Whitehaven urges NSW to keep hands off coal cash cow
Cashed up coal miner Whitehaven says it will make sure politicians in NSW understand the consequences of increasing royalties ahead of next year’s state election, as a global energy shortage prompts customers to seek contracts that are double or triple the normal duration.
The politics of energy dominated Whitehaven’s investor update on Monday, which sparked a surge in the company’s share price to record levels when managing director Paul Flynn indicated next month’s full-year earnings would be 15 times higher than last year.
A series of geopolitical interventions over the past two years have caused extraordinary turbulence in coal markets and resulted in prices for top quality NSW thermal coal being nine times higher than they were in August 2020.
At $US433.90 a tonne on Friday, top quality NSW thermal coal was close to the record price of $US436.07 a tonne set on May 20.
Prior to September last year the price had never been higher than the $US194.79 set in 2008 and the price was below $US50 per tonne in August 2020.
China’s ban on Australian coal in 2020 combined with numerous weather and pandemic related disruptions to mines in several nations – including multiple incidents of flooding in NSW – to drive coal prices to record levels long before war in Ukraine prompted many coal consumers to blacklist Russian products and drive prices even higher.
European nations will officially stop using Russian coal on August 10 and Mr Flynn said Whitehaven had agreed to send a few shipments of NSW coal to European customers.
But fresh from a trip to Whitehaven’s biggest sales destination, Japan, Mr Flynn said he remained focused on servicing the North Asian customers that had supported the business over the past decade and the South East Asian customers that are expected to be the world’s strongest future growth market for thermal coal.
Mr Flynn said those Asian customers were more focused on long-term security of supply than the extremely high prices they were having to pay for coal.
“Customers are really just worried about continuity of supply, they were quite measured in their conversations, they all understand cycles come and go....they were starting to raise their attention more toward two to three-year type contracts and it was really just about locking in that physical supply rather than price right now,” he said.
“Our existing customers, they are starting to look at longer-term arrangements so where we have had an evergreen type annual contract, they are looking to do something a little more firm and put a second or third year on the back of that.
“It is really just about locking in that physical supply rather than price right now.
“There is a tricky balance we are going to have to manage here in terms of interest from non-traditional jurisdictions and balancing the needs of existing customers who have been with us a long time.
“That promotes more [coal market] tightness and presumably a longer horizon of good pricing here.”
Whitehaven said it expects to report $3 billion of full-year earnings before interest, tax, depreciation and amortisation (EBITDA) next month; up from $204.5 million for the year to June 2021.
Less than two years after the miner was asking lenders for covenant relief, Whitehaven now has net cash of $1 billion and will continue making huge cashflows for a while yet based on the traditional lag of several months between market prices and the prices Whitehaven’s customers pay for their coal.
Whitehaven has a share buyback program underway and Mr Flynn will reveal more about the company’s plans for shareholder returns on August 25.
Record coal prices and profits are prompting governments to seek a bigger share of the spoils; the Queensland government infuriated miners last month when it added three new levels to the state’s coal royalty regime.
Mr Flynn said the changes were “very negative” and had reduced the net present value of Whitehaven’s undeveloped Winchester South coking coal project in Queensland by 3 per cent.
Winchester South was supposed to be Whitehaven’s first step beyond mining in NSW and Mr Flynn said he hoped NSW did not follow suit next year.
“We will be making sure that NSW government leading up to the election in March next year understands the critical role the resources sector plays in NSW and ... further investment needs certainty,” he said.
“Unpredictable things that occur, such as in Queensland, don’t really foster the confidence necessary to commit billions of dollars of capital to the projects this industry typically spends.”
The NSW government did not change coal royalty rates in last month’s pre-election budget but many in the mining industry fear it will be politically easier to raise royalties next year after the election.
Asked whether governments still cared whether there was investment in more coal projects, Mr Flynn said he believed they did, particularly in Queensland where coal was a big part of the economy.
Whitehaven has all state and federal approvals in hand to build a new coal mine at the Vickery site in NSW where Rio Tinto previously mined coal with high-energy content.
In previous years Mr Flynn expressed frustration that Vickery was being delayed by slow approvals processes and legal challenges by environmentalists, but in the past 18 months Whitehaven has repeatedly signalled that it is not in a rush to develop the mine.
Mr Flynn extended the wait for development of Vickery again on Monday when he said Whitehaven was unlikely to take a final investment decision on the project within the next 12 months; a comment he has been making for more than 18 months now.
By waiting longer before developing Vickery, Whitehaven may allow the market for skilled labour to cool from the extreme tightness that is currently forcing it to pay quarterly retention bonuses to key staff.
Consumables are also extremely expensive at the moment, with Mr Flynn revealing that suppliers were imposing 26 per cent increases on the price of truck tyres.
It may also allow Whitehaven to use Vickery – which is expected to cost between $700 million and $1 billion – as leverage in royalty discussions with politicians ahead of the NSW election in March 2023.
Mr Flynn said the strong interest Japanese coal-fired power generators had shown in buying Vickery’s coal in years gone by remained evident on his recent trip to Japan.
“They know there is going to be structural tightness in the market for some time to come and speaking to the customers, across a few customers there was an aggregate of some 3000 new megawatts coming on, ultra-super critical plants, all of which would be ideally suited to Vickery,” he said, in reference to the new coal-fired power stations under construction in Japan.
“They are brand new units coming on with 30 or 40 year type horizons on them and they are wondering where that coal of the future is going to come from if people stop investing [in new mines].”
Whitehaven shares traded above $6 on Monday morning for the first time since the company took on its modern structure in 2012 when three small companies – Aston Resources, Whitehaven Coal and Coalworks – combined to form a single company.
Shaw and Partners analyst Peter O”Connor said it was “not ludicrous” to suggest Whitehaven shares could soon be fetching $10 per share.
“The cash cow will keep on giving for at least another couple of quarters, at this super elevated rate, not least because of pricing lags,” he said in a note.
Asked whether he was seeing evidence that sustainability focused investors were changing their attitudes toward coal in the wake of the energy price crisis sweeping much of the world, Mr Flynn said he believed change was underway.
“The sentiment has certainly moved. No one is forgetting the [emissions reduction] commitments that each country has made but I think everyone is looking at this and saying ‘look how fragile our energy system is’,” he said.
“At the same time the world has been incentivising intermittent sources of energy into the system with the hope that would do the same thing as baseload infrastructure does, which it doesn’t.
“I suspect energy security will be re-rated as a priority.”
Whitehaven has traditionally not sold significant volumes of coal to Chinese customers and Mr Flynn said China’s ban on Australian coal – and recent speculation that it may be relaxed – did not “bother us too much”.
Mr Flynn said he did not expect that blacklisted Russian coal would satisfy all of China’s needs and he expected Indonesian miners would be the biggest losers if China did resume purchasing Australian coal.
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