Whitehaven Coal — Market missing the big picture.Whitehaven Coal...

Whitehaven Coal — Market missing the big picture.
Whitehaven Coal [ASX:WHC] announced annual earnings and the sale of 30% of its Blackwater coal mine last week.The share price rallied on the news initially. Then sold off!
From March to July, WHC’s share price increased 42%. From July to now, it’s down over 20%.Did Whitehaven’s actual value move that much?Of course not. It’s only the market’s perception of value that changed.WHC has a short and long-term story.The short-term story is costs. That is weighing on the price right now. The long-term story is the investment in Blackwater by Japanese steel makers. That is very bullish.Let’s look at these stories one at a time.

First, costs…Unit costs increased 16.5% to $120/t from FY23 to FY24.Guidance for FY25 is for costs to increase again to $140-$155/t. That’s another 20% plus increase. There are a few one-offs in that increase, so you should expect unit costs to decline in FY26.However, these numbers don’t include royalties, which are becoming an increasing expense thanks to state government short-sightedness. Keep that in mind for later…WHC revealed these higher-than-expected costs at a time when metallurgical coal prices are under pressure.

Obviously, higher costs and falling prices translate into weaker margins and cash flows.This is especially relevant for WHC, which needs to make deferred payments in relation to the acquisition of the Daunia and Blackwater mines.WHC must make these payments on the acquisition anniversary (2 April) for the next three years. Next April’s payment will be around $760 million.That seems large. But think of it in the context of WHC’s potential cash flows. In FY24, it generated EBITDA margins of $84/t. (EBITDA is a proxy for cash flow).At 27 million tonnes of coal production (guidance for FY25), that equates to $2.27 billion. Less $500 million in capital expenditure, $250 million in net interest expense, and the $760 million payment, leaves $760 million to pay tax and dividends etc.

At those margins, WHC is comfortable.But costs are higher this year by around $20/t. A $20/t fall in prices across the board would result in EBITDA margins of $44/t and much lower cashflow.This is what the market is worried about. And that’s a fair short-term consideration. But costs are likely to fall in FY26, which will help rebuild margins. And then there is the positive longer-term outlook for coal prices…

Why Japan wants our coal.

As part of the results announcement, WHC also revealed it had agreed to sell 30% of its long-life Blackwater mine to two Japanese steel makers for US$1.08 billion (AU$1.6 billion). The deal will close in early 2025.Nippon Steel (who purchased 20%) made a statement to its own exchange about the deal.

This is really interesting (my emphasis added):‘Currently, there are growing concerns that capital investment in coal assets will shrink due to the implementation of policies to raise coal royalty rates in Australia’s states, which hold significant influence over the supply of steelmaking coal to the seaborne market.‘This will certainly contribute to a decrease in the supply of steelmaking coal in the long-term.‘Given the strong sense of urgency in respect to this decrease in the supply of steelmaking coal, Nippon Steel has determined that, as an end-user of steelmaking coal, it is necessary to invest in the BW Coal Mine to secure a long-term stable supply of coking coal required for Nippon Steel’s technologically advanced coke production.’

And this…‘…the current situation where raw material and fuel prices remain persistently high regardless of fluctuations in the steel market due to the structural decline in investment in resource development and other factors presents a significant challenge to the sustainability of Nippon Steel steelmaking business.’

If that’s not a clear sign of concern about long-term supply, I don’t know what is. Nippon wants access to coal and wants to profit from its scarcity value in the years and decades ahead.

Please keep this in mind when looking at the day-to-day share price moves.In my view, this is a multi-year investment. There is strategic value in WHC that the market isn’t currently recognising. But Nippon Steel is.This is the reason why Yancoal [ASX:YAL] cut its dividend recently. It’s conserving cash to bid for Anglo American’s met coal assets. It too sees the strategic value in these assets.

Meanwhile, ‘investors’ run from one stock to the other on a daily basis!Don’t be like that. Have a plan. Stick with it. Be patient.WHC’s sale of 30% of Blackwater will ensure a big influx of cash to make the deferred payment next April and ride out any short-term price volatility.

It’s tricky to value WHC given that it will lose 30% of Blackwater production from the start of next year. But I am confident that on a long-term time frame, buying here will prove to be an astute move.

WHC remains a BUY.