Company Reports

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its purchase of the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi in April 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly half thermal coal and half coking coal.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its purchase of the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi in April 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly half thermal coal and half coking coal.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

While well down on the first half fiscal 2023, adjusted net profit after tax of AUD 373 million, or AUD 0.46 per share, in the first half of fiscal 2024, was solid. Whitehaven is on track to meet our full-year forecast of AUD 838 million, AUD 1.00 per share. Yes, the company made AUD 1.8 billion net profit in the same half last year, but this half eclipses all others until the 2022 coal price bonanza. Importantly, Whitehaven is in strong financial health with AUD 1.5 billion net cash at the end of December 2023. This is key given the imminent acquisition of the Daunia and Blackwater mines from BHP. The deal is on track to close in early April 2024 as planned.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its agreement to buy the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi, effective from the June quarter 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly half thermal coal and half coking coal.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its agreement to buy the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi, effective from the June quarter 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly 50/50 between thermal and coking coal.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its agreement to buy the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi, effective from the June quarter 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly 50/50 between thermal and coking coal.

No-moat Whitehaven Coal has agreed to buy the Daunia and Blackwater metallurgical coal mines from BHP and Mitsubishi for at least USD 3.2 billion (AUD 5 billion), one third of which is vendor-financed. Up to USD 900 million (AUD 1.4 billion) additional funding is payable if metallurgical coal prices stay elevated for three years after the closure of the deal, likely in the June 2024 quarter. BHP will retain exposure to the profit and cash flow from these mines until the deal closes.

We maintain our fair value estimate for no-moat BHP of AUD 41 per share as fiscal 2024 first-quarter sales met our expectations. BHP also reiterates fiscal 2024 guidance. BHP’s share of sales from its Western Australia iron ore operations, the main driver of its earnings, was 64 million metric tons, up modestly on the previous quarter and the same period last year. BHP’s WAIO business is on track to meet our unchanged forecast for fiscal 2024 of roughly 255 million metric tons, its share, around 3% higher than last year. An average price of USD 98 per metric ton was modestly lower than our forecast for fiscal 2024 of about USD 102, but futures prices are higher. We continue to forecast WAIO unit cash costs of around USD 18 to USD 19 per metric ton for fiscal 2024. BHP’s iron ore business accounts for about 60% of our forecast fiscal 2024 EBITDA of roughly USD 30 billion.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Equity output is expected to grow to 19 million metric tons by fiscal 2028.

We raise our fair value estimates for no-moat-rated coal miners Glencore, New Hope, and Whitehaven after updating our assumed near-term thermal and metallurgical coal prices. Our updated fair value estimates also incorporate our latest foreign exchange rate assumptions along with higher coal royalty rates imposed by the New South Wales government. New South Wales will scrap the cap on domestic thermal coal prices effective July 1, 2024, which will be replaced with a 2.6% increase in state coal royalties from that date. However, higher royalties are more than offset by improved near-term thermal and metallurgical coal prices and weaker exchange rates versus the U.S. dollar. Our fair value estimate for Glencore increases by 4% to GBP 530 per share and Whitehaven by 3% to AUD 9.80 per share. Our New Hope forecasts already incorporated the new royalty assumptions; however, we increased our New Hope fair value estimate by 3% to AUD 6.30 per share given higher near-term thermal coal prices and the lower AUD/USD exchange rate.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

No-moat Whitehaven Coal’s fiscal 2023 result was another record given high prices. Net profit after tax of AUD 2.7 billion, or AUD 3.03 per share, was up 37% on last year and 8% above our expectations. EBITDA rose 30% to about AUD 4 billion while Whitehaven generated significant free cash flow of AUD 3.3 billion, or AUD 3.75 per share. The average coal price of AUD 445 per metric ton, also 37% higher than the AUD 325 last year, drove the record result with coal sales volumes down 8%. Along with inflation, lower volumes saw unit costs rise 23%, to AUD 103 per metric ton. The AUD 0.42 per share fully franked dividend was more than we expected, taking total 2023 dividends to AUD 0.74. Including share repurchases, the payout ratio of 50% was at the top end of the target range.

We raise our fair value estimates for thermal coal miners due to continued strong thermal coal prices. Of our coverage list, no-moat Whitehaven Coal is the most impacted, and we increase our fair value estimate to AUD 12 per share, up from AUD 9. We also recommend shareholders vote in favour of the company’s proposal to buy back up to 240 million more shares over the next 12 months. With Whitehaven shares trading at a 31% discount to our increased fair value estimate, we think the proposed buyback is likely to be accretive. We also raise our fair value estimate for no-moat New Hope Corporation to AUD 8 per share, up from AUD 6.30, and reduce our fair value Uncertainty Rating to High from Very High. No-moat Glencore is the other company we cover with material exposure to thermal coal, and we raise our fair value estimate to GBX 700 per share, up from GBX 570. About GBX 35 of the increase is due to a weaker GBP/USD rate.