New Hope Earnings: Strong Coal Prices Benefit While Higher Planned Coal Royalties Are Tolerable

New Hope’s NHC fiscal 2023 earnings were strong despite wet weather in the first half dampening volumes from the Bengalla mine. Underlying EBITDA rose 11% to AUD 1.7 billion versus fiscal 2022, with higher thermal coal prices offsetting 14% lower volumes. We maintain our fair value estimate of AUD 6.10 per share for no-moat New Hope. We raise our expectations for near-term future coal prices and expect a faster increase in volumes from Bengalla. However, we expect a slower start for New Acland stage three with environmental court delays lowering our near-term volume forecasts there.

Our midcycle price assumption is USD 100 per metric ton, upgraded from USD 90 per metric ton previously. This price is supported by New Hope’s position in the lowest-cost quartile of the cost curve and the incentive price required for supply to meet demand. Given New Hope’s position in the cost curve, there is a long tail of lower-quality, higher-emission, higher-cost coal that is likely to be disrupted before New Hope sees a fall in demand, which we don’t believe will occur this decade.

The New South Wales government will now scrap the planned cap on domestic prices, set to begin in July 2024. It is replaced with a 2.6% increase in state royalties from July 1, 2024. Higher royalties cut about AUD 0.10 per share from our New Hope fair value estimate, but this is offset by higher medium-term coal prices and volumes, and the slightly weaker AUD/USD exchange rate.

The average fiscal 2023 realized thermal coal price of AUD 347 per metric ton was a record for the group and 23% up on last year. However, prices have moderated in 2023 as the global energy crisis unwinds. But with supply from Russia constrained due to the Ukraine war, new supply is generally challenging to bring on, and demand robust, we expect elevated medium-term prices. We assume thermal coal averages about USD 170 per metric ton in fiscal 2024, and about USD 150 from fiscal 2025 to 2027.