The title of this thread (viz. "Will New Hope make money?") - which kicked off a little over than a year ago - goes a long way to informing the highly- leveraged nature of the beast that is NHC.
At the end of the half-year during which the thread started (namely H2,2020), NHC would report Pre-Tax Profit of just $25m.... down from almost $100m in the prior half-year and from over $140m just a year earlier.
And in the following half-year (1H,2021) the company basically broke even (that's if one overlooks the long list of of so-called "non-regular" items.)
While NHC's earnings are highly variable (to be expected for a price-taking commodity business), what is clear is that the company has been seriously under-earning in recent periods:
Recent Half-Year Pre-Tax Profit:
1H,2017 = 100
2H,2017 = 104
1H,2018 = 172
2H,2018 = 187
1H,2019 = 215
2H,2019 = 141
1H,2020 = 96
2H,2020 = 25
1H,2021 = ~1 (that's right.... around one million dollars)
Of course, that's all looking in the rear-view mirror and the question now is what can NHC earn over the next few years in an environment when the coal price looks like being well-supported by fundamentals in a way that it has not been since the last commodity boom (i.e., demand recovery coinciding with lack of supply side response):
View attachment 3256307It is worth remembering that when the coal price was last at levels of, and above, $110/t for a reasonable period of time, namely in 2012, it recorded Pre-Tax Profit of almost $250m.
But the big difference is that NHC did not own Bengalla at that stage (NHC's fist 40% interest in Bengalla was acquired in 2016 and the second 40% stake was acquired in 2018) ; so attributable production was only 5.6mt in FY2012 (from New Acland and the sub-scale New Oakleigh mine, both higher operating cost mines than Bengalla - NewOakleigh closed in 2013 and Acland will cease producing sometime over the coming 6 months).
This time the cycle upswing will happen with NHC's attributable sales being 8mt pa, some 40% higher than the previous cycle upswing.
So, if current coal prices are sustained, the question that warrants answering is what kid of profits and cash flows could NHC generate?
A range of coal price scenarios are presented in the table below, with the current pricing (~US$110/t) and corresponding pro forma financials and cash flow outcomes - along with resulting valuation metrics - highlighted in yellow:
View attachment 3256652Based on my admittedly crude modelling, should current coal prices persist, the stock is effectively trading on a P/E multiple of just 5x, an EV/EBIT multiple of just 4x and a FCF yield in excess of 20%.
Assuming 60%dividend payout ratio, the DY would be around 12% and that would still see the company be able to reduce its debt at a rate in excess of $130m pa.
My personal view is that this particular cycle will see even greater tightness than previous ones because - even though demand growth might not be as intense as it was during the previous commodity boom a decade ago - demand is still growing; but the major difference this time around is that the supply side response will be a lot slower and a lot more muted, that's if it occurs in any form at all.
So I would not be in the least surprised if the coal price averaged closer to $120/t over the next 2 or 3 years and I would not be surprised if it peaked at $150/t. (Anything higher than $150/t for a sustained period is a level at which demand destruction might start to occur, however. So only demand destruction is the threat to the price, I believe, because the long lead times involved and the current sheer hatred of coal in developed world capital markets means that new supply would take a very long time to come on stream and would have to originate in places such as China or India.)
Either way, based on the table above, assuming a minimalist 8x P/E multiple (hardly at all demanding), the stock is currently pricing in a coal price of somewhere between US$90/t and US$100/t.
And at the coal current price of around US$110/t, that 8 xP/E multiple (which corresponding to 13% FCF Yield, so implying roughly only an 8-year mine life) translates into a
$2.70 share price, a further 60% upside to add to the stock's 40% rise in recent weeks.
If the US$130/t scenario eventuates - which I consider to be well within the realms of possibility, probably a 10% to 15% chance of it happening - then the discussion will promptly change to contemplating a share price in
excess of $4.00/share.
.
(20min delay)