Coal Mining: Looking through short-term uncertainties

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
15 March 2023, 7:30 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • February dividends disappointed as feared/flagged as producers mainly appear to be withholding dry powder for M&A optionality.
  • We think SMR is the most likely acquirer of assets, and New Hope Corporation (ASX:NHC) the least likely, although risk and opportunities apply to all producers in the interim.
  • Unfortunately, a prolonged BMA asset sale process makes forecasting August dividends difficult, overhanging holders of large surplus cash (WHC, NHC).
  • Our positive sector outlook is premised on strong upside risk to medium-to-long term coal prices. All producers offer upside potential but suit varying strategies.

Updating sector forecasts

We update sector forecasts for reported 1H/CY22 results, ongoing volume/cost adjustments and re-shaped coal price forecasts (NEWC down, HCC up).

February dividends disappoint

Results wrap: As feared, February dividends underwhelmed versus the surplus capital held by key producers, particularly Whitehaven Coal (ASX:WHC). Various explanations were made (accrued tax/step-ups, conservatism).

But the producers are clearly building cash for M&A optionality particularly as debt/equity remains expensive.

Weighing M&A versus capital management potential through 2023

M&A starter’s gun fired: All the ASX listed producers will take a close look at the BMA assets and we detail the most probable outcomes. We think Stanmore Resources (ASX:SMR) has the best chance of being rewarded should it buy Daunia only.

We think M&A risk may most overhang WHC, Coronado Global Resources (ASX:CRN) and NHC in the short term as large dividend expectations were likely priced in. We think NHC will be the most disciplined, with a greater chance of releasing windfall dividends in time.

Dividend uncertainty through August?: The ~18 month BMA divestment timeframe risks recent reservation (driving underwhelming dividends) extending into August. However, we do expect some better clarity by then as some non-buyers get filtered out.

Nonetheless, there’s a healthy amount of guesswork in forecasting near-term dividends, also noting ongoing buybacks (WHC).

M&A could drive a major disparity in returns: Execution (or not) and price discipline (or not) could well drive large disparities in stock returns. Companies which may acquire well (SMR) or companies which don’t acquire, and distribute enormous surplus cash (WHC, NHC) could strongly outperform in time.

However, the opposite risks also apply. We think the market is discounting WHC most for the risk of expensive M&A.

Sector investment views

Windfall sector dividends have been delayed, not consumed, for most producers in our view. The most disciplined boards should duly reward shareholders with the spill-over of excess capital and/or disciplined growth. SMR and WHC look excessively cheap for their growth and returns potential respectively.

Ex M&A, WHC looks far too oversold on the recent NEWC correction (FY23F FCF yield +40%, P/NPV 0.69x). We expect the re-tightening of thermal coal pricing dynamics through April to be a key catalyst for WHC and NHC. 

NHC’s 1H dividend has potential to underwhelm on Mar-21. Short-term volatility may present an opportunity.

We have Add recommendations on all the producers but explain why their individual traits suit different varying investor types/strategies.

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