A few thoughts on the quarterly from my side. Conscious my disclosure is 'not held', I sold last year and have been waiting for the right moment to re-enter. Whilst the share price has come off a lot, I think there's fairly good reason for it so am still undecided (though feeling more positive). Here's the main things I took from Monday's report, would welcome feedback accordingly:
- Market demand: seasonally lower demand (to be expected) but the report twice highlighted sustained high customer inventories. Also noted that management "expect coal prices to remain subdued during NH summer period". They hope the turning point here will be winter (still some time away, obviously) however an extra hot summer would go some way to depleting those stockpiles. The mild winter has driven an oversupply in both coal and gas, which to me is a reminder to keep an eye on TTF as a bit of a lead indicator for NEWC, even if it's not totally precise. I remember Jeremy Raper flagging this (well before NEWC cratered, TTF started to drift) and that was a helpful sell signal. The buyback is out of action for another month yet and the market has likely digested the good news in the report so I suspect the share price continues to drift along here a while?
- Production/costs: ROM production continues to trend downwards (go back and look at their historic guidances versus actuals from 2019 onwards. I have a chart of this I made I can dig out). Along with inflation the downward trend is evidently impacting costs. Noting that FY23 costs came in at A$103/t, recall that it wasn't that long ago that costs were A$75/t (FY20 and FY21). Question is, how sticky are most of those costs? Diesel will move up and down but labour costs less likely to do so (and will probably just increase given competition for workforce; appears there just aren't enough people coming into the mining space). Happily for the last year the price movement negated all of that cost pressure but on a go-forward basis it looks less bullish (especially with the stuff like the $1/t safeguard cost which Paul intimated would be rising in future).
- Balance sheet/financing: this is the main event; nobody can deny that $1.85B unencumbered cash on a $5.7B market cap is simply sensational. The issue is, everybody can see this and yet the multiple stays where it is. I'm personally doubting there is a wakeup / 'come to Jesus' moment when the wider market realises coal is here for a good long while, and they start re-rating the multiple. As someone in the US noted, I suspect WHC and the like become a fossil-fuel bond, reliably paying X% every year. The key is obviously, how big is X? I think the big change is how much cash they'll be distributing on a go-forward basis, bearing in mind that their target of 20-50% NPAT allows for a huge swing. In my view, being as conservative as possible, they'll likely move down that range. For me, the single most important sentence in the quarterly was this: "Whitehaven will retain cash on the balance sheet for operating the business, including for working capital purposes." This is hardly a surprise - all businesses do this and they already were too - but coming hard on the heels of the commentary about bank financing (or lack thereof) the read-through here is that they have to be more self-reliant than ever so their cash retention policy likely ratcheted up several notches. If you think back to the last quarterly (or perhaps the one before that), there was some angst about the sub-par interim dividend paid. From memory both Paul and Kevin flagged that the dividend was typically weighted to 2H; with all of the above in mind I think the final FY23 dividend size will be a big indicator for how the business will distribute cash going forward. But I think investors need to be prepared for a lot more cash being retained, especially if they want to develop Vickery. Remember Paul's comments about "for right or wrong, banks view Vickery as a thermal project (...) there's no way we could change that". In other words - no local funding. They'll likely have to do it themselves, and with an end-user stumping up the cash and thus taking a decent share.
- M&A: the media has been full of all sorts of bizarre rumours (I was pleased to hear Paul all but sledge the Australian's takes on this). For me the lead indicator is that the lapsing of the $1B credit facility all but takes WHC out of the running for Daunia. I'm unclear why Paul wouldn't just shut it down, but perhaps they're still hopeful of picking it up on the cheap, perhaps backed by a US bond or some such. But their met mix was just 4% this quarter so they're a long, long way from their target of 50% and something evidently needs to change there - which will cost a chunk of cash either way.
- Corporate: I ended up with pretty mixed views of the buyback - as said in past posts, I personally thought it was pretty stupid running the buyback once the share price got over $9.00, but to be fair perhaps much of the strength came from people misbelieving (if that's a word) that the buyback would support the price much more than it did. But even that said, seeing them down to 836,600,784 shares on issue is pretty sensational.
So all in all, it looks like WHC, NHC etc become a bit like tobacco stocks - unloved but generating decent cash returns for those who can own it. The key obviously becomes buying at the right price, which will help determine your payback period (and then the rest is free carried for however many years you wish to hang around). But the numbers look a lot less exciting right now. Some very quick figures, deliberately leaning to the conservative: assuming NEWC averages US$140 for a while (let's call it A$200), royalties increase from 7% to 10%, costs average $110, equity volumes are 14.0mT, capex at $325M p/a, then at
current shares outstanding that's free cash flow of $0.43/sh. What portion of this is paid would be paid out on an ongoing basis remains the unknown. All in all, I'm keen to see what the final FY23 dividend is, and how the market reacts thereafter. That's my thoughts at the moment, clearly undecided but still very interested in the longer-term outlook. Would welcome feedback from the likes of
@pastperformer,
@paulgf and
@polarbear666 etc. Cheers
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