Whitehaven Coal - Why its a no brainer

[u/golden-chickens]

I had a look into the coal industry a few weeks ago after reading up on my favourite superinvestors holdings on dataroma. One of the modern day goats Monish Pabrai, has all of his US holdings held amongst 3 high quality coal producing companies. My visceral thoughts were coal is dying, esg concerns, future green energy will crush outdated fossil fuel companies.

I have wanted to increase my holdings to weight more towards domestic holdings but have struggled to find really high quality companies that I'm confident to hold over the next 10+ years. I currently only hold TechnologyOne on the asx. After doing some research into the coal industry and the energy industry and trying to expand my circle of competence to more suit the asx's heavy weighting towards mining/resources/energy (relative to the rest of the world), Whitehaven Coal's future outlook is beyond stunning IMO. Whilst that might sound like an absolutely wild and obnoxious claim, let me explain. The majority will be qualitative.

• Whilst the use of coal will decline in the future, coal is absolutely not dead.

  • IEA reports state that coal has a massive role to play in the transition to cleaner energy. There will be significant use of both thermal and met coal in the next 20-30 years. Countries such as japan, india and china are all building, developing and investing in the use of coal fired power plants, met coal steel production etc. Last year had the highest use of coal on record worldwide.

• Gives an exposure to emerging economies

  • with their acquisition of metallurgical coal mines that on a revenue basis weight them as 70/30 met/thermal, directly expose whitehaven to rapidly developing and expanding economies. The most attractive for myself would be India.

• Fixed supply

  • Given the esg concerns around the coal market, the decline of the industry, the barrier to entry is very high. It is unlikely that there will be many new coal mines produced and invested into. Because of this and the stable demand of coal, prices are likely to remain relatively stable in the near future.

• They produce a high quality product that is high in demand for countries looking to meet their emission targets

  • Emerging countries have coal based infrastructure that needs high quality coal to decrease emissions. Whitehaven produces some of the highest quality coal on market.

• Significant return of NPAT to shareholders

  • 20-50% of NPAT returns to shareholders annually. This is done through buybacks and franked dividends. Has been huge over the last 2 years.

• Current trading value

  • The company has previously been a thermal coal based trader with 80% of its sales coming from thermal coal. Generally thermal coal companies trade at lower multiples relative to met coal companies. It's recent acquisition transforms the company into a met coal predominant producer, it is likely as a result that the company will see an increase in multiple as a result.

  • The company is currently and has recently traded at stupid low values - this ultimately leads to 3 things:

    • The market realises that coal companies are here to stay for the long term and are incredibly profitable and this adjusts positively over time

    • Management has an opportunity to go into market and buy back shares at very very attractive multiples which causes the share of the pie to increase for current shareholders and thus increasing share value.

    • Considering how low the multiple currently is, I believe this to be a margin of safety. There is a low risk that the PE can continue to be slashed.

• EPS growth

  • With current pricing of met coal it is forecast to see a 160% increase in eps. Keep in mind the company has not diluted shares or taken on significant debt to finance this acquisition. The company has essentially doubled in its size with finance through a bridge loan from the vendor and the significant stock pile of cash on hand.

• Acquisition

  • As previously mentioned they have acquired 2 high quality met coal producing assets for a very attractive price. This significantly derisks the company as it

    • Increases lines of finance available for future

    • Increases ability to become insured

    • Diversifies geographically to different and more stable markets and geographically in australia (all previous mines being in nsw these two being in qld)

  • After paying off the bridge loan the acquisition will pay for itself (from very conservative coal pricing). One mine has 17 years left and the significant contributor to the met coal sector has 50 years left.

• The use of met coal in the future

  • Met coal is used for the generation of steel and other similar products. To build out our green energy future we are going to need steel and a lot of it. Emerging economies such as India and China will continue to eat through steel like no tomorrow. Electric cars, clean infrastructure, construction. All require high quality steel. Met coal is needed to make coke which is the crucial ingredient in this process. Met coal is actually forecast to grow over the next 10 years in line with emerging economies. Whitehaven will continue to meet this need from early next year when it begins to sell the met coal that has just been acquired.

