We trimmed our position in Whitehaven Coal (ASX: WHC) in September by recommending a ‘Half-Sell’ and booking profits following a 700% return. In the last couple of months, we have continued to see the energy crunch play out globally, and the position that the coal industry finds itself in, in the short term, is exceptionally strong.
The last time we covered WHC, we outlined why it was essential to retain exposure to the stock and the coal industry, and we would like to emphasise the points and build on them as we head into closing out 2022 with what could be a brutal northern hemisphere winter.
Despite the anti-ESG sentiment, Coal and Whitehaven are not going anywhere. To put things into perspective, Whitehaven exports its coal into Asia for electricity generation, steel making, smelting and other industrial processes. Its three important markets are Japan, Korea, and Taiwan, representing 77% of sales in FY22.
In Japan, WHC helps keep the lights on for an average of 33 minutes every 24 hours. In South Korea, WHC effectively keeps the country operating for 23 minutes a day, and in Taiwan, it is about 27 minutes each day that Whitehaven is keeping electricity generated. On a weighted average basis, that’s about 30 minutes of electricity daily provided by Whitehaven to some 200 million people in these important markets.
Whitehaven is now realising Coal Prices higher than Last Year
After announcing, arguably, the best results in the recent ASX earnings season, Whitehaven has had a great Q1 as record-high coal prices continue to keep profit margins high. In 1Q23, Whitehaven achieved a record average coal price of A$581/t for the quarter, compared with A$514/t in the June quarter and just A$189/t in the prior corresponding period.
As for production and coal sales, the expectation was soft, given the seasonality of weather conditions and mine sequencing. Results were, therefore, as per market expectations.
WHC rails coal from its mine sites to Newcastle port via both Pacific National and Aurizon rail providers. They export coal through the Port of Newcastle using the two export terminals, Port Waratah Coal Services (PWCS) and Newcastle Coal Infrastructure Group (NCIG).
Production was strong at Narrabri and ahead of plan, with consistent volumes, good quality coal and completion of an efficient long wall step-around in late July.
Production was as expected
All open-cut mine operations – Maules Creek, Werris Creek and Tarrawonga – were expected to produce lower volumes in the September quarter relative to the strong June quarter due to mine sequencing. However, production was lower than planned across all three mines primarily due to rain disruption and flooding impacts in September, which cut off mine access at Maules Creek for seven days. At Tarrawonga, access was cut off for two days, and haulage roads were closed for 14 days in September. Operations slowed further due to labour shortages, absenteeism and seasonal impacts relating to heavy fog and increased noise-related delays in the winter months.
In the September quarter, coal sales were also planned to be lower than in the June quarter due to lower planned production. Sales tracked broadly in line with production with some drawdown of coal stocks. In the September quarter, sales comprised 92% thermal coal and 8% metallurgical coal, with 100% of thermal coal sales being high CV coal.
Therefore, September quarter managed run-of-mine (ROM) production was 4.0Mt, down 37% on the June quarter (down 22% on pcp), and total equity sales of produced coal were 2.9Mt, down 32% on the June quarter (down 14% on pcp); managed sales of produced coal of 3.7Mt, down 31% on the June quarter (down 12% on pcp).
Whitehaven holds a net cash position of $1.93 billion as of 30th September 2022, with $1.55 billion cash generated in the September quarter. This result was well within expectations, and WHC remains on track to hit its guidance for FY23.
Coal Market Dynamics Remain Strong
Coal Prices are forecasted to remain above the US$300/t level through 2023. The September quarter saw three consecutive record highs for the monthly gC NEWC Index, with the month of September setting the record high at US$434/t, following US$417/t in August and US$411/t in July. The September quarter gC NEWC index of US$421/t exceeded the June record high of US$377/t by US$44/t.
Energy security was a continued focus during the quarter, with continued strong demand, supply constraints and high prices for high-quality thermal coal. The impact of sanctions and embargoes on Russian coal is resulting in a high CV thermal coal trade flow response, where countries that typically do not take large volumes of high CV thermal coal are now moving to take advantage of cheaper Russian coal.
Northern hemisphere coal inventories are adequate coming into the winter season; however, they are expected to be drawn down quickly and replenishing stocks with Russian coal is unlikely to occur under the current sanctions. There is also uncertainty around natural gas supply into Europe via the Nordstream pipelines, which has appreciably strengthened gas prices, making thermal coal significantly cheaper on a per gigajoule basis than gas. The European coal-to-gas price differential is also apparent in the Asian market.
