In the current era with an increasing focus and interest in ‘clean energy’ while moving away from fossil fuels, one wouldn’t expect to be able to make money with coal companies. That’s a false perception as coal prices remain quite strong, and the share price of Whitehaven Coal (OTCPK:WHITF) (OTC:WHITY) has increased by in excess of 300% since my most recent article on the company now just over three years ago. The coal producer has done very well, and it’s time to see if there’s a good chance the company could continue its strong performance.
Source: Yahoo Finance
There is some volume in Whitehaven Coal on the OTC market, but its domestic listing in Australia is much more liquid. The ticker symbol in Sydney is WHC, and the average daily trading volume in Australia is approximately 6.25 million shares. The current market cap is just over A$4.5B, giving Whitehaven a very respectable market capitalization.
Whitehaven completed its expansion in 2014 and 2015, and that was the main reason why I was so positive about this company in the summer of 2015: WHC was on the brink of almost doubling its coal production, which was anticipated to unlock some economies of scale that would be helpful to increase the operating margins.
Source: annual report
In FY 2018 (which ended in June), Whitehaven Coal produced 17.7 million tonnes of coal from its mines, of which 16.2 million tonnes were ‘saleable’ coal, and these tonnes were subsequently sold to its customers.
Although the total amount of coal sales increased by just 10%, the total revenue increased by roughly 20% thanks to the higher coal price. The total revenue for FY 2018 came in at A$2.26B (Whitehaven reports its financial results in Australian Dollar, and we will use that currency throughout this article), resulting in an EBIT of almost A$789M. That’s an increase of 50%, despite having to spend an additional A$142M on buying third-party coal for re-sale.
Source: annual report
As Whitehaven’s balance sheet has gotten stronger and debt is now cheaper, the total financial expenses fell by 40%, resulting in a pre-tax income of A$760M and a net income of A$525M (53.2 cents per share). That’s just over 25% more than the previous financial year, and this lower percentage increase could be explained by the higher tax bill. On a $285M revenue increase, Whitehaven paid approximately A$164M in additional taxes. There’s an easy explanation for that: in FY 2018, there was a A$30.5M reversal in taxes which suddenly became payable, while there were some one-time tax benefits in FY 2017.
Given the current share price, Whitehaven Coal is trading at just nine times its net income, which appears to be quite cheap. Just to be sure about the reliability of the accounting profits, I also double-checked the cash flow statements to figure out the correlation between the free cash flow and net income.
Source: annual report
Whitehaven Coal reported an operating cash flow of A$831.5M, but this included a A$218M benefit from changes in the working capital position and the deferred taxes. On an adjusted basis, the operating cash flow thus came in at A$603.5M.
Whitehaven spent A$143M on capex and A$9.6M on capitalized exploration expenditures, resulting in a total capex of approximately A$152.5M. This results in a free cash flow of A$451M and a FCF conversion of 86%.
Where to go from here?
Whitehaven’s production rate remains quite high, and it should be able to sell approximately 22-23 million tonnes of coal in the current financial year as well. In the first quarter (which ended in September), Whitehaven produced 4 million tonnes of saleable coal, while it sold approximately 4.9 million tonnes. A part of these additional 0.9 million tonnes were stockpiles that are currently being sold into the market at relatively strong prices, while there may also be some additional third party coal purchases.
Additionally, the company has been ramping up the production at the new Narrabri mine, and this should provide a meaningful contribution to the consolidated production (and cash flow) profile.
Source: annual report
I don’t see any other risks than the coal price. Whitehaven is one of the largest employers (and the largest non-government employer) in the region, so the 1,600 direct jobs it provides are an important part of the local economy. As such, the only thing Whitehaven really has to worry about are the coal prices. And these coal prices remain strong. Have a look at the company’s coal market update (the emphasis is mine):
Source: quarterly update
And with total coal reserves of 985 million tonnes of coal (of which 885 million tonnes are ‘marketable’ reserves), Whitehaven’s reserves can keep the company going for the next few decades.
Over FY 2018, Whitehaven Coal has spent almost A$600M on dividends and special dividends. Assuming a ‘normalized’ dividend of just 30 cents per share (payable in two tranches), the current dividend yield is approximately 6.75% based on the current share price (the closing price on Tuesday, November 20), and approximately 25% based on the average cost of the stock if you also initiated a long position throughout the summer of 2015.
This means Whitehaven Coal has been a cash cow in my portfolio last year thanks to the two normal dividends and the two special dividends that were paid in 2018. I do expect the company to continue to pay a generous dividend (its balance sheet barely contains any debt), but I will be selling 2/3rd of my position. Not because I’m unhappy with Whitehaven’s performance, but because I’m taking some of the 300% profits off the table and I’m expecting to be able to deploy the cash into other investment opportunities.
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Disclosure: I am/we are long WHITF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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