WHC Whitehaven Coal

[donnie]

Whitehaven Coal could prove to be a very good long term hold, with some good directors on board according to this news article. Its price has risen over a dollar since listing.

Gunnedah coal float draws the big names

Jamie Freed
May 23, 2007

SOME of the biggest names in the Australian coal industry have teamed up to float ambitious Gunnedah Basin miner Whitehaven Coal.

Although the oversubscribed prospectus sought only $1.9 million, high-profile coalminers such as former Excel Coal managing director Tony Haggarty and AMCI founder Hans Mende had already poured in millions of their own money. Whitehaven recently raised another $24 million from institutions ahead of the expected float.

The board, which also includes Toll Holdings chief financial officer Neil Chatfield, EnergyAustralia chairman John Conde and former Excel executive director Andy Plummer, hardly lacks access to funding.

Mr Haggarty received more than $95 million last year from selling his Excel holding after US coalminer Peabody Energy bought the company for $2.04 billion. In March, AMCI sold some of its Australian mines to Brazil's CVRD for $835 million.

Mr Haggarty and Mr Plummer invested $15 million in Whitehaven earlier this year, and have 44 million options exercisable at $1 if the company's share price surpasses hurdles ranging between $2.50 and $5.

Whitehaven managing director Keith Ross, the former head of AMCI Australia, said the decision to go public was for strategic reasons rather than concerns over financing in the near-term.

"We have a fairly active growth plan," he said. "We want the flexibility which comes with being a public company."

Based on its $1 offering price, Whitehaven would have a market value of $323 million upon listing.

It expects to sell 1.6 million tonnes of coal from its three operating mines this year, but its expansion plans could see it selling 10 million tonnes a year by 2011. It has been profitable every year since it started production in 2001.

Directors and management will control 86 per cent of the shares

[AMR]

Having more than doubled since September, I'm surprised no one here is interested.

Would anyone be able to give a link to future financial projections? I can't find anything past 2009.

[mark100]

WHC is my pick of the listed coal producers. The further sell down of Narraibri last week reduced some of the development risk as well.

Would be interested to hear any other views

[Huang Chung]

Hi Mark

I had a look at Whitehaven briefly a couple of months back. I seem to recall they have some hedging positions that are doing them no favours. Slowly unwinding, with the emphasis on 'slowly'.

H.C.

[mark100]

HC did you see the annoucement this week where they have reduced some of the near term fixed price contracts in exchange for offering a discount to market on pricing post 2012?

This has a significant positive impact on WHC's near term earnings and longer term when the Narrabri mine is bought on line the negative impact is reduced because the portion of overall coal production that is being sold at a fixed price is greatly reduced (if you can get what I'm trying top say here)

Going on Wilson HTM's numbers the affect in 2009 and 2010 of the pricing restructure increases EPS in 2009 from 44c to 56c and in 2010 from 40c to 56c. They haven't provided 2011 numbers but that year will see a big jump because that is the first full year of Narrabri production.

Also last week WHC sold a further 15% of the Narrabri project for $245m, implying a value for Narrabri of $1633m. They now own 77.5% of Narrabri which imples a value to WHC of $1265m. Adding on the $245m WHC will receive gives a 'value' of $1510m.

As a comparison, WHC's market cap is currently $1510m with net debt of around $30m, giving an Enterprise value of $1540m. In other words, the market is only valuing all of WHC's other assets at $30m despite the fact that WHC is forecast to earn $214m next year from these assets!

The Wilson HTM analyst (who I rate quite highly) has an unrisked valuation of $7.30 for WHC and a risked valuation of $6.40. It is harder to initially see this value in WHC compared with some other coal miners because most of the WHC value is in Narrabri which doesn't fully come on line until 2011.

[Huang Chung]

HC did you see the annoucement this week where they have reduced some of the near term fixed price contracts in exchange for offering a discount to market on pricing post 2012?

This has a significant positive impact on WHC's near term earnings and longer term when the Narrabri mine is bought on line the negative impact is reduced because the portion of overall coal production that is being sold at a fixed price is greatly reduced (if you can get what I'm trying top say here)

Going on Wilson HTM's numbers the affect in 2009 and 2010 of the pricing restructure increases EPS in 2009 from 44c to 56c and in 2010 from 40c to 56c. They haven't provided 2011 numbers but that year will see a big jump because that is the first full year of Narrabri production.

Also last week WHC sold a further 15% of the Narrabri project for $245m, implying a value for Narrabri of $1633m. They now own 77.5% of Narrabri which imples a value to WHC of $1265m. Adding on the $245m WHC will receive gives a 'value' of $1510m.

