ASX:WHC
Whitehaven Coal Ltd
Investment Summary
The fund managers believe Whitehaven Coal Ltd is well-positioned for growth following its acquisition of the Daunia and Blackwater metallurgical coal mines from BHP, expected to yield 70% of revenue from metallurgical coal. Despite recent price fluctuations, the company’s share price rallied due to positive market sentiment and robust operational forecasts; notably, the company is on track to meet FY24 guidance while trading at a low PE of 9. The fund managers highlight the importance of capital management, particularly with plans for a 20-30% sell-down of Blackwater, which could enhance capital returns and reduce debt. They raise concerns over capital allocation, noting potential risks in pursuing further acquisitions while facing pressure from coal price volatility and increases in royalty rates. Nevertheless, the consensus remains optimistic, as the managers anticipate long-term upside through strategic cost reductions and production improvements in both the acquired and existing assets, fortifying Whitehaven's status as a high-quality mining company on the ASX.
Commentary From The Managers
Blackwattle Investment Partners
30 Sept 2024
$7.22
- WHC was the largest positive contributor to performance during the month.
- WHC rallied 10% in September on improving China sentiment and rebounding metallurgical coal prices.
- WHC is an Australian coal producer with thermal coal mines in NSW and recently acquired metallurgical coal mines in QLD.
- Blackwattle Investment Partners views WHC as one of the highest quality mining companies on the ASX, with strong financials and a capital disciplined management team.
- Our conviction in the material long-term upside for WHC as an ‘improving / enduring quality’ business has allowed us to invest confidently through the recent market volatility.
- We expect more market volatility as China may require more stimulus to offset structural issues.
- However, WHC has numerous multiyear internal levers to maintain and improve the business quality beyond cyclical commodity price movements.
- These levers include: cost reduction and production improvement in the acquired metallurgical coal mines, paydown of the deferred BHP acquisition payments, Vickery expansion & selldown, Daunia/Winchester South expansion & selldown, and further disciplined capital management.
Blackwattle Investment Partners
31 Aug 2024
$6.72
- WHC was the largest negative contributor to performance during the month.
- WHC fell 13% in August on weakening metallurgical coal prices.
- WHC is an Australian coal producer with thermal coal mines in NSW and recently acquired metallurgical coal mines in QLD.
- WHC delivered a strong FY24 result, but announced the sell-down of 30% of Blackwater Coal mine at a significant premium to original price.
- This sell-down puts WHC in a net cash position, reducing downside risk.
- China’s weakening property market is pressuring steel consumption, impacting metallurgical coal.
- Metallurgical coal prices remain healthy compared to historical prices due to tight supply.
- Blackwattle Investment Partners continues to see long-term upside for WHC as a quality business.
- WHC considered one of the highest quality mining companies on the ASX with strong financials.
- Expect WHC to execute on internal levers for improvement including cost reduction and production increases.
- Focus on paydown of deferred BHP acquisition payments and expansions (Vickery, Daunia/Winchester South).
- Blackwattle Investment Partners views WHC as maintaining disciplined capital management.
Endeavor Asset Management
30 Apr 2024
$7.72
- Endeavor Asset Management notes an 8.7% increase in the share price of Whitehaven Coal (WHC) in April.
- The business is on track to meet its FY24 guidance.
- The 20-30% sell down of the Blackwater asset is viewed as a positive avenue for increasing optionality towards capital returns.
- This transaction is also seen as beneficial for debt reduction.
- Endeavor Asset Management continues to hold its position in Whitehaven Coal due to these developments.
Cadence Capital
30 Apr 2024
$7.72
- Cadence Capital provides an update on their investment thesis in Whitehaven Coal Ltd.
- During the month, Whitehaven Coal completed the acquisition of the Daunia and Blackwater metallurgical coal mines.
- This acquisition will transform Whitehaven from producing predominantly thermal coal to producing both thermal and metallurgical coal.
- Post-acquisition, 70% of Whitehaven's revenue is expected to come from metallurgical coal.
- Whitehaven Coal is currently trading on a PE of 9, annualizing their first half profit.
- The current PE does not include the substantial earnings accretion from the acquisition.
- Cadence Capital continues to hold because of the positive transformation in Whitehaven's revenue structure.
Cadence Capital
31 Jan 2024
$8.43
- Whitehaven Coal has shown strong performance following its acquisition of the Daunia and Blackwater metallurgical coal mines from BHP.
- Post-acquisition, approximately 70% of Whitehaven Coal's revenue will come from metallurgical coal, with the remainder deriving from thermal coal.
- The shift towards predominantly metallurgical coal is considered well-timed as thermal coal prices have decreased while metallurgical coal prices have risen.
- Cadence Capital continues to hold its position regarding Whitehaven Coal as it anticipates favorable market conditions.
Spheria Asset Management
30 Sept 2023
$7.19
- Whitehaven Coal (WHC.ASX) share price rallied almost 17% in September from heavily discounted levels.
- Last year, the company traded at all-time highs with thermal coal peaking over US$400/t in September 2022.
- Current share price has nearly halved, trading at a significant discount to peers, considered very cheap on an absolute basis.
- As of FY23 year-end, the company had $2.7bn of net cash and $400m of franking credits, with a market capitalisation around $5.6bn.
- Forecasted to generate over $500m of pre-tax free cash flow in 1H24 at current coal prices, despite a heavy capex campaign.
- Trading on 2-3x pre-tax free cash flow based on this run-rate.
- The discount reflects valid concerns over capital allocation, as the company is pursuing BHP’s metallurgical coal assets in QLD.
- Pursuit of these assets may delay capital returns to shareholders and introduces risk of potential overpayment.
- Exposure to an onerous royalty regime in QLD could suppress leverage to rising coal prices.
- NSW government's announcement of a 2.6% increase in coal royalties from July 2024 will impact WHC by approximately $100m pa negatively.
- Expectations of the royalty increase being worse likely aided share price performance in September, despite thermal coal prices falling from US$173/t to $129/t.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.