New Hope Corporation Limited

NHC Details

Update on Project New Acland Stage 3: New Hope Corporation Limited (ASX: NHC) is primarily involved in the coal exploration and project development in New South Wales & Queensland. It also has entities engaged in agriculture, and oil and gas exploration. As on 1^st February 2021, the market capitalisation of the company stood at ~$1.12 billion. On 3^rd February 2021, the company confirmed that the High Court of Australia upholds the appeal by Oakey Coal Action Alliance Inc (OCAA) against its subsidiary (100%) New Acland Coal Pty Limited (NAC) regarding Queensland Court of Appeal's decision on final orders given on 1^st November 2020. The High Court has ordered remittance of the company’s mining lease applications and environmental authority application to the Queensland Land Court for reconsideration. NHC has decided to meet with the state government officials to discuss and seek a final decision on NAC’s pending state approvals. Based on the same, NHC will be able to move ahead and engage the local community of Oakey on the project. During December 2020 quarter, the company announced sale of 50 million fully paid ordinary shares of NHC by Washington H. Soul Pattinson and Company Limited’s (WHSP). The controller of the company (WHSP) now holds 365.6 million fully paid ordinary shares (approx. 43.94% of the issued share capital) in the capital of NHC. 

Q1FY21 (ending October 2020) Result Highlights: For Q1FY21, the company recorded a decline of 36.5% YoY in its total saleable production of coal at 2.11 million tonnes. This was due to reduced output from both QLD and NSW operations. NSW production was down due to a planned dragline shutdown at Bengalla mine. For New Acland, NHC was ramping down operations at the site and experiencing regulatory delays and hurdles for Stage 3 of the project. The total coal sold for the October 2020 quarter stood at 2.30 million tonnes, down by 31% at on pcp basis. The company reported, the price of coal in Newcastle rose by 17% (monthly average) from July 2020 given the readjustment of supply demand gradually post the COVID-19 outbreak. It is also witnessing business strength in Asian markets. The company experienced redundancies from the previous quarter especially from the former Executive Leadership Team. It appointed Mr. Rob Bishop as the new CFO during the quarter. 

Coal Production Highlights, Q1FY21 vs Q1FY20 (Source: Company Reports) 

Outlook: Despite the key capital programs (major mid-life shutdown of the dragline) planned for NSW project at Bengalla mine, the company expects to deliver production planned for the full year. For New Acland, the company will engage with state officials to seek a conclusive stance on the outstanding approvals on the project and update investors.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of NHC gave a positive return of 23.25% in the past three months and a positive return of 3.92% in the past six months. The stock is currently trading towards its 52-weeks’ low level of $1.02. The stock of NHC has a support level of ~$1.23 and a resistance level of ~$1.51. We have valued the stock using Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like Whitehaven Coal Limited (ASX: WHC), Fortescue Metals Group Limited (FMG), Champion Iron Limited (ASX: CIA), and others. Considering the current trading levels, growing top line and bottom line from FY17-FY19, increased dividend pay-out from FY17-19, valuation, and associated risks of pending regulatory approvals on New Acland Project Stage 3, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.325, down by 1.852% on 3^rd February 2021.

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

Stanmore Coal Limited

SMR Details

Look at December 2020 Quarter (Q2FY21) Results: Stanmore Coal Limited (ASX: SMR) is engaged in the mining, development, produce and sale of thermal and metallurgical coal in Queensland. As on 3^rd February 2021, the market capitalisation of the company stood at ~$227.14 million. During the quarter, the company confirmed the appointment of Mr. Marcelo Matos as the permanent CEO. The company reported 850k tonnes of ROM coal produced for Q2FY21, up by 33% on QoQ basis. The production was 2% lower for Q2FY21 on YoY basis. The company’s total saleable coal production, and total coal sold stood at 582k tonnes for the given quarter. The total sales of coal stood at 582k tonnes for December 2020 quarter, 17% YoY up from Q2FY19. During the quarter, the company redesigned its mine plans, decreased the fleet capacity and strip ratios to minimise costs as coal prices are low and prime waste mined to the tune of 7.9Mbcm lower than previous quarters. During the quarter, SMR has decided to invest in further exploration at Isaac Downs and has been notified by the Queensland Government in January 2021 about the probable timeline for EIS Assessment Report completion by early March. SMR has finalised a bankable feasibility study and spent $0.88 million on Isaac Downs project studies, and engineering works so far. For Q2FY21, SMR secured a loan facility upto US$40 million with Golden Energy and Resources (GEAR) maturing on 30 June 2022.

Production Highlights December 2020 Quarter (Source: Company Reports)

Outlook: SMR estimates coal mining production to be lesser at Isaac Plains East for the next quarter as compared to the last quarters due to reduction in fleet capacity. It aims to minimise costs and strip ratios and undertake mine plan transition to Isaac Downs. SMR remains on track for development in 2HFY21.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of SMR gave a positive return of 4.69% in the past three months and a positive return of 47.16% in the past six months. The stock is trading slightly higher than the 52-weeks’ average price band of $0.50-$1.01. The stock of SMR has a support level of ~$0.737 and a resistance level of ~$0.849. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like South32 Limited (ASX: S32), Yancoal Australia Limited (ASX: YAL), Coronado Global Resources Inc (ASX: CRN) and others. Considering the current trading levels, rising top line from FY15-FY19, and profitable bottom line from FY17-FY20, decent outlook and plans for FY21, valuation and associated risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.780, down by 7.143% on 3^rd February 2021.

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

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