Much like Europe, our main Asian customer regions appear to have sufficient stocks in preparation for the cooler season. Russian coal is steadily moving out of key Asia markets as sanctions roll through. The large state-owned power utility in Taiwan stopped taking Russian coal in August, and Japan will stop taking delivery of Russian coal at the end of March when pre-existing contracts run out in line with the Japanese fiscal year.
Looking locally, several weather events impacted coal producers during the September quarter, which, together with the forecasted La Niña weather patterns, has further bolstered support for high coal prices out of East Coast Australia.
Total coal exports from the Port of Newcastle for September 2022 YTD are down 11.9% (14.2Mt) compared to the prior corresponding period and down 15.5% (18.9Mt) compared to the September 2019 YTD, the peak export year. Exports are down due to a combination of production impacted by weather, labour availability, COVID impacts, and lower yield as producers maximise high CV coal production to take advantage of the differential between high CV and low CV prices.
The metallurgical coal market significantly weakened in the September quarter as steel demand dropped on a significant slowdown in China due to strict COVID lockdowns, India’s tariffs on steel exports and overall softened demand for steel products. The continued inversion of metallurgical and thermal coal prices incentivises the sale of thermal coal over metallurgical coal.
Given the lack of available supply-side response, we continue to view thermal coal prices as well supported throughout FY23 and beyond. La Niña and labour shortages may continue to impact production with strong demand for high-CV coal and extremely tight supply in the absence of Russian coal. While pricing is relatively strong compared to historical levels in metallurgical markets, we expect further volatility with ongoing global economic pressures.
WHC’s product mix is 87% thermal coal. This means that WHC’s profitability relies heavily on thermal coal and not metallurgical. As we mentioned earlier, thermal coal prices are expected to remain elevated – above the US$300 a tonne level for 2023.
Outlook – Whitehaven is on Track to Hit Guidance
Whitehaven remains on track to deliver within the range of its overall production, sales, and cost guidance for FY23, as issued on 25th August 2022. Given the market dynamics we mentioned earlier in this report, we do not expect a curved ball to be thrown in the way of the market by WHC.
Mine sequencing plans allow for opportunities to lift volumes throughout the year, underpinning the expectation of meeting overall volume targets.
Maules Creek is currently tracking at the low end of production guidance, while Narrabri is tracking at the top end of its guidance and may exceed the top end if operations continue to perform well. For the open-cut operations in Gunnedah and Maules Creek, so far in October, we have seen further wet weather delays, approximately two days of mine access road closures at Maules Creek and five days of haulage road closures impacting Tarrawonga.
While forecasters expect La Niña to decline over Spring with a return to more neutral conditions in early 2023, WHC has strategies in place to minimise the impacts of La Niña. These strategies include transporting reduced shifts of employees to the site via helicopter when roads are closed and contracting additional haulage capacity when haulage roads are open.
More Dividends & Buybacks are on the horizon
As we witnessed in the September quarter, higher expected coal prices will offset the decrease in production volumes. This means that WHC’s Net Profits will remain elevated, leading to materially high interim dividend payments.
Whitehaven reported that it has now completed 10% of its share buy-back earlier this month. A total of 103.3 million shares have been bought back at an average price of $5.69 per share for a total cost of $587.9 million.
This $587.9 million of capital returned through the share buy-back, together with $449 million of dividends paid (48 cents per share) to shareholders in respect of FY22, represents a total of $1.04 billion of capital returned to shareholders.
At Whitehaven’s Annual General Meeting (AGM) to shareholders on 26th October, the company announced that shareholder approval was granted to extend the company’s share buy-back programme through an on-market buy-back beginning on the 27th of October.
The Board has therefore authorised to acquire of up to a further 240 million shares, which is approximately 25% of issued shares over a 12-month period. This ensures that 35% of Whitehaven’s equity would have been bought back by the firm in less than 2 years – a staggering return to investors.
Whitehaven’s perfect storm of bullish coal prices and healthy production levels amid a massive global energy crunch continues. The WHC share price continues to trace the coal price movements. The supply & demand dynamics at play in the coal market are expected to play out throughout 2023 – supporting the WHC share price at these elevated levels. WHC now realises higher coal prices than before, and profitability is expected to remain elevated – leading to a high interim dividend. The company recently completed a 10% stock buyback and has launched an additional 25% stock buy-back campaign. We recommend maintaining exposure by ‘Holding’ positions.