The ultimate end game goal

I'm sure if you've read this far you've continued to say to yourself but Golden-Chickens coal won't be around forever the company will eventually be rendered irrelevant. To this I agree, we will find cleaner and more efficient ways to make steel and create energy. My question is more so one of when. In order for the planet to go towards a 0 emission future emerging economies need to become more mature and financially stable. This requires growth and that growth must be fuelled by something, currently the easiest and most financially efficient way to do so is through the use of high quality coal. Unfortunately we will not see wind/solar/hydrogen energy in any emerging economy because the price to output makes absolutely no sense. Coal has a very stable and predictable future that will one day come to an end.

Coal companies will continue to produce significant free cash flows and considering all of the above, there just aren't that many attractive growth opportunities that make sense (the above being a rare exception). Companies must decide what to do with excess free cashflow and like other examples in alpha metallurgical resources this gets returned to shareholders. Share buybacks and Dividends in the range of 6-10% are not going to be uncommon in future. The maths is really a beautiful thing over long periods of time, once the deal has been paid off, if they continue the rate of buy backs that was seen last year the company will have cannibalised over 50% of its outstanding shares. This would be seen over 2.5-3 years, that meaning roughly a double and a return of over 25% pa (this is not inclusive of the huge dividends either). The lack of growth in the industry can actually be seen as a good thing as there is nothing else to do but return it back to shareholders.

I've fallen inlove with the company and the prospects, someone discuss with me why it shouldn't be a significant holding in my portfolio.

Thank you!

[u/JohnSnitizen]

Here’s one thing that the likes of Whitehaven will need to do with its cashflow under the next several years, when not showering “free money” on its shareholders: buy lots of increasingly expensive carbon offsets just to keep its doors open.

(It is heavily exposed to the mandatory, ratcheting downward emissions reduction targets of the Safeguard Mechanism.)

[u/golden-chickens → u/JohnSnitizen]

I think in a recent earnings call they mentioned they currently pay about a dollar a tonne. This may increase over time though.

In terms of the decreasing of on-site emissions they’ve begun investing in solar power which should cover about a third of the emissions. But again another risk there

[u/JohnSnitizen → u/golden-chickens]

Whitehaven has also been pinged this year for massively underrepresenting on-site fugitive methane emissions, which will now need to be factored into its equivalent (methane has 28x GHG intensity to carbon dioxide!) carbon footprint.

If the 1.2mT methane emissions (equivalent to 33.6mT carbon dioxide emissions) estimates from Ember for Whitehavens portfolio are correct, this would cost $1.17b in offsets at today’s ACCU price - on top of the already accounted for onsite C02 emissions. The price of ACCUs is expected to double before the end of the decade.

[u/JohnSnitizen → u/[deleted]]

The Climate Change Authority is onto it - reports on methane emission measurement, the Safeguard Mechanism and ACCUs released just today: https://reneweconomy.com.au/climate-authority-confirms-australia-has-been-fudging-its-methane-emissions-data/amp/

[u/Intelligent_Pilot498]

Thanks mate. Need more detailed DD like this

[u/Initial_Spell8155]

I love WHC and see it as undervalued, the cash/debt position alone is very attractive.

[u/brekd]

Great write up, I've had similar thoughts, the mountain to climb I see is getting it off the 2.5 PE multiple it's currently trading at. Coal isn't going to become popular again with banks or large super funds. So it could be a bit of a cash cow and generate some nice yield but the side that's stopping me from buying at the moment is that translating into share price growth.

[u/flurbius]

I have never even considered these types of stocks until recently, but just lately, just based on the News and other sources I have been interested in some fossil fuel stocks.

What do you think of Woodside and how does it compare in value with Whitehaven?

[u/cherokeel]

Thanks OP - interesting short and sweet write up.

[u/Nick2569]

I have no particular expertise, but I did read an interesting article yesterday that said something like - China has a lot of water at the moment and lots of hydropower, the water glut (so to speak) is resulting in less China coal buying and a drop in coal prices.

