Some people might not like hearing this, but coal is not going away any time soon.
According to the BP Energy Report 2020, coal consumption declined by 0.6% in 2019, and its share of global energy consumption fell to its lowest level in 16 years, at 27%. Consumption has been hit by the global economic downturn in the wake of the COVID-19 pandemic, so the 2020 figure will end up showing a bigger fall than last year. However, the commodity is still responsible for 27% of global energy consumption, second only to oil, and in terms of electricity, coal is the largest single source of generation, accounting for 36% of the world total.
Every day, we read that renewables, and less carbon-intensive energy sources in general, will replace this share. Maybe so, but at present, renewables represent 10% of world electricity generation.
More recently, global coal generating capacity grew every year between 2000 and 2019, nearly doubling from 1,066 gigawatts (GW) to 2,079 GW. Further, about 500 GW of new coal capacity is either being built or planned.
A Greenpeace study released earlier this month showed that China alone added about 29.9 GW of new coal power capacity last year, making a total of about 1,040 GW, according to China Electricity Council data. China had about 46 GW worth of new plants under construction as of May, the study said. Another 48 GW were under various stages of development, Greenpeace estimated: it said that China views coal as “an important source of cheap power and mass employment.”
Not all of the new coal capacity being built or planned around the world will go ahead – as debates rage about acceptable levels of carbon-dioxide emissions, and the perceived negatives of these in the climate-change argument – but enough of it will to keep coal as a major part of the world’s energy mix for the foreseeable future.
In Australia, coal’s share of electricity generation is still about 60%.
Then there is the issue of coking coal – also called steelmaking coal, or metallurgical coal. It is used to make steel, in blast-furnaces. Thermal coal represents about 75% of the world’s coal use, with the rest coking coal. At present, there is no substitute for coking coal capable of being used in initial steel-making at a large scale; although electric arc furnaces, which produce steel from scrap metal, and don’t need coking coal, represent about 30% of the world’s steel production.
In both kinds of coal, Asia is driving the demand; in the West, coal’s share of both markets, electricity and steel, is declining.
Economically, coal could hardly be more important to Australia. In 2018-19, we exported $44 billion worth of coking coal and $26 billion worth of thermal, compared to $10.3 billion worth of coal 25 years ago. The country is the world’s largest exporter of steelmaking coal, accounting for 53% of total exports, and is the second-largest exporter of thermal coal (behind Indonesia), with about 25% of total exports.
All of this should be straightforward for investors, but sadly it is a politicised argument. The loud argument runs that coal produces carbon-dioxide emissions when used, these emissions cause climate change, so coal has to go.
There is a counter-argument, which is not heard as loudly, but which nonetheless exists, and cannot be wished away.
Asia (and other parts of the world) still have “electricity poverty” – estimates of the extent of this go as high as more than one billion people who do not have any electricity at all, and another two billion who have severely limited access to electricity. The imperative to deliver electricity is what has driven – and will continue to drive – countries such as China and India to use coal for the vast bulk of their electricity needs. Certainly, these countries are able to show large percentage increases in their use of renewable energy – off low bases – but coal is still going to do the heavy lifting in terms of electricity for a long while to come.
You will also read in many places that no banks will touch the coal industry – and certainly, many banks signal quite loudly that they will not. But others seem always to fill the gaps. Earlier this month, for example, Australian miner Yancoal successfully refinanced an existing syndicated bank guarantee facility, with a $975 million replacement bank guarantee facility. In the March 2020 quarter, fellow Australian coal producer Whitehaven completed refinancing of its $1 billion senior bank debt facility with a syndicate of Australian and international banks.
However, for a variety of reasons, mostly to do with the economic impact of COVID-19 coal prices have come down, and look likely to settle at lower levels, going forward, than Australian producers would like to see.
Some investors won’t want to touch coal – I get that. Others might want to at least take a look at the coal sector on the share market. Here are the four heavyweights of the Australian listed coal sector.
