I forgot to expand on the previous post. Enjoy.Initiating...

I forgot to expand on the previous post. Enjoy.

Initiating Coverage on New Hope(ASX:NHC)

Solid company, good dividend play and long-termhold that should appreciate on volume growth and the eventual rebound inthermal coal prices

The CoalTrader

Apr 09,2025

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I had meant to release this analysis of New HopeCorporation Ltd (NHC) last week, but a couple of things got in the way, thenthe 2 April tariff announcement happened and that took precedence. It isperhaps a strange time to be initiating new coverage, but I hope that you’llfind value in this analysis of NHC.

Right now, Matt and I have said that we’re in oneof those periods where all equities (and asset classes for that matter) arehighly correlated and the macroeconomic trends will largely dictate short termcoal share prices. You can see in the chart below that NHC shares havegenerally tracked with other global thermal coal names and the SPY (an ETF thattracks the S&P 500 index) over the last 5 trading days.

NHC is doing a bit better than otherthermal-focused miners, perhaps because it sells a significant proportion ofits output under term contracts, and is focused on exports to Japan, Taiwan,and South Korea (JKT). See NHC’s customer mix below, of which JKT made up 70%of FY24 sales.

Source: NHC 2024 Annual Report.

But WHC and YAL also do a fair amount of sellingunder term contracts. And all three have some exposure selling into China whiletrying to do the majority of their business with buyers in JKT. In sum, I don’tyet have a perfect explanation for why NHC shares are faring better than someof the other coal names at the moment.

Let’s get into the analysis and why I think thatNHC shares should move gradually higher once macroeconomic and trade riskssettle down. I know those macroeconomic risks are a huge caveat to any outlook,but I like to trade on the fundamentals. Picking up some NHC shares in the nextfew weeks could very well be a good long-term play if you have the stomach toride out the trade war news.

Company Background

New Hope is a very solid company that is prettyfocused on coal mining, has a very good track record of keeping costs down(including minimizing royalty payments), and pays investors guaranteeddividends. It’s a solid and impressive company that reminds me in some waysof ARLP, but with more growth potential.

NHC is an Australian coal miner with a long historyof thermal coal mining and some smaller, complementary segments including coalterminal operations, leasing land around its mines for agricultural uses, andoil & gas drilling. The core operations consist of two sizeable thermalcoal mines, one in New South Wales (Bengalla) and the other in Queensland (NewAcland), which produce high-quality export thermal coal at costs that allow thecompany to be profitable across market cycles (see table below). Note that NHCdoes sell a small amount of coal to domestic Australian utilities.

FY24 Cash Costs and Margins

Source: NHC 2024 Annual Report.

Cash costs, including royalties, of ~A$106/mttranslate to between US$63-64/mt at the port. Even in a tough year like FY24,that allows NHC to enjoy margins of more than US$40/mt as the coal is sold on a6,000 kcal/kg NAR basis at Newcastle. Note that the actual margins (includingnet commodity and FX movement) vary somewhat depending on the FX and coalprices hedges that NHC puts on and were above US$50/mt for FY24.

NHC operations are summarized in the image below.Note that NHC’s terminal operations are shown at Brisbane, and the company’soil & gas locations are designated by the diamond-shaped markers. NHC isactually looking for a buyer for its Bridgepoint Energy oil and gas assets andexpects to raise A$50-70 million from the sale. NHC also owns 22.97% of MalabarResources, an unlisted public company that is developing the Maxwell mine nearNewcastle. I’ll write a bit about Malabar next because NHC is considering anacquisition of 100% of the company, and that’s something that’s likely holdingback the share price in the near term.

Source: NHC 2024 Annual Report.

Malabar Resources controls the Maxwell project andthe nearby Spur Hill project in the Upper Hunter coalfields. Maxwell iscurrently producing coal from an underground, bord-and-pillar operation, butwill eventually produce coal via a low-cost longwall mine. See the diagrambelow, from NHC’s website.

Source: Malabar Resources.

The Maxwell mine is planned to have costs in thefirst quartile of the global coal cost curve and a long, 26-year mine life.Maxwell is selling a semi-soft coking (met) coal that makes weak coke but is ahigh-quality thermal coal and can be sold into both the met and thermal coalmarkets. Malabar is getting a 10% premium to thermal coal prices right now forMaxwell coal, but these are for small volumes of coal sold only into Japan.

But the Maxwell longwall coal from the WoodlandsHill seam is planned to be fairly high in ash content, which can limit itsmarketability or require additional processing to remove the ash. Thus, I thinka conservative way to think about Maxwell is that it’s a good, low-cost projectthat will essentially produce high-quality thermal coal (6,000 kcal/kg). Inrelatively oversupplied met coal markets like we have now, semi-soft coalscross over into the thermal coal markets anyway, and I’d like to be conservativein my assumptions.

