Coal prices rally past US$400: Dirt cheap valuations that no one cares about
Coal miners are printing cash amid supply disruptions and Europe's shift back to coal
Source: iStock
Mentioned
KEY POINTS
- Newcastle thermal coal futures rally past US$400 a tonne with ease
- Coal supply faces further disruptions due to rail disruptions in NSW
- Coal stocks trade a 'cheap' valuations relative to other miners
Newcastle thermal coal futures rallied past US$400 a tonne, with flooding in parts of NSW further exacerbating tight supply side conditions.
Coal names including New Hope Corporation (ASX: NHC), Whitehaven Coal (ASX: WHC) and Coronado (ASX: CRN) have staged a V-shape recovery back towards all-time highs.
Though, names like Terracom (ASX: TER) and Stanmore (ASX: SMR) remain rather muted following Queensland’s ‘super profits tax’ on coal miners in late June.
Mid-large cap ASX coal stocks performance (Source: TradingView)
The key rail line that connects coal miners to the Port of Newcastle - the world’s biggest coal export port - was shut last Tuesday, and will remain closed until further assessment, according to Argus Media.
Affected miners include Yancoal’s (ASX: YAL) Moolarben mine and the four Whitehaven owned mines in the Gunnedah Basin.
Dirt cheap valuations that no one cares about
Coal is one of few commodities left standing after the recent recession-inspired selloff.
Newcastle Coal Futures 3-month performance vs. copper, oil and iron ore (Source: TradingView)
A player like Whitehaven achieved average coal prices of A$202 a tonne at margins of 55% in the first-half of FY22.
In the 9 months to March 2022, the company generated $1.28bn cash or approximately 26% of its current market cap.
It wouldn't be surprising to see industry wide headwinds such as weather, labour shortages and cost inflation impact second-half performance, but its difficult to argue that such factors will outweigh the benefit of surging coal prices.
Still, coal miners have historically traded at a relative discount to other miners such as iron ore and copper.
It's difficult to say why that's the case, especially when a name like Whitehaven handily generated almost 30% free cashflow in just 9 months, on top of structural benefits such as European countries returning to coal for power generation.
Perhaps the market and funds are just averse to 'dirty' coal.
Food for thought
New Hope reported $913m in earnings for the 9 months ended April 2022, almost a third of its current $3bn market cap.
Earnings aside, the April quarter was deemed a "challenging" one due to unseasonal rainfall and covid-related staffing issues.
The operational shortcomings outweighed the earnings result, with New Hope shares down -7.8% on the day of the announcement.
It will be interesting to see which narrative - potential operational headwinds or earnings power - triumphs as we head into August reporting season.
