Bulk Buys: Whitehaven Coal is stuffed full of cash, now where can it spend the stuff?
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Thermal coal prices have done a belly flop in 2023, falling from all time highs with the velocity of a Loony Tunes anvil.
The ferocity of the slide from US$450/t three quarters of the way through 2022 to US$134/t for Newcastle 6000kcal front month futures yesterday has been a whirlwind.
The major cause has been – along with a recovery in production after two weather and calamity stricken years for mining and logistics networks in a number of jurisdictions including Australia – a slide in demand out of Europe where gas stores are now at high levels.
But the Aussie miners who produced through the Covid era are sitting on the spoils of the historical outlier that was the 2022 energy market.
Whitehaven Coal (ASX:WHC) was the first coal major to report its final quarter numbers on Monday.
Despite receiving an average price of $264/t in the three months to June 30 against FY23 prices of $445/t, WHC still generated $435 million, leaving it with $2.65 billion in the bank after $1.6 billion in capital returns via dividends and a ~$950 million share buyback.
Whitehaven MD and CEO Paul Flynn told shareholders the coal producer, which at 18.2Mt hit the lower end of its full year ROM production guidance, delivered a 10% premium to the GlobalCoal Newcastle Index at US$161/t in the June quarter.
The miner also delivered 299,000t under the NSW Government’s domestic coal reservation scheme, achieving $115/t on the quality of the coal supplied, mostly from its Werris Creek mine, under the $125/t price cap for 5500kcal coal under the scheme.
According to WHC, around 36.4Mt were exported out of Newcastle in the June quarter, up from 31.8Mt in March for a total of 132Mt, well below the 155Mt shipped in FY22. Volumes are expected to improve this financial year as the impact of weather and labour shortages abates.
For now, WHC says coal prices are expected to remain subdued.
“We expect coal prices to remain subdued during the Northern Hemisphere summer period while high coal stocks at end user facilities and cheaper alternatives, including gas are available,” the firm said. WHC bosses remain hopeful of a turnaround.
“We maintain our view that increased gas and coal demand for the winter period will mark a turning point in the market where trade flows and the tightness of high CV coal supply will provide support for pricing. In metallurgical markets, volatility is expected to continue for the balance of CY23 reflecting uncertainty around the strength of economic activity in developed and developing economies.”
The question for Whitehaven now is where does it put all that money?
It could keep returning it to shareholders. Some $2b has gone back into their pockets over the past two years. But growth is also on the agenda.
The Vickery extension project has been approved in a staged form, while the Winchester South met coal project in Queensland is the next on the agenda.
But with the regulatory environment turning against new coal mines, the other opportunity is mergers and acquisitions.
The obvious one on the market is the Daunia and Blackwater South sale, two mines from BHP (ASX:BHP) and Mitsubishi’s BMA business in Queensland that have been on the market since earlier this year.
“We look at all assets that fit in the strategic cross hairs of the business,” Flynn said on an analyst call Monday.
“Any question around timing or otherwise would be better directed to the person running that, which is BHP.
“As I’ve said previously, we look at all those things that fit between those parameters.
“Of course, Daunia is proximate to our Winchester South, so that’s obvious why we would want to have a look at that but beyond that those questions on timing would be better directed to BHP.”
The build vs buy conundrum comes, as Flynn says, with different risk profiles. Labour and capex costs, which are yet to be finalised for the full Vickery project, could be a factor when the full proposal is put to Whitehaven’s board later this year.
Banks view Vickery, which will be a high-grade thermal mine producing a premium product suited to the Japanese market, as purely an energy coal mine, though Flynn says it will produce some semi-soft coking coal.
That makes finance, especially traditional bank finance, a sticky issue.
Whitehaven has not renewed an undrawn $1 billion finance facility held with a range of banks, but has secured contingent credit for guarantees on things like environmental bonding, rehab, port and rail and other financial guarantees.
It’s among the clearest indicators yet that traditional banks view thermal coal investments as a risk to their ESG and decarbonisation promises.
“We went through that process. It’s a range of banks. I’d say to you that it is increasingly difficult being a thermal coal producer to attract external funding,” CFO Kevin Ball said.
“It’s fairly challenging when you go to a bank and say I’ve got $2.6 billion on a balance sheet and they look at you and say ‘sir, why do you need that? First of all.’ That certainly played into the conversation,” he added later.
“A number of banks took opportunities to say ‘well you’ve got plenty of cash, come back when you’ve got something else you want to do, but at the moment we’ll take our opportunity to decarbonise’.
“On that front, the contingent side of the world, we were really well supported, a diversified group there, and I’d say to you anybody who is in thermal coal is going to face difficulty getting funding from traditional sources.”
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Iron ore prices meanwhile continue to defy the bearish overtones of naysayers on China’s admittedly pallid-looking property industry.
Singapore prices for 62% Fe iron ore rose 1.71% yesterday, hitting US$114.35/t as of Australia’s market close.
China’s GDP grew at just 6.3% in the second quarter. It’s a number that sounds better than it is, given a bunch of the country’s biggest cities were in Covid lockdowns that time last year.
Youth unemployment is above 21% and consumer prices could zag against the rest of the world amid fears of deflation.
The bullish picture for iron ore producers is that means the country is in need of more of its patented stimulus ahead of a Politburo later this month, with economists watching closely to see how far Xi Jinping can stare at the current situation without blinking.
The biggest concern is in property, a big source of steel and iron ore demand, with newly constructed floor space down 25% in the first half after a 39% drop in 2022, Commbank analyst Vivek Dhar noted.
“The property sector clearly needs policy support, but measures that relax purchasing restrictions alone are unlikely to move the dial,” he said.
“Confidence remains critically low after the property sector cratered last year and any policy support will likely need to be larger and in place for longer than previous property downturns to be effective.
“Policy support for infrastructure investment is likely the most assured pathway to support China’s economy and ensure China grows at least 5% in 2023.”
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