Malabar Acquisition?

Likely one of the biggest factors keeping NHC shareprices from rising is the fact that NHC has expressed interest in acquiringMalabar. Many Australian shareholders treat NHC as a dividend play and wantmaximum return of cash to shareholders. Coal company shareholders across theworld, it seems, do not want to see M&A deals that increase risk and cutcash flows in the name of growth.

NHC was a bidder for the Anglo met coal assets,which would have no doubt angered some shareholders who hold NHC for thedividend. And now NHC is known to be looking at a A$1.1 billion acquisition forthe remainder of Malabar. I do think that would be a fair price for a HunterValley asset producing high-quality thermal coal. The mine should be able toproduce 5.5 million mt of coal at full production, requires an additional~A$500 million in capex to reach that output, and should be able to sell coal withcosts of A$120-130/mt and sales prices of A$210-220/mt (~US$125-130/mt) for agross margin of some A$80/mt. A transaction price of A$1.1 billion for aboutA$400 million in annual EBITDA is a 3x multiple and a fair value for theMaxwell asset that could have a life of 20+ years (plus the Spur Hillreserves).

None of that may matter to you if you’re buying NHCshares for the dividend, but if you want to read more about Malabar’svaluation, the company posts a periodic financial analyst’s report to the investor section of its website. Take these reports by Bridge Street with a grain of salt for two reasons: 1) the research is not totally objective, and 2) any mining project has a lot of unknowns in terms of production, costs and marketability of the output. For example, the cash cost estimates for the Maxwell project have varied a lot, even though I do think it will be a “low-cost” operation. So, please read the financial disclosures on the Bridge Street research if you do read it.

Production Still Growing - In This Market Cycle andBeyond

My case for NHC shares is that the company is setto grow production, and that higher output plus rising thermal coal prices willpush up share prices. Share prices should rise regardless of whether we see anymajor re-rating of the stock or coal sector.

This production growth was evident in the company’srecent earnings release on 18 March. NHC reported half year saleable coalproduction for FY25 (6 months ended 31 January) of 5.4 million mt, an increaseof 33% y/y. Plans are to continue that rate for the rest of the fiscal year andthen raise production by roughly 1 million mt a year over the next 3 years toget to a run rate above 14 million mt by 2028.

Source: NHC 2024 Annual Report.

Most of the production growth this year and in thenext few years is expected to come from the New Acland mine as legal challengesagainst the mine’s Stage 3 expansion have recently been dropped. This isexcellent news, and provides more certainty that NHC will hit its productiontargets in the chart above. New Acland produced saleable coal of 1.2 million mtthe 1st half of FY25, up 300% y/y, while Bengalla is operating at its targeted13.4 million tonne per annum run rate.

The strong production growth in 1st half FY25 whilekeeping costs flat allowed NHC to increase Net Profit After Tax (NPAT) by 35%y/y to A$340 million even as realized coal prices fell. In turn, that allowedNHC to begin a A$100 million share buyback program on 1 April. Thatcounter-cyclical buyback is a great use of the excess cash at this time, andexactly what I want to see as an investor.

And NHC is going to pay out a fully-franked (taxadjusted for Australian investors) dividend of $0.19/sh on 9 April, giving NHCa dividend yield of ~11% (based on the most recent year’s dividends). Thismakes NHC shares palatable for even the coal-haters in Australia. Expansionarycapex of A$500 million over the next 3 years (most of it to increase productionat New Acland) will likely cause dividend yield to dip into the high singledigits. But with over A$800 million in cash (including cash equivalents andfixed income investments) on the balance sheet, NHC should still be able to paya healthy dividend even if they acquire the remaining ~80% stake in Malabar.

Valuation

A lot of investors and analysts believe that NHC isa dividend play and don’t give it much credit beyond that. The stock is prettywell covered in Australia. Most analysts rate NHC as a neutral or hold as thereisn’t any major catalyst they see that will re-rate the share price. If youread the X.com comments about NHC, there are a number of investors holding itfor the dividend, who don’t think more of the stock.

But I think there’s a bit more to NHC. Withexpanding production and margins that should stay solid, New Hope should beable to generate free cash flow of between A$750-800 million per year by 2028(assuming Newcastle thermal coal prices of just US$125/mt). Hitting A$800million per year in FCF would be an expansion of FCF by some 25%. If the FCFmultiple remains around today’s level of 4-5 times, share prices could rise bya similar amount.

Even if NHC shares have a few rangebound yearswhile the New Acland Stage 3 expansion is taking place, investors pick up ahigh single digit dividend yield. And that’s all very conservatively assumingthat Newcastle thermal coal prices trade at US$125/mt. I expect that Newcastleprices will exceed those levels.

-JA