Whitehaven Coal: Cash tsunami on approach

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
27 August 2021, 7:30 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • FY21 operating financials were in-line, but operating cashflow fell modestly short.
  • FY22 sales guidance was a touch weaker than expected, but flat cost guidance was a highlight.
  • Seaborne thermal coal markets look strong into CY22 on a confluence of factors including a Chinese domestic supply crisis.
  • Our base case valuation adjusts slightly to (login to view), and our valuation under a bullish pricing scenario comparable to the 2017-18 period is (login to view).
  • Clear upside risk to shareholder returns linked to WHC’s strong cashflow leverage remains compelling.

FY21 result snapshot

FY21 operating financials (EBITDA $205m, NLAT -$87m, no dividend) met our expectations, but operating cashflow ($139m) missed our estimates by $49m due to higher rehab costs (Sunnyside, Rocglen) and a working capital + Inventory build which should partially unwind in the 2H.

Key takeaways

Narrabri optimisation: We look through the ~$550m write-down at the revised/ more realistic mine plan, and given prior book value looked excessive (WHC now 0.7x PPE+Cash and 0.86x NPV). The 20% reduction in reserves (-30Mt to 167Mt) mostly reflects targeting of narrower working section to maximise quality and value.

Reserves still supporting +20 years of life at productivity pushing 8Mtpa at shallower depth (supplemented by cut & flit mining) offers comfort. Development capital costs (200 Mains & Infra, ~$60m) have been pulled forward but will build a platform into the Stage 3 extension under evaluation.

FY22 sales guidance (18.0-18.6Mt) was 4% below our prior forecast mainly on lower Narrabri output, but today’s highlight was flat cost guidance despite rising energy/input costs. WHC will benefit from lower Narrabri remediation/ disruption and productivity benefits driving higher volumes (+6%),

The targeting of more conservative debt metrics ($300m max net debt, ~0.5x max leverage, longer tenor) via further funding from offshore markets is welcome, and shouldn’t surprise against domestic banking dynamics.

The intention to bank 12-18 months of cashflow before re-considering greenfields growth is also welcome in terms of supply discipline and supports clear upside to shareholder returns. We also think it is strategically sensible to maintain a net cash position for potential M&A, noting WHC sits among a small cohort of capable domestic operators for BHP’s QLD assets should they come to market.

Forecast and valuation update

DCF based valuation revises to (login to view) ex any value for Vickery or Winchester. The Narrabri reserve reduction (long dated) is more than offset by a reduction in WACC (to 8.8%) and recognition of overheads within site unit costs.

We forecast net debt to reduce by $522m in FY22 to ~$290m (~8% gearing, ~0.3x leverage) inclusive of modest dividends (3% forecast yield). Under the bullish pricing (page 4), we forecast net cash by end-FY22, supporting dividend upside. Our valuation in this scenario is (login to view).

Investment view

WHC offers ~16% upside to our base case and +60% upside to our bull case valuation.

Clear upside is linked to coal prices trading persistently higher than market assumptions. WHC’s cashflow leverage is getting harder to ignore, trading on a FY22F FCF yield of ~36%.

Price catalysts

Market recognition of WHC’s valuation disconnect is more likely the longer coal prices stay near record levels.

Risks

Narrabri’s operating risks will remain elevated in LW10 in our view.

Production disruption from a key asset(s), infrastructure availability, commodity price and FX volatility. 

ESG investing trends potentially driving a permanent discount to fair value.

Find out more

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