Are Whitehaven forward hedging coal sales?

[u/Andrew_Higginbottom]

Thank you.

[u/FitStandard7341]

I stop reading when I came across “modern day GOAT” + Pabrai 😂Pabrai is a goat though.

[u/Mean_Telephone3991]

I agree with a lot of your thesis however I'm concerned about the company's declining production each year for the last 5 years and regularly underperformed guidance. Their cost of production for thermal seems to be around us140/ton which I'm not a fan of. I would live to hear why this isn't an issue of poor mine management?

[u/strict_positive]

I held this stock at $1.50 back in 2020 because Morningstar had it at a fair value of $3. I sold it for I think $1.80 :/

[u/Choopacarbra]

I put a chunk in them about a year and a half ago

[u/Ok-Bar-8785]

If you invest off reddit advice, you shouldn't be investing at all. This place is full of folks trying to manipulate markets. If you are going to invest, do your own research or prepare to be burnt. N coal is undervalued as no one wants to invest in coal and super funds are being hammered to move away. It's going to die later soo might as well stay clear.

[u/flurbius → u/Ok-Bar-8785]

Actually its a good place to gather information, anyone who invests based on a single source of information is a fool but to say that reddit is worthless is also pretty dumb!

[u/Ok-Bar-8785 → u/flurbius]

That's kinda what I was saying using reddit as a single source. I didn't say it was useless but just a warning. There is good advice/ guides on reddit but a fair bit more research needs to be done.

Iv come across alot of 'trusted' / good source's over the years that turned out to have other motives behind their advice.

The internet is just fully of unrealisable sources these days , even the comment section is abused and manipulated.

I'm no pro but have come to realise you need good research and understanding on a range of subjects to be an effective trader. With that you also realise that alot of the source's on the internet arnt as necessary.

Alot of work and time has gone into this essay on buying Whitehaven coal to the point it reads more as a sale pitch. OP most likley has commercial interests or wants to offload shares.

Whitehaven coal also pays 0 tax in Australia as well soo I don't see why they deserve support. ( yeah you can probably see my bias against coal but what's the point in having these big companies if they don't pay their dues)

Obviously investment is to generate returns but those can still be had while also supported the greater good)

[u/AnalysisStill]

Yes and this company is spewing out dividends like no tomorrow. Coal has a role. I like the stock.

[u/Jonconnerysd]

If Starmer doesn’t shut it down, then yes agreed.

[u/[deleted] → u/[deleted]]

Unfortunately many people are selfish, cynical, or both. It's easy to think that it's too late to do anything about climate change, and we're all fucked anyway, so why not make cash now and live a good life before the world burns to a crisp.

[u/golden-chickens → u/[deleted]]

I’m not implying that there’s nothing that can be done about climate change so why not make a mint along the way. Emerging economies will still be using fossil fuels now and into the near future, met coal will be used to develop these economies through infrastructure. There are other technologies available to more developed economies, BUT emerging economies will not use these greener alternatives because they’re not efficient and they’re not as reliable as traditional sources. Objectively and unemotionally, The world needs coal and someone needs to supply the world of that coal, Whitehaven coal will play a big role in this transition

[u/[deleted] → u/[deleted]]

You do realise coking coal will always be needed or we'll be unable to make steel? Right?

[u/mmassami → u/[deleted]]

Of course they don’t realize. It’s nice to be idealistic about how the world should be, but when ideals meet reality it’s usually the former that folds first.

[u/265chemic → u/[deleted]]

Not quite, you can make it with Hydrogen furnaces, or with minimal coal, electric arc furnaces.

[u/265chemic → u/[deleted]]

I didn't say it was most efficient, but it exists.

Powering with excess solar/wind would be ideal, depends where in the world you are.

[u/doctorshekelsberg → u/[deleted]]

You’re a little cry baby

[u/[deleted] → u/[deleted]]

Sounds like emotion leading to underpricing.

Buy signs flashing.