Monsters of Rock: Thermal coal prices slide 64% in a year but incumbents are still sitting on strong profits

New Hope Corp says the coal miner is still seeing strong demand for its product despite falling thermal coal prices
On track to hit guidance, after lifting coal sales 18% this year to date
But market prices for thermal coal have tumbled 64% in the past year after 2022’s boom

New Hope Corp (ASX:NHC) is among the few pure play thermal coal producers left with peers looking desperately to get into steelmaking coal to future proof their businesses.

Whitehaven Coal (ASX:WHC) notably emerged as the successful bidder for BHP’s (ASX:BHP) Daunia and Blackwater mines in a $6.4 billion gamble that will turn it from being a predominately energy coal producer to a miner extracting 70% of its revenue from metallurgical coal.

New Hope meanwhile operates the Bengalla mine in NSW’s Hunter Valley, 15% of Malabar Resources — the newly minted operator of the Maxwell mine — and the New Acland mine in Queensland, where first production in the October quarter of 238,000t of ROM coal from its third stage came after years of regulatory disputes and community opposition which delayed the mine’s extension.

That portfolio is heavily leveraged to thermal coal sales. While they surged to unbelievable heights of more than US$450/t just over 12 months ago, thermal coal out of the Port of Newcastle is now selling for a far more tepid US$123/t.

With the addition of New Acland, ASX quarterly filings today from NHC show the Soul Patts backed miner ramped up ROM and saleable coal production by 1% QoQ to 2.447Mt and 2.044Mt respectively, though coal sales fell 14% to 1.819Mt.

However, after major logistics challenges last year, New Hope remains on track to hit guidance for FY24, having sold 9.021Mt YTD, up 18% from 7.638Mt a year earlier.

As for pricing, that hasn’t helped as much.

New Hope’s quarterly report showed the average Newcastle index 6000kcal price was up 4% QoQ to US$148.05/t in the October quarter, but down 64% against the same period last year.

“The uncontracted market for high quality coal has been limited and heavily discounted as physical pricing has remained challenging leading up to the Northern Hemisphere winter,” NHC said.

Demand for incumbents remains strong

That may deliver a warning note to emerging coal producers who thought last year’s price boom cracked open the door for a broader revival of the industry.

However, bigger players like New Hope continue to see strong demand. The company has flagged it intends to keep delivering dividends to shareholders as its major form of returns after paying out a 21c final ordinary dividend and 9c per share special dividend on November 7.

A share buyback approved to return up to $300m to shareholders has also raised $192.4m, with the company reabsorbing 37.1m of its shares.

New Hope said demand had improved for Australian coal from two sources in China and South Korea.

“In a tight market the Company’s forward sales book is strong with no unsold supply until January 2024,” it said.

“Demand from China has remained steady over the quarter, enabling API5 pricing to remain well supported, which in turn is providing a floor to gC NEWC pricing. Korean demand for Australian coal has improved as restrictions placed on Russian coal imports come into effect.

“In October, the competitiveness of the gC NEWC against the API2 and API4 materially improved, resulting in 6000 NAR from Australia ranking higher into Asian countries.

“The combination of these factors and the onset of winter in the Northern Hemisphere is expected to result in increased demand for gC NEWC products from next quarter.”

Excluding state royalties, New Hope expects to deliver cash costs of $72-81/t in 2024 at Bengalla ($83/t FOB ex royalty in the quarter), well below its average realised sale price of $221.45/t for the quarter. It delivered underlying EBITDA of $244.9m in the October quarter, down 8.5% on lower sales.

Meanwhile, the company said it intended to “vigorously defend” Queensland Magistrates Court proceedings alleging that it had engaged in unlawful conduct in historical mining of the West Pit at New Acland.

Coal sector rallies

Coal miners were among the few miners in a serious rally today, with New Hope up more than 1% and Whitehaven almost 2% higher and Yancoal (ASX:YAL) in between.

It came amid a broader run for energy stocks, with oil prices on the rise. Higher oil prices often signal a run for coal miners because coal is a cheaper switching fuel for oil and gas.

Coronado (ASX:CRN), which is primarily a met coal producer, ran 3.38% higher, with fellow Queensland coal exporter Stanmore up 2.63%.

The materials sector, containing Australia’s large hard rock miners, was down slightly with gold miners the biggest drag on the sector in a hangover from Friday’s rally.