Time for a short squeeze? Published in the Fin Review last night
Whitehaven boss strives to find light in coal's tunnel
Breakfast has been more enjoyable for Whitehaven Coal chief executive Paul Flynn over the past month.
''I look at the coal price when I am sitting down having my breakfast in the morning and I look at the production stats,'' he says.
''It does definitely add some momentum to your day when you see things improving.''
After a winter of discontent that pushed more than half of Australia's thermal coal mines into the red, there are signs the cycle is past its nadir.
Prices for top-quality NSW thermal coal have rallied from just below $US50 per tonne to $US58 per tonne over the past month, while a slight weakening of the Australian dollar over the same period has also helped local miners.
Flynn hopes those twin tailwinds have provided some comfort for investors who have recently feared Whitehaven might follow coal rival Coronado into a dilutive equity raising to survive the downturn.
Those fears were illustrated by a surge in short positions in Whitehaven from 1.95 per cent in mid August to 5.37 per cent on September 28; a metric that revealed a growing number of investors believed the 83 per cent slide in Whitehaven shares over the past two years had further to run.
"Our liquidity position at the time of the announcement of [August] results was about $470 million in combined liquidity,'' said Flynn.
''Pricing has improved since that time so that just adds further liquidity to the bank, so we feel very good about it. We have said from the beginning we didn't think an equity raising was necessary, and we certainly don't think that now.
"I do feel like we have seen the worst of it, I feel like the balance of risks now are to the good rather than to the bad.
''I think the momentum we have carried into this new year is far better than what we carried into last year.'' Controllable factors
Weak coal prices were not Whitehaven's only problem in fiscal 2020; coal sales slumped to a five-year low after uncontrollable factors like bushfires and drought disrupted production and drove up unit costs.
But controllable factors also played a role; a failed approach to skilled labour recruitment drove up costs at Whitehaven's flagship Maules Creek mine, while NSW environmental regulators also pursued the company over a couple of localised breaches. A major leadership reshuffle in December 2019 sparked the exit of three operational and planning executives who had helped Whitehaven's coal production quadruple between 2012 and 2019: chief operating officer Jamie Frankcombe, Maules Creek manager Nigel Wood and projects boss Brian Cole.
Flynn has run Whitehaven for almost eight years, and says that after an era of rapid growth, the time had come for Whitehaven to pause and reset before considering any further growth.
''You have got to recognise that all of what made you successful may not be necessarily all of what you need to be successful in the future, and we've confronted that as an organisation, and as a result we have made significant change,'' he says.
''The foundation of the business was smaller assets [which were] easy to manage, but we have openly acknowledged that our future is larger scale, more efficient operations.
''The type of skills you need to manage those smaller operations are vastly different from the ones you need as the scale and complexity of your business grows.'' Incremental improvement
A resetting and refining of Whitehaven is now underway through Project Strive, which seeks to find incremental improvement opportunities across the business.
''We all pick up bad habits along the way as we grow individually and as an organisation, and this is an opportunity to round out those rough edges,'' he says.
Flynn says Whitehaven needs to mature through better planning, more focus on process and "execution discipline''.
He hopes Project Strive will manifest in more consistent production from Whitehaven's mines and lower unit costs, which have risen 34 per cent over the past four years.
''We do see last year as being the high-water mark from our costs perspective, and we can already see cost improvements in that regard in the first quarter of this year,'' he says.
Flynn will notch up eight years at the helm of Whitehaven in March 2021, putting him behind only Woodside's Peter Coleman and Evolution Mining's Jake Klein in the longevity stakes at the big end of the Australian resources sector.
Having refreshed Whitehaven's executive ranks over the past year, Flynn signalled he had no plans to exit any time soon.
''I love the business, it is a very exciting place to be. To see the new skills come into the business and enrich our existing team is tremendous and there is just a lot here to do, so I am very excited by the future," he said. More consolidation
The board of Whitehaven also appears to believe Flynn is the right man to lead Whitehaven's next phase.
Last month the board tweaked the structure of Flynn's long-term incentives, to increase the exposure to progress on Whitehaven's three growth projects: the Vickery project in NSW, expansion of its existing Narrabri mine in NSW, and development of Whitehaven's first hard coking coal mine at Queensland's Winchester South.
