Company Overview- Whitehaven Coal Limited (Whitehaven) is engaged in the development and operation of coal mines in New South Wales. The Company operates in two segments: Open Cut Operations and Underground Operations. The Company’s Gunnedah operations include the Tarrawonga (70% owned by Whitehaven), Rocglen (100% owned by Whitehaven), and Sunnyside (100% owned by Whitehaven) open cut mines and the Gunnedah coal handling and preparation plant and train load out facility (CHPP’ (100% owned by Whitehaven). The Werris Creek mine is 100% owned by Whitehaven.

Analysis– WHC reported an underlying loss of A$9m for 1HFY14, ahead of market expectations due to lower operating costs and depreciation. Importantly Maules creek remains on track for first production by the beginning of CY2015, with key construction and approval hurdles met. Cash flow was also better than market expectations due to lower receivables and inventory. December 2013 net debt was A$557 Million. Stronger than expected Earnings before interest payments, tax, depreciation, and amortization (EBITDA) was driven by lower unit costs at Narrabri, which offset lower revenue. Unit costs declined to A$72/t from A$75/t in the FY13 and are trending lower in 2H. Project spend will ramp up with approximately A$410 Million left to spend on Maules Creek.

The Maules Creek project is 30% complete and according to the company is on track for first coal production in the March Q 2015 but the schedule is tight. Construction of the rail spur started in early January will take 13 months to complete. The best case scenario will be first production in late March Q and we continue to assume first production in Sep Q. Capex risk remains to the downside with every contract coming in on or below budget meaning the A$70m of contingency will unlikely be fully used. We believe that A$350m of the A$525m available debt facilities will be drawn. However if thermal coal price remains below US$80/t then the majority of the available facilities will be required.

WHC has an impressive organic growth profile with the objective of increasing saleable coal production to above 20Mtpa by FY18 and increasing production of Pulverized Coal (PCI) and semi soft coal to 30% of total coal production. The company’s key growth prospects are Maules Creek and Vickery and the current operating assets include Tarrawonga, Rocglen and Werris Creek, which are all open pit mines while Narrabri is the company’s first underground mine. All operating mines are located in NSW’s Gunnedah basin 350km from the port of Newcastle. WHC is a relatively low cost producer (A$75/t all in costs). High yields offset the long haulage distance to port. The balance sheet is solid as is the management team who has a proven track record of developing coal mines in NSW.Near term the ramp up if the 6Mtpa Narrabri longwall and constructing and de risking Maules Creek are important catalysts as is an improvement in thermal coal demand and the weakening AUD.

The outlook for WHC is dependent on the outlook of thermal coal market given 77% of WHC’s revenues are from thermal coal sales. We think WHC continues to deliver against its objectives and see near term positives including a rising thermal coal price, increasing cash flow and commencement of Maules Creek. The A$ exchange rate is closely tied to the performance of WHC in the long term. We see the AUDUSD falling to 85C in the long term which will provide support for A$ coal prices.

Narrabri performed very well during the December 2013 half. Longwall production exceeded nameplate capacity for the period and achieved a weekly record of 193kt of Run-of-mine (ROM) coal. Mining in the second panel was completed in January 2014. Following the success of the blending strategy, additional PCI production can be planned. For FY14 WHC is forecasting 850 kt of PCI production, however management are working hard to beat this.


Daily Chart WHC (Source – Thomson Reuters)
 

Price		Price % Change
Close:	1.86 (05-Mar-2014)	3M:	4.29%
52 Wk High:	2.69 (06-Mar-2013)	6M:	(10.54%)
52 Wk Low:	1.47 (07-Nov-2013)	1Y:	(30.87%)

One highlight of their recently released result was that they have decided to be owner-operators of Maules Creek. WHC have already procured the fleet and will put in operating leases to buy the equipment. WHC are still targeting costs of A$67/t pre royalties including operating leases for Maules Creek. We note that WHC has secured offtake agreements for the delivery of the thermal coal when the mine starts up in March 2015. WHC will be pushing for 20% metallurgical coal production in the first year which is to be stepped up by 10% pa over the next few years until reaching a 50-50 split between metallurgical coal and thermal coal production. The Maules Creek site has experienced protestor activity over the last few months. Management have stated that these issues are not causing concern for the Maules Creek construction schedule. CEO Paul Flynn stated that all contracts for Maules Creek have come in on or under budget. There is $410m left to spend on Maules Creek construction and WHC has a $525m undrawn facility.
 
 
 

	Industry Median	2013	2012	2011	2010	2009
Profitability
Gross Margin	38.7%	8.1%	28.2%	28.2%	33.0%	34.1%
EBITDA Margin	33.8%	2.6%	48.8%	23.7%	22.6%	27.8%
Earning Power
Pretax ROA	5.8%	(2.7%)	0.5%	0.6%	14.5%	42.9%
Pretax ROE	14.1%	(3.5%)	0.6%	0.9%	19.6%	57.7%
Liquidity
Quick Ratio	1.05	0.84	1.22	1.94	2.14	1.60
Current Ratio	1.30	1.08	1.29	2.05	2.23	1.66

 
Revenue of A$402 million for the period increased 43% from the prior corresponding period. Average cost of sales decreased to A$71.69/t from A$75.25/t in the December 2013 half and A$79.30/t in the prior corresponding period. The large scale Maules Creek project remains on track for first production next calendar year. To date A$224 million has been spent to date representing 30% of budgeted capital expenditure of A$767 million for the project. Key milestones including the commencement of construction of the rail line by Leightons have been met. Based on the strong quarterly production from Narrabri the potential for increased production at Werris Creek and on track construction at Maules Creek, we put a BUY recommendation on the stock at the current price of $1.86.

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