1. Whitehaven Coal (WHC, $1.44)
Market capitalisation: $1.5 billion
Three-year total return: –10.8% a year
FY21 Forecast yield: 2.8%, 45% franked (grossed-up, 3.3%)
Analysts’ consensus valuation: $2.50 (Thomson Reuters), $2.507 (FN Arena)
Whitehaven Coal produces premium-quality coal, both thermal and coking, from mines in New South Wales, and exports to customers in Japan, Taiwan, India, Korea, China, Chile, Malaysia, Vietnam, Noumea and Indonesia. The company has had a tough year, downgrading its coal production and sales targets in December after disruption from drought, bushfires and staffing problems, and then being hit by the COVID-19 impact and weaker demand, which caused another sales target downgrade in April.
The company has also had to delay a final investment decision on the $700 million new Vickery project near Gunnedah in New South Wales, which was expected to be made in 2020. Whitehaven also hopes to build a new coking coal mine in Queensland at Winchester South, but an investment decision on that project was not expected in 2020. The company has also been considering an expansion of the Narrabri mine.
Whitehaven already has approval to mine up to 4.5 million tonnes of coal each year at Vickery, and the current approval process seeks to increase that to 10 million tonnes per year. If given the green light by regulators, Whitehaven envisages a mine that runs for 25 years producing an average of about 7.2 million tonnes per year. The mine will produce premium coal, both semi-soft coking coal and high-energy thermal coal.
Whitehaven has the flexibility to move between markets: when steelmaking coal prices are high enough, Whitehaven can sell its thermal coal as semi-soft coking coal by washing it. Whitehaven typically needs semi-soft prices to be $US10 per tonne higher than thermal coal prices to justify doing this.
WHC has been hit by lower coal prices, and it looks as though it will sell up to 19% less coal in 2020 than last year, which would make it the company’s weakest year of coal sales since 2015.
WHC has been hammered over the past two years – with its price falling by 75%. This brings about another negative, in that the stock was removed from S&P/ASX 100 Index, effective last week. But Whitehaven looks to be pretty good value at current levels, with a dividend stream that is a bonus in terms of total-return prospects . One thing that is a touch alarming about the stock is the highly divergent views of brokers: Credit Suisse is the outlier on the positive side, with a price target of $3.10 – but the underbidder is Macquarie, at $1.60. There are more brokers inclined in the Credit Suisse direction, however.
2. New Hope Corporation (NHC, $1.367)
Market capitalisation: $1.1 billion
Three-year total return: 3.8% a year
FY21 Forecast yield: 5.4%, fully franked (grossed-up, 7.7%)
Analysts’ consensus valuation: $1.70 (Thomson Reuters), $1.55 (FN Arena)
New Hope Corporation produces thermal coal for domestic and export customers, from its 80%-owned Bengalla mine in New South Wales – the company’s biggest producer – and its New Acland and Jeeproobilly mines in Queensland. New Hope’s main export markets are Japan, China, Taiwan, Korea, Indonesia, Vietnam and Chile.
New Hope is waiting for approval to expand the New Acland mine to Stage 3 Project, and is also planning a move into coking coal through reactivating the Burton project in Queensland.
The company produced 10.9 million tonnes of saleable coal in 2019, up 21% on 2018, and followed this up with a 33% lift in production in the January 2020 half-year (NHC uses a financial year ending in July), to 6.2 million tonnes. But the effect of lower coal prices was shown by a 42% fall in half-year net profit, to just under $70 million.
Then came the COVID-19 impact, which has bitten hard. In the April quarter report, saleable coal production slipped by 22% on the year, to 2.3 million tonnes, while coal sales fell by 8.5%, to 2.8 million tonnes. New Hope said that while thermal coal prices had been quite resilient up until the end of March, as a result of reduced electricity demand across most global markets, thermal coal demand and price had declined sharply since the beginning of April 2020. NHC conceded that this sudden reduction in price combined with the reduced coal production from its Queensland coal operations will harm its financial performance in the second half of the financial year.
