Monsters of Rock: Goldman checks out NSW miners after coal royalty hike and how fair is the big Newcrest takeover?
Goldman Sachs says new coal royalty rates in New South Wales will make it harder for miners to justify expansions, placing a question mark on future developments and curbing earnings for the sector’s big players.
New South Wales became the second state in the past two years to ratchet up commissions on coal sales, lifting its rates 2.6% across the board to 8.8-10.8% depending on whether mines are underground or open cut.
It comes after Queensland lifted royalties to what Goldman said were the highest in the world last year, an effective rate of around 20%, something which saw the Sunshine State report the largest surplus of any State in history last financial year and prompt BHP (ASX:BHP) to withdraw capex guidance for its BMA met coal assets.
The NSW rate increases from the Chris Minns Labor Government came after consultation with coal miners over the past month, but still drew the ire of Glencore and Whitehaven Coal (ASX:WHC) when they lobbed on Wednesday.
Intended to raise $2.6b over four years for the NSW coffers between July 2024 and 2028, the new rates will see Whitehaven’s earnings per share fall 7-8% in FY25-26, lowering its NAV by 6% and price target by 3% to $6.90, according to GS’ Paul Young and Caleb Heiner.
New Hope Group (ASX:NHC) will see those metrics slide 4-5% though FY24 will be higher after recent strong operating results, with NAV down 6% and PT down 3% to $3.30 with a sell rating, while South32’s (ASX:S32) impacts will be minimal given its growing exposure to battery metals like zinc and copper taking over from its met coal earnings.
GS sees 6000kcal Newcastle thermal prices of US$140/t in the second half falling to US$125/t in 2024, with high grade met coal hitting US$265/t in the H2 2023 before dropping to US$230/t next year.
But longer term, the impact could be felt strongest on the supply side.
“On balance, we view the higher royalty rates as negative for EPS and NAV, and also believe it will disincentive companies to invest in new projects and brownfields growth (such as WHC’s larger Vickery greenfield thermal coal project), which may reduce Australian coal supply over the medium to long-term, in particular thermal coal,” Young and Heiner said.
Of course, that’s is sometimes the point when you raise royalties on things society wants less of, though on the flipside lower supply and a stickier transition to renewables than hoped for could see coal prices surge again like they did after Russia’s invasion of Ukraine last year.
Coronado (ASX:CRN) is GS’ preferred pure coal play, but its operations are situated in Queensland and the United States.
Today’s bleak dose of reality comes from the pen of auditors Grant Samuel, who have told Newcrest (ASX:NCM) shareholders that a proposal from the world’s biggest gold miner Newmont to buy them out is not fair, but is the best they’re going to do.
The scheme booklet for the $29.4 million deal has landed, or at least that was the equity value when the bid was placed in April. It looks like a big dive in Newmont’s share price means it’s now worth somewhere between $23.5-26b.
That’s extrapolating Grant Samuel’s numbers, with Newmont’s share price falling from US$51.09 to US$39.32 since its second proposal, endorsed by Newcrest’s board.
At the time the consideration came to US$21.54 per NCM share, but based on recent New York trading Grant Samuel says it makes more sense to value Newmont’s stock for the vote at between US$40-44 per share.
It has fallen to US$38.36 since Grant Samuel’s report, released to the ASX today, was compiled. That places the consideration of the all scrip bid at US$17.10-18.70 per share, barely overlapping with fair value for NCM on GS’ accounting of $18.64-21.13.
“While it could be argued that any amount of overlap results in a transaction being “fair”, in Grant Samuel’s view, the extent of the overlap in this case is insufficient to meet the requirements for the Newmont Transaction to be “fair” in terms of ASIC’s regulatory guidelines particularly as Newmont’s Latest Share Price ($39.32) represents consideration of only $16.83 per Newcrest share,” the pencil pushers said.
However, Grant Samuel has given the deal a green checkmark on the proviso, essentially, that nothing better is on the horizon for Newcrest shareholders.
No other bidders have crawled out of the woodwork to challenge Newmont, nor could anyone barring the seemingly disinterested Canadian giant Barrick really start a joust.
Newcrest’s offer is “best and final”, Newcrest’s share price would probably fall if the deal fell over, and Newmont’s shares being at 10 month lows means there’s probably headroom for upside, Grant Samuel suggested.
“If the Newmont share price recovers during this period, it could change Grant Samuel’s views on fairness, although Grant Samuel’s opinion would, in any event, still be that the Newmont Transaction is in the best interests of shareholders,” they said.
“If a superior proposal does not emerge prior to the Scheme meeting, the choice is essentially between the Newmont Transaction and the status quo. In this case, Grant Samuel’s judgement is that the Newmont Transaction (including the Scheme) would be in the best interests of Newcrest shareholders.”
The scheme meeting will take place at the RACV City Club in Melbourne on Friday October 13.