CRITERION: Happy to get your hands dirty? Old King Coal’s a profitable old soul
Coal producers may be maligned as fossil-fuel dinosaurs and shunned by ESG-conscious investors, but the ASX-listed exponents are sitting on piles of cash courtesy of Vladimir Putin’s energy squeeze and tightly held global supply.
That means dividends galore from producers such as Whitehaven Coal (ASX:WHC), New Hope Coal (ASX:NHC), Coronado Global Resources (ASX:CRN), Yancoal (ASX:YAL) and Terracom (ASX:TER).
According to t’internet, 21 ASX stocks yield more than 10 per cent, with four coal miners topping the list.
Based on expected current-year earnings, local and South African producer Terracom yields an extraordinary 43 per cent (and pays its divs quarterly), followed by Yancoal and Coronado (both 21 per cent) and New Hope (16 per cent).
Such extravagant yields signal that investors assume that the companies’ earnings (and thus dividends) are unsustainable – a reasonable assumption for mining stocks captive to boom-and-bust commodity cycles.
Inevitably, dividend payouts will revert to the norm, but until then investors stand to recoup a large chunk of their capital outlay in dividends which, by the way, are usually at least partly franked.
The coal miners are sitting on cash that would make a drug lord blush. Whitehaven, for instance, had $2.7 billion in the bank at the end of the March quarter, after paying $500 million in tax and $373 million in dividends and share buybacks.
As of December 2022 New Hope had $2 billion stashed away for a rainy day, while Yancoal has $2.8 billion (albeit with a pending $1.5bn tax bill).
To soak up cash, Whitehaven has spent $1 billion on buybacks to date, while New Hope is in the process of buying back $300 million of stock.
Acquisitions, perhaps? The guessing game is on who will end up with the BHP-Mitsubishi alliance’s Blackwater mine and the smaller Daunia pit in the Bowen Basin, on the auction block with a rumoured $2 billion price tag.
From an investor perspective the underbidding ‘losers’ could well be the winners as they return their war chests to shareholders.
In the case of Whitehaven, the stock surged last week after the buyback – paused since mid March – resumed. This suggests that if the company was looking for an acquisition, it’s not any more.
Coal prices will also determine whether the black riches can keep flowing.
After peaking at a record $US450/t in late 2022, thermal coal prices have settled at the $US190 a tonne level after a balmier-than-expected European and Asian winter. But that’s still four times higher than the asking price three years ago.
Coking coal peaked at $US550/t in early 2022 and now fetches around $US240/t.
The miners’ March quarterly reports to date tell a tale of steady prices offsetting lower production as a result of weather and labour shortages.
Whitehaven reports an average received price of $400 a tonne, compared with $527/t in the December quarter and $315/t year-on-year.
Yancoal revealed an average price of $347/t, 35 per cent higher than a year ago but with saleable coal volume sliding 27 per cent to 5.9 million tonnes.
In the longer term, thermal coal asset valuations are likely to tumble as more institutional investors shun the ‘devil-with-horns’ commodity.
Used for steelmaking, metallurgical coal marches to a different tune and arguably is ESG friendly given iron ore will help to build infrastructure for a low-carbon economy.
We’ll put our slender neck on the block and declare the death of Old King Coal as exaggerated, with the miners of the black gold remaining dividend cash cows for some time.
This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.