Whitehaven's Narrabri mine has hit troubles, just as coal prices recover. By Gaurav Sodhi, 19 Apr 2021
Imagine you’re a coal miner. Persuading someone to buy your shares is tough – as is getting someone to lend you money, sign your insurance, approve your development and, if you’re selling to China, buy your product. The easiest part of being a coal miner these days is supposed to be mining the stuff. For Whitehaven Coal, though, the mining part is proving tough. In NSW, the Narrabri mine – Whitehaven’s second-largest asset – has again experienced stability problems, which lowers output and raises costs.
Key Points:
Stability issues at Narrabri mine
Lower output, higher costs for the full year
Coal prices recovering
Unstable ground:
Whitehaven confirmed that quarterly production from Narrabri fell 29% compared to the same period last year and, because the best coal seams couldn’t be mined, costs rose 5%.
With key equipment damaged and mining delayed to amend the mine plan, annual production from Narrabri will fall from an expected 5.3-5.5m tonnes per annum (mtpa) to 4.5-4.9mtpa.
A combination of lower output and higher costs at Whitehaven's second-largest asset isn’t good news but the sharemarket’s response was savage; the share price has fallen 20% since the downgrade.
Considering that Whitehaven’s largest asset, Maul’s Creek, is humming and total coal production was up 9% for the quarter, you might think the market’s reaction was over the top.
This is, however, the third downgrade at Narrabri, and the falling share price suggests some investors are losing confidence in the miner's understanding of the asset.
Narrabri utilises a complex longwall mining technique with sophisticated automation. A lot can go wrong, and this isn’t the only challenging longwall mine in the country. It’s a mining method gaining a reputation for difficulty and complexity so it is possible today’s problems aren’t simply a one-off.
Yet the largest and best asset of the business remains Mauls Creek, and Narrabri has shifted focus away from this quality asset.
Mauling it:
Mauls is a simple open-cut operation that produces high-quality thermal and metallurgical coal. With decades of reserves, high production rates and low costs, it’s hard to imagine this mine alone being worth less than $2 a share.
After water problems and labour shortages last year, production has soared 60% over the current quarter and the company confirmed output would be well over 12mtpa for the full year, about 60% of the company’s total.
Strong performance here helps compensate for woes at Narrabri, but it doesn’t offset them completely.
Whitehaven is still expecting full-year production to fall by up to 10%, the decline all coming from Narrabri. Unit costs have been revised higher, from about $70 a tonne to $73-75 a tonne.
This is frustrating because thermal coal prices, particularly for high-quality coals typically produced by Whitehaven, have been roaring. Newcastle benchmark thermal coal prices have doubled from their pandemic lows and now sit at about $100 a tonne, a level that should support decent margins and cash flow.
Cash flowing:
Spot prices, which we don’t think are demanding, ought to support operating profits of $400m per year for Whitehaven and about $250m in free cash flow. At current prices, that’s a free cash flow yield of close to 20%. We’d call that a decent margin of safety.
Whitehaven has a strong history of operating performance and has outlined ways of resolving the ground stability issues encountered to date. The solutions mostly involve skipping difficult seams of coal altogether which, while not ideal, would still solve the problem.
There remain plenty of risks: Whitehaven’s operations are more complicated than peer New Hope, the balance sheet carries more debt, and multiple geological problems at a Narrabri remains a concern.
Yet we are being well compensated for these risks and higher coal prices help offset them. We’re lowering our Buy price slightly from $1.40 to $1.30 but Whitehaven is again stirring interest. HOLD
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