High hopes for New Hope’s new mine

At face value, it may have appeared to be a fairly innocuous deal, but on closer analysis New Hope Corporation's (ASX: NHC) recently announced plans to acquire a 15% stake in unlisted Malabar Resources looks like a smart move.

New Hope’s decision to stump up $94m for a slice of the company's flagship asset, Maxwell Mine - an underground metallurgical (MET) coal project located 10kms south-west of Muswellbrook in the Hunter Valley - speaks volumes.

The Maxwell mine is in close proximity to New Hope’s cornerstone asset the Bengalla open cut thermal coal mine operation.

Has the world changed that much in six months?

Only six months ago the [coal] industry was perceived from both an ESG and investment perspective to be persona non grata.

New Hope’s decision to buy into Maxwell puts paid to speculation that the company was going to turn its back on coal in favour of metals projects.

Buying into Maxwell at this juncture appears to be a fairly ballsy move, especially given the new Labor government’s hardening stance on coal and plans to reduce Australia’s greenhouse gas emissions by 43% below 2005 levels by the end of the decade.

Was Maxwell smart?

While $94m is tantamount to loose change for New Hope, the acquisition by default ascribes a much longer tail to this sunset industry than many are willing to admit.

Management told investors that Maxwell - which is fully permitted and approved for production until 2047 - aligns with the company’s strategy to invest its surplus cash into coal assets that are low on the cost curve with long life approvals.

What Maxwell also does, notes management, is add meaningful equity tonnes at an attractive entry price investing alongside well-respected founders who have a strong track record of developing coal projects and companies.

Last mine under the wire

While the likelihood of new open cut thermal coal mines being granted approval seems remote, there appears to be ongoing appetite for the 'boutique' underground variety.

Subject to a swag of conditions, Maxwell’s underground met mine was granted approval in 2020.

As a large, high-quality resource, with a 25-year mine life, Maxwell is expected to produce an initial 3m tonnes of coal, before rising to around 6m tonnes per annum.

Given the attractiveness of this resource, there’s every likelihood New Hope will consolidate its stake in Maxwell the same way it did with Bengalla – in which it now owns 80%.

Money trail

How much the money the project will require long-term is anyone’s guess.

But Intelligent Investor suspects costs might come to around $80 a tonne, and assuming normalised prices of around $200 a tonne, the fund manager estimates operating profit for the project of around $700m annually, which equates to circa $100m for New Hope’s stake.

“The purchase implies a price of over $600m for the Malabar equity and, including some debt, an enterprise value of about $800m, suggesting a reasonable price has been paid,” the fund manager notes.

The fund manager reminds investors that the project also comes with a 25MW solar farm with which to mitigate energy inputs and major above-ground infrastructure from the former owner.

Growth and diversification

Given that New Hope’s other development option, New Acland in Qld has little hope of being approved, Maxwell clearly expands the company’s asset base, while providing growth upside.

Investors should pay close attention to New Hope’s full year results next month for what the miner has in store.

With thermal coal prices remaining elevated, investors can also expect New Hope to pay an attractive fully franked dividend.

Consensus on New Hope is Moderate Buy.

Based on Morningstar’s fair value of $5.26 the stock appears to be undervalued.

Goldman Sachs has a Sell on New Hope and a target price of $3.50.

After Citi's update on coal price forecasts, the broker reached a valuation of $4.50 for New Hope and retained a Buy rating.

Citi forecasts a full year FY22 dividend of 71.00 cents and EPS of 85.10 cents.

New Hope Corp share price over 12 months.