY21 by 21% YoY to $699.3mn. WHC has posted a decline in its EBITDA in 1HFY21 by 79% YoY to $37.2mn, due to lower coal prices at $80/t as compared with $108/t in 1HFY20. The company has posted a net loss of $94.5mn in 1HFY21 as compared with net profits of $27.4mn in 1HFY20. The company has generated lower cash from operations in 1HFY21 to $54.9mn (Declined by 55% YoY). The net debt of the company stood at $823.1mn as on 1HFY21 as compared with $787.5mn as on 1HFY20.

Key Highlights (Source: Company Reports)

Key Risks: The company is present in the mining of coal, so any adverse climatic conditions such as flood, earthquake may result in a halt of mining activities and may lead to a business loss. The company is also exposed to foreign exchange risk, as it is operating in multiple countries, so any fluctuation in the currency rates may lead to the financial losses for the company. 

Outlook: As per the company guidance for FY21, the company is now expecting 21.4-22.0 mt of managed ROM coal production from its three ongoing projects, as compared to its previous guidance of 21-22.5 mt. The Managed coal sales are expected to be in a range of 18.5-19.0mt, as compared to the previous outlook of 19-20mt. Moreover, the company is expecting Coal unit cost (Excluding Royalties) to be in a range of $69-72/t. The company will be incurring ~$10mn for the expansion and development of its operating mine at Maules Creek and ~$25mn for the Vickery land acquisitions and project expenditure.

Valuation Methodology: EV/Sales based Relative Valuation Method (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: In the last one month, WHC has increased by ~10.2% and by ~6.9% in the last three months. The current market capitalisation of WHC stands at ~$1.86bn as on 25 March 2021. The stock is currently trading above the average of its 52-weeks’ price level range of $0.830-$2.240. On the technical analysis front, the stock has a support level of ~$1.42 and a resistance of ~$2.00. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of a low double-digit upside (in % terms). We believe that the company can trade at slight discount as compared to its peer median, considering adverse climatic conditions, foreign exchange risk, decline in revenues and EBITDA in 1HFY21 along with low cash generated from operations. For the purpose, we have taken peers New Hope Corporation Ltd (ASX: NHC), BHP Group Limited (ASX: BHP), to name a few. Considering a growth opportunity with long life mines, decent outlook, valuation, current trading levels, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $1.775, up by 1.934% as on 25 March 2021.

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

New Hope Corporation Limited

NHC Details

Update on Colton Coal Project: New Hope Corporation Limited (ASX: NHC) is a diversified energy company. The company is engaged in coal mining, oil and gas, marketing and logistics, and investments. Recently, the company announced that the liquidators of Northern Energy Corporation Limited and Colton coal are planning to begin proceedings against NHC and few other previous directors and officers of NEC and Colton in regard to an alleged voidable transaction, asset transfers, bankrupt trading, as well as violation of directors’ duties, in a claim worth ~$174.1 million plus interest and costs. Though the company has not carried out any proceeding against such claims; however, it intends to defend the allegation against any proceeding, which is commenced. Notably, earlier, the company had announced that Australia’s High Court had dismissed the applications for special leave to appeal by Wiggins Island Coal Export Terminal Pty Ltd (WICET) and by NEC and Colton Coal in relation to the New South Wales Court of Appeal decision.

Bengalla Joint Venture to Improve Revenues: The JV with Bengalla is expected to bring in improvement in production and revenues, going forward. The Bengalla mine has produced 4.5mn tonnes during the 1HFY21 as per expectations. The lower production resulted from mid-life dragline shutdown at the Bengalla mine. The company is expecting a total production of 10mn tonne by the end of FY21, with the return of dragline to full operations.

Financial Highlights for H1FY21: NHC has posted a revenue of $405.5mn in 1HFY21 as compared with $618.2mn in 1HFY20. The company has posted an EBITDA of $81.2mn in 1HFY21 as compared to $212.6mn in 1HFY20. NHC has generated lower cash from operations in 1HFY21 to $62.4mn as compared with $122.6mn in 1HFY20. 

The company has also declared a dividend of AUD 0.04 on 23 March 2021, with an ex-date of 19 April 2021, and the payment date of 5 May 2021.

Cash and Debt (Source: Company Reports)

Risks: The company is engaged in coal production and exporting to multiple countries, so there is always a risk attached with foreign currency movement, which may lead to financial losses for the company. The company is present in coal mining and any adverse climatic conditions may impact the business and may lead to severe financial losses. 

Outlook: The company is expecting a total production of 10mt by the end of FY21, owing to the commencement of Bengalla project at its full capacity after the shutdown of dragline during 1HFY21.

Valuation Methodology: EV/Sales based Relative Valuation Method (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: In the last one month, NHC has increased by ~4.9% and decreased by ~2.8% in the last three months. The current market capitalisation of NHC stands at ~$1.13bn as on 25 March 2021. The stock is currently trading above the average of its 52-weeks’ price level range of $1.050-$1.650. On the technical analysis front, the stock has a support level of ~$1.19 and a resistance of ~$1.58. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of a high single-digit (in % terms) upside. We believe that the company can trade at slight discount as compared to its peer median, considering lower revenues and EBITDA in 1HFY21, flood disruptions, and adverse climatic conditions. For the purpose, we have taken peers Whitehaven Coal Ltd (ASX: WHC), BHP Group Ltd (ASX: BHP), to name a few. Considering the improving revenues from Bengallia project, recent update on Colton Coal project, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $1.38, up by 1.47% as on 25 March 2021.

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

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