Company Reports

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

New Hope offers exposure to global energy demand via increasing thermal coal production at a time when many other miners are winding down or selling their thermal coal assets. The strategy relies on demand for high quality thermal coal remaining robust longer-term. The purchase of a further 40% interest in the Bengalla coal mine in New South Wales in 2018 took its ownership of Bengalla to 80% after the company purchased its initial 40% stake in 2016. Along with the development of New Acland Stage 3, this sees New Hope reliant on thermal coal. We forecast equity salable thermal coal production to rise to about 13 million metric tons in fiscal 2028, up from roughly 7.5 million in fiscal 2023, driven by the ramp up of New Acland Stage 3.

New Hope offers exposure to global energy demand via increasing thermal coal production at a time when many other miners are winding down or selling their thermal coal assets. The strategy relies on demand for high quality thermal coal remaining robust longer-term. The purchase of a further 40% interest in the Bengalla coal mine in New South Wales in 2018 took its ownership of Bengalla to 80% after the company purchased its initial 40% stake in 2016. Along with the development of New Acland Stage 3, this sees New Hope reliant on thermal coal. We forecast equity salable thermal coal production to rise to about 13 million metric tons in fiscal 2028, up from roughly 7.5 million in fiscal 2023, driven by the ramp up of New Acland Stage 3.

No-moat New Hope’s fiscal 2024 first-half result fell materially on last year's but was broadly in line with our expectations. Adjusted EBITDA of about AUD 430 million declined 60% on the same period last year, driven by lower thermal coal prices. Average prices of AUD 197 per metric ton were 58% down on last year, which more than offset higher coal sales and lower unit cash costs. The AUD 0.17 fully franked interim dividend to be paid in May was higher than we expected, and we now forecast total 2024 fully franked dividend of AUD 0.34 per share, up from AUD 0.27 previously. This represents a forward yield of 7.4