What will New Hope Corp do with the cash that is flowing from surging thermal coal prices?
-Focus on Bengalla as New Acland on care & maintenance pending court hearing
-New Hope's cash bank spurring acquisition speculation
-Current share price suggests the market is expecting a correction in thermal coal
Cash is flowing for New Hope Corp ((NHC)) as thermal coal prices remain higher for longer amid tight physical markets. The company posted robust FY21 operating results, although brokers were disappointed with the number of abnormal items.
No guidance was offered for FY22 yet Citi highlights the company generated more than $100m in operating earnings (EBITDA) in August alone, proving the strength of free cash flow. The surge in gas prices has added additional pressure to coal markets and the broker marginally increases FY22 earnings estimates because of better expectations from Bengalla volumes.
New Hope has transferred its excavator to Bengalla from New Acland to provide additional mining capacity. The mine has permits for up to 15mtpa run-of-mine capacity and the company will focus on product quality, not output. Bengalla has a low-cost position and Citi forecasts run-of-mine production in FY22 of 13mt. Morgans expects Bengalla will generate $710m in EBITDA in FY22 at cash margins of around 61%.
Recent market dynamics have meant Credit Suisse has raised its forecast for thermal coal to US$150/t which lifts its estimates for FY22 earnings by 29%. Pricing is expected to remain strong throughout the northern hemisphere winter and the broker assesses upside to consensus earnings estimates from elevated spot prices and/or the stage 3 extension at New Acland.
New Acland aside, Macquarie continues to be impressed with Bengalla and expects there is material upside at spot prices, currently around US$175/t. While acknowledging the strong cash flow, the broker emphasises that FY22 guidance has not been provided, although notes the company expects prices to remain strong into FY22.
Macquarie calculates the New Hope share price is currently pricing in a thermal coal price of US$95/t, well below spot. At spot prices net asset valuations increase around 200% to a heady $5.15 a share.
In explanation, Macquarie points out the current price of the shares suggests the market is expecting correction in thermal coal prices, yet there is a risk prices remain higher for longer and earnings momentum continue. Nevertheless, the broker is cautious about the longer-term aspects of thermal coal.
As an interesting contrast, Macquarie notes the company's rehabilitated sites continue to increase its exposure to pastoral land. Cattle prices have increased 40%, New Hope has pointed out, expecting further yields and efficiencies in both livestock and cropping.
Goldman Sachs flags the risk that, with thermal coal use for power generation, New Hope customers could look to diversify their energy mix and thus weaken demand for coal. Meanwhile, with operations in Australia the company benefits from a weakening Australian dollar.
FY21 results were largely in line with forecasts, with underlying EBITDA of $367m, although the final dividend of $0.07 fell a little short of expectations. Credit Suisse interprets this to mean potential acquisitions are being lined up, believing New Hope could build a net cash position of $300m by the end of FY22.
If the gearing ratio were to ratchet up to 15% versus the 4% in FY21, the broker assesses a $600m acquisition opportunity, which could mean either volume growth or product diversification.
Management emphasises it will only consider assets that are at the low end of the cost curve, value accretive and with long-range approvals to operate. Citi observes, given the criteria, an acquisition could be outside Australia while Macquarie suspects New Hope may have an eye on BHP Group's ((BHP)) assets that are up for sale, such as Mount Arthur.
Yet Morgans believes the probability of New Hope acquiring Mount Arthur is low, given the lease complexities and improved profitability, suspecting BHP could be less inclined to sell at this point. The broker expects the surplus cash flow for more likely be used for higher dividends before the next major investment.
New Acland stage 2 will be put on hold and the future of stage 3 is unknown, awaiting a hearing in the Land Court in November, although the company is still confident it will eventually be approved.
Citi is not so sure and Macquarie does not forecast New Acland stage 3 will be developed. Morgans believes a positive recommendation being put to the minister would be a bonus in terms of its view on the stock, as the project is not incorporated in valuation.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Neutral rating and $2.60 target, noting the stock is trading at its long-run thermal coal forecast of US$70/t. The database has four Buy ratings with a consensus target of $2.35 that signals 9.1% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 12.0% and 5.4%, respectively.
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