Ground Breakers: At 2023 coal prices how is Whitehaven holding up?

• Whitehaven thinks demand for high CV thermal coal will remain strong for years
• Major ASX coal miner has lost around a quarter of its market cap this year as prices have tumbled
• E&P Financial places $7.50 valuation on WHC at long run thermal price of US$120/t

Last year was a watershed for the maligned believers in the future of the coal industry, as Russia’s war with Ukraine sent prices up to record highs of US$450/t, more than double anything seen before or since.

They have cooled substantially as Europe’s demand has waned, though front month futures Newcastle 6000kcal high CV coal lifted more than US$7 yesterday to US$141.00/t.

The scale of that fall has hit a number of stocks hard.

$5.8 billion Whitehaven (ASX:WHC) has seen around a quarter of its market cap shaved off this year, as has Yancoal (ASX:YAL).

At a 13% fall New Hope Corp (ASX:NHC) is slightly better off, while Stanmore Coal (ASX:SMR) is down around 12%.

But beauty is in the eye of the beholder.

Could there be value in knocked down coal stocks? Potentially, but it will likely be reliant on gas prices moving higher and encouraging switching back from gas to coal.

Whitehaven recently held a session with sell-side investors in the market to test-sell their story that demand trends for high caloric value coal will grow alongside oil and gas for a number of years, while supply struggles to keep up.

While Whitehaven is trading at $6.62 today, down 1.49%, E&P Financial analysts Adam Martin and Branko Skocic have placed a $7.50 valuation and Neutral recommendation on at a long term coal price of US$120/t, below current levels but above historical norms.

“Coal prices have been falling but have started to stabilise. There is the potential that coal prices have bottomed albeit it is difficult to know as the recent increase in European gas prices appears due to temporary Norwegian production outages,” they said in a note.

“In the absence of further supply disruptions, Europe’s strong inventory position could mean gas prices remain under pressure throughout the Northern Hemisphere summer.

“While this would weigh on thermal coal prices, we note our estimates already reflect thermal coal prices near US$130/t.”

Whether Whitehaven is cheap at these levels really depends on where thermal pricing heads.

“At US$130/t, Whitehaven is trading at c.2.5x EV/EBITDA,” Martin and Skocic said.

“Should Thermal increase to US$150/t or even recover to more like US$200/t WHC looks very cheap.”

But they say the company, which is still conducting a big share buyback, may need to raise its payout ratio to improve dividend yield.

“At current prices, dividend yield in FY24 has got even more skinny at 2.7%. This assumes 20% of profit as dividend, 30% annual buyback. Perhaps a greater payout is needed?”

Longer term outlook remains positive

While commodities for the energy transition command more interest and investment clarity these days, Martin and Skocic say the longer term outlook for coal “remains positive”.

“We believe medium-term value is potentially building, but it depends on where gas and thermal coal prices level out,” they said.

“The longer term outlook for coal remains positive, driven but sticky non-OECD demand and structural supply challenges.

“We believe the market has structurally shifted to a higher CV product.

“This has been driven by a combination of environmental and technological reasons as new high efficiency, low emissions power plants (HELE) are designed to take high CV thermal coal which producers such as Whitehaven supply.”

The other big questions around WHC are the status of its development projects at Vickery and Winchester South and its production performance, which has been stuffed by labour shortages and wet weather over the past year.

It cut upwards of a million tonnes out of its ROM coal production guidance for FY23 back in April on the back of issues at its Maules Creek mine. All eyes will be on its quarterly production report and FY24 guidance.

And on the markets?

Winners were few and far between with most commodities stumbling.

Gold fell 0.9% to US$1912/oz on fears of further rate hikes in the US, now well short of the plus-US$2000/oz levels seen in April.

The materials sector stumbled 0.87%, though that wasn’t awful in context of a lightly bleeding broader market.

Gold producers struggled, down 1.23% across the All Ords Gold sub-index. Evolution Mining (ASX:EVN) was in the green though.

Also up and about among the large caps were Champion Iron (ASX:CIA) and Leo Lithium (ASX:LLL).