Monsters of Rock: Chinese whispers bring Aussie coal stocks to life
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Is the rumoured return of Australian coal to the Middle Kingdom’s ports a case of boycotter’s remorse or just Chinese whispers?
News emerged today, thanks to industry monitor Sxcoal, that the never official but officially enforced ban on coal from Australian mines that has been in place since October 2020 could be reversed in the next two months.
That had some unintended consequences. While it was initially thought Australian companies would struggle to place product in what was, post-Covid, an extremely tough market, the opposite occurred.
An energy shortage in Europe and Asia mixed with the increased pull on other sources of coal from China saw a choke in global supply that sent prices for both steelmaking and thermal coal skyrocketing.
While China has been ramping up thermal coal production and is largely self-sufficient when it comes to energy coal, it is expected a reversal would be positive for metallurgical coal, with SXCoal saying some steel mills are already making preparations for the ban’s reversal.
“The 2020 bans impacted met coal more so than thermal coal suggesting that a ban unwind might benefit met coal volumes and prices,” Shaw and Partners research boss Peter “Rocky” O’Connor said in a note.
“What an amazing couple of years in the coal market. The so-called old energy on a pathway to oblivion … yet the best commodity performer in FY22 and the best so far in FY23 to date.”
Coking coal prices are still elevated but falling steel demand amid a weaker global economic outlook has seen them collapse by over 60% since hitting a record high of over US$670/t in March after Russia invaded Ukraine.
“This Chinese decision may be the catalyst that closes the met coal price higher (~US$250/t) towards thermal coal price (~US$430/t),” O’Connnor said.
“This would go some way to redress the pricing anomaly that has recently see met coal price – the premium coal offering- trade at a discount to thermal coal.”
There are few official sources to cling to with this one making it an echo in the wind in some senses.
Yet the news energised coal stocks already catching fire due to rising coal prices, with thermal coal prices lifting 1.4% to US$432/t yesterday.
A grab bag of the biggest coal names on the ASX showed massive gains across the sector. Whitehaven Coal (ASX:WHC) lifted 6.68% to $5.75 as of 3.20pm AEST, its highest share price in around four years.
Yancoal (ASX:YAL) climbed 9.71% to $5.65, New Hope Corp (ASX:NHC) was up 6.97%, Bowen Coal (ASX:BCB) rose 14.29%, Stanmore (ASX:SMR) gained 5.95%, Queensland coal miners Coronado (ASX:CRN) and Terracom (ASX:TER) were both up more than 8.5% and diversified players BHP (ASX:BHP) and South32 (ASX:S32) lifted 2.49 and 1.71% respectively.
The news would broadly fit into a narrative of thawing relations between Australia and China since the Morrison Coalition government was turfed out.
Our foreign minister Penny Wong met with her Chinese counterpart Wang Yi in Bali on Friday.
Wong called the meeting a “a first step towards stabilising the relationship”, though Prime Minister Anthony Albanese later said “Australia doesn’t respond to demands” when asked by journalists about a list of four items presented by the Chinese foreign minister to improve relations.
Mining stocks have been beaten down in recent weeks by tumbling commodity prices.
While they may not be the prettiest at the ball right now they could be the most fund to dance with though.
In RBC’s estimations, lower your expectations and you could well be happy with the outcome.
“Most companies for the July quarterly results will be publishing the usual operation metrics for 4QFY22 but also, importantly, forward operational estimates (FY23 production),” RBC’s Kaan Peker said.
“We have incorporated cost increases into our FY23 forecasts.
“However, given the elevated pessimism around the sector and upcoming results season, we think the bar is set low for possible positive operational and cost surprises and find decent value in the sector.”
Bad moods could be good news it seems.
Where is the value likely to be found? Probably not at Rio (ASX:RIO), which needs to ship at a rate of 350Mtpa through the second half of the year to hit the mid-point of its guidance.
Peker thinks yet another guidance downgrade could be on the cards from Rio’s Pilbara ops. But large downgrades are unlikely to be the norm since many already reduced guidance in the last quarter and gold miners tend to be good at controlling grades to backload production in the back end of the financial year.
While it sits at the middle to bottom end of guidance for most companies in its orbit, RBC thinks heaps could grow production next year.
“Despite difficulties, several covered companies will grow production this year (IGO, SFR, S32), and next year (BHP, MCR, RIO, OZL, IGO, S32),” Peker said. “We expect all gold miners to grow YoY production into FY23 with an average 15% increase. Our growth expectations are broadly in line with consensus.”
Gold miners like Northern Star (ASX:NST), Silver Lake (ASX:SLR) and Regis Resources (ASX:RRL) are also looking better than the bearish sentiment suggests, Peker says.
“Value is emerging across gold sector, with an average P/NAV of 0.80x and FY23E FCF yield of 11%,” he said.
“We favour golds with greater relative safety via strong balance-sheets, good FCF yield and operating stability. We find this notably in NST, and attractively priced RRL and SLR.
“While, we assume ~5% YoY increase to costs across our coverage, a key risk would be if overly conservative guidance was set.”
Peker expects capital management, growth capex, cost inflation and portfolio composition to be key themes in the upcoming reporting season.
But the prevailing market environment points to a conservative approach in the near term, with the potential for major projects like Ramelius’ Edna May Stage 3 pit, Regis’ McPhillamys, OZ Minerals’ West Musgrave FID and South32’s Trilogy and Hermosa projects to be deferred.
“We expect companies may favour a cautious near-term approach, divergent on asset quality, size, balance sheet and commodity exposure,” Peker said.
“On dividends, we favour large-cap, financial year reporting miners.
“We forecast strong capital returns across the sector, particularly from the mid-large cap diversified miners heading into full-year results (BHP, S32 and FMG have 6-7% fully-franked, final dividend yields).
“Conversely, miners reporting interim results could side with caution (RIO and OZL). NST’s 5% dividend yield adds to its gold, safe-haven appeal.”