Vickery and Winchester South are effectively greenfield projects; a rarity in the coal sector, given how hard it is to win coal mine approvals from government in these climate conscious times.
''It will take a little bit more than five years to do both of those, of course, but you can see where I am going," says Flynn.
Building is not the only way to grow; miners like BHP and Peabody are trying to sell Australian coal mines, while Pembroke Resources is trying to raise funds to build a coking coal mine directly adjacent to Winchester South, creating an opportunity for greater cooperation with Whitehaven.
Flynn expects there will be more consolidation in the Australian coal sector, but vows to remain disciplined and focused on shareholder value.
''We do think our business would be better balanced with a 50/50 split [between thermal coal and coking coal], but we are fortunate with our existing thermal assets that demand is very good.'' he says.
NSW thermal coal assets will be the backbone of Whitehaven's business for the forseeable future, meaning Flynn has little choice but to continue being corporate Australia's loudest advocate for coal's place in a carbon-constrained future.
It's a role he is happy to take on, and he welcomes the NSW's government's recent "Future of Coal Statement" and the federal government's declaration in September that carbon capture and storage (CCS) is one of six technologies deemed a priority for investment.
The NSW statement openly speaks of a ''transition away from coal'' to "new energy sources", but notes that the gradual pace of change means the local industry has several decades of life ahead of it.
''Many countries around the world have begun a transition away from fossil fuels to low carbon sources of energy to meet commitments under the Paris Agreement. This will ultimately lead to the global phasing out of coal in electricity generation (thermal coal), but will take some decades to complete,'' said the statement, which was published in June.
While he welcomed the NSW statement, Flynn does not share the view that thermal coal's future is limited to a finite window.
It's a timely topic in the wake of China's pledge last month to be carbon neutral before 2060, but Flynn warns against confusing "net zero" emissions with zero emissions.
''That does not mean no coal-fired power,'' says Flynn, of China's 2060 target.
''What it does point to, is the world as a whole, China in this instance, will be focused on means by which they can not only lower the emissions output from those existing energy sources, but they will look at other means by which they will offset those emissions through other mechanisms.
''Technology changes in terms of developing new sources of energy, no doubt, but it also continues to evolve the existing, and we are seeing that [with CCS].
''There will be plenty of progress to be made on all fronts.'' Europe vs Asia
One factor that has strained public discourse in Australia over coal's future has been the disconnect between cultural ties to developed nations in Europe and business ties to Asia.
For every environmentally focused policy reform in Europe, Australian coal miners point to new power stations being built in Asia, where the vast majority of Australian thermal coal is sold.
If you are interested in emissions reductions, you should be indifferent to where they come from, and we are definitely of that view.
— Paul Flynn, Whitehaven CEO
Even within Asia there are contrasting trends, with coal demand growing in emerging economies like Vietnam and Malaysia, but forecast to slide in big economies like Japan, South Korea and China.
IHS Markit forecasts contained in the NSW statement suggest the combined effect for total Asian thermal coal demand will be a decline from about 600 million tonnes this year, to about 470 million tonnes in 2050.
Those forecasts are a far cry from the Intergovernmental Panel on Climate Change's belief that coal's share of global electricity generation would need to be close to zero by 2050 for the world to limit temperature rises to 1.5 degrees.
Whitehaven's Maules Creek mine, and its future Vickery operation both boast coal with higher than average energy content, and the company believes that will equip it to cope with a carbon-constrained world better than miners who sell lower quality coal. Time for change
Flynn also believes CCS will have a big role to play in coal's future, even though it won't suit every power station and has not yet proved itself to be economically successful for coal-fired power.
''Up until now the policy support for CCS has been minimal relative to other forms of emissions reductions initiatives such as rebates and subsidies for renewables, and the time is nigh to change that,'' he says.
Flynn says investors are better informed about climate and energy policy than they were five years ago, and he is optimistic that public debate over the sector is becoming less ideological.
''Asia is going to require renewables, gas, coal and nuclear, it is going to be an all of the above situation to meet those needs and I think people have come to understand that better over time, rather than looking at this thing in a binary fashion,'' he says.
''The broader community has also understood that we don't need to be ideological about this; if you are interested in emissions reductions, you should be indifferent to where they come from, and we are definitely of that view.''
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