As a comparison, WHC's market cap is currently $1510m with net debt of around $30m, giving an Enterprise value of $1540m. In other words, the market is only valuing all of WHC's other assets at $30m despite the fact that WHC is forecast to earn $214m next year from these assets!

The Wilson HTM analyst (who I rate quite highly) has an unrisked valuation of $7.30 for WHC and a risked valuation of $6.40. It is harder to initially see this value in WHC compared with some other coal miners because most of the WHC value is in Narrabri which doesn't fully come on line until 2011.

No, I didn't see this news, (and, by the way, a very nice summary Mark).

Sounds like it's worth another look.

Cheers mate.

[SEC]

I remain surprised how WHC seems to demand a price premium wrt its peers. Prior to the hedge book restructure WHC was trading at 09PE of 12 based on consensus eps estimates (ie *not* an estimate based on one broker who may have an overly optimistic or pessimistic views on a co's performance). This compares with 10 for FLX (which has a speculation premium built into its price) and 6 - 8 for the likes of CEY, MCC and GCL.

If Wilson HTM are accurate in its eps revaluation it adds 12cps to estimates and brings consensus 09PE down to 9, still a premium to its peers.

Yes I know WHC is planning to bring a large amount of extra production online by 2012 that may justify its premium, but based on history I argue otherwise.
1. WHC is about 80% owned by directors - very tightly held, low liquidity. Such companies usually trade at a discount to the market, not a premium.
2. Large coal mine expansion plans are fraught with risk. Almost all listed co's that are bringing coal mines online in Australia in the past few years have reported production delays and cost blowouts. WHC has extra risk in that rail and port infrastructure are constrained and they are assuming all this will be fixed on time by 2012.
3. When EXL was listed it had a similar profile to WHC - tightly held, similar coal grades and similar expansion plans. It never traded at a premium to its peers.
4. I suspect WHC is a high cost producer along the lines of GCL; WHC do not provide any information on mine production costs. WHC struggled to generate any operating cashflow in the past 18 months.

Conclusion - WHC definitely has good potential but this potential does not warrant its price premium. Fair value wrt its peers would see WHC trading nearer $3 than $4 at the moment.

SEC

[mark100]

Fair enough comments SEC. On the EPS numbers from Wilsons I was simply pointing out the effect that the hedge book restructure had. Most of the other brokers haven't incorporated this information yet into their forecasts.

Your right about the risks of Narrabri coming on stream on time and budget. I am under the impression that WHC will look to further de-risk by selling down their interest further as time progresses. They have already moved from 100% to 77.5% over the past 9 months or so and you can't argue that the price they received for the last 15% was very impressive and implies a value to WHC very close to WHC's current market cap. I also note much of FLX's value is in Moolarben which hasn't even started construction yet.

EXL might not have traded at a premium but Peabody liked the look of it and some of the EXL guys are backing WHC. History has shown that foreign predators have been more than willing to value future expansion plans more highly than Australian investors.

I don't hold WHC at this stage and I take your comments on board SEC. I'm actually looking for a sub $3.50 price for an entry.

[SEC]

Fair enough comments SEC. On the EPS numbers from Wilsons I was simply pointing out the effect that the hedge book restructure had. Most of the other brokers haven't incorporated this information yet into their forecasts.

Your right about the risks of Narrabri coming on stream on time and budget. I am under the impression that WHC will look to further de-risk by selling down their interest further as time progresses. They have already moved from 100% to 77.5% over the past 9 months or so and you can't argue that the price they received for the last 15% was very impressive and implies a value to WHC very close to WHC's current market cap. I also note much of FLX's value is in Moolarben which hasn't even started construction yet.

EXL might not have traded at a premium but Peabody liked the look of it and some of the EXL guys are backing WHC. History has shown that foreign predators have been more than willing to value future expansion plans more highly than Australian investors.

I don't hold WHC at this stage and I take your comments on board SEC. I'm actually looking for a sub $3.50 price for an entry.

Looks as if WHC got a very good price for the 15% selldown since they got less than quarter the amount for a 7.5% selldown just 5 months prior, when WHC's price was similar to what it is now.

I have no problem in a miner selling down its stake in a development (to fund working capital etc), but having multiple stakeholders may reduce the company's appeal to predators. In this regard EXL was the opposite to WHC, it kept upping its stakes in mine developments to the point it got too appealing and the EXL dierectors sold out too cheap. The ex EXL directors may be wanting to avoid that mistake again...

As for Moolarben, it ain't starting for a while yet!

SEC

[mark100]

Well I got my sub $3.50 entry, it was $2.20 today. Looking for a bounce from here but will kill it off if the slide continues next week