But late last month, New Hope told the market that demand in Vietnam and Taiwan was strong, with Korea “firm” and China “recovering quickly” – and that it was “being flexible” to respond to these dynamic thermal coal markets. On an outlook beyond the next 12 months, New Hope said it was well-positioned to meet the growing energy demands of its Asian customers.
Brokers are not as positive on NHC as they are on Whitehaven – taking the three most recent (May) target price changes, the consensus is looking for $1.47. Where NHC is superior is on its forecast fully franked dividend yield, but the price-recovery situation looks better for WHC.
3. Coronado Global Resources (CRN, 98 cents)
Market capitalisation: $944 million
Three-year total return: n/a
FY20 (December) forecast yield: no dividend expected
Analysts’ consensus valuation: $2.18 (Thomson Reuters), $2.03 (FN Arena)
US-Australian mining firm Coronado mainly produces coking coal, from three mines in the US and the Curragh mine in Queensland, which also produces thermal coal that it sells to the Stanwell Power Station. In April, Coronado withdrew its 2020 production guidance and idled its US operations – however, most of these came back online earlier this month. The closure will now see production for this year come down from the previously expected range of 19.7 million tonnes–20.2 million tonnes to a new range of 16.5 million tonnes–17 million tonnes – but the company says sales volumes should be higher than production, as it uses stockpiles to meet customer demand.
One of its US mines, however, Greenbrier, will remain closed for at least the rest of 2020, and as a result CRN will book an impairment of about US$60 million–US$70 million on Greenbrier in the first-half result.
Brokers now expect CRN to turn in a shocking 2020 (calendar-year) result, with FN Arena’s collation of analysts’ estimates projecting a 98% fall in earnings. But conversely, analysts feel that the company is well-positioned for when prices recover, at least on the coking coal side – which is the main driver of CRN’s valuation – and that the heavy price discount (the stock has more than halved in 2020) positions it as an outstanding buy, with the prospect of a quick return to dividends in 2021 adding to the appeal.
4. Yancoal Australia (YAL, $2.03)
Market capitalisation: $2.7 billion
Three-year total return: –26% a year
FY21 forecast yield: n/a
Analysts’ consensus valuation: n/a
Yancoal, which operates five coal mines and manages five others across New South Wales, Queensland and Western Australia, is having the same problems as its peers: in the March quarter, it says coal production (82% of it thermal coal) was down 8% on the year, and its average realised price was down 18%. While Yancoal says the supply and demand dynamics in both thermal and metallurgical coal prices, as well as exchange rates, are almost impossible to predict at the moment, its move during the March quarter to lift its stake in the Moolarben Joint Venture from 85% to 95% will enable it to boost its guidance for 2020 (calendar-year) coal production from 36 million tonnes to about 38 million tonnes.
Yancoal also reiterates the point that Australia is expected to retain a market share of about 26% of the growing world seaborne thermal coal requirement, and to play a critical role as a primary source of premium grade coals. With its portfolio of mines, it says that, to counter the anticipated short-term volatility in thermal coal prices, it continues to “optimise the product quality and volume” that it places into the market.
Yancoal is not covered by any of the major brokers, which makes assessment difficult, but investors will note that it has been a belter of a dividend payer: for 2019, it paid 31.56 Australian cents, unfranked, at a payout ratio of 50% of net profit. The company is a low-cost producer – in 2020 its operating cost was A$61 a tonne – but it is not going to earn enough to pay that level of dividend in 2020. But Yancoal has a strong balance sheet – it entered 2020 with cash and cash equivalents of $962 million in total – and it’s likely that there will be a dividend. Even if last year’s dividend is cut by 50%, that would still place YAL on an unfranked yield of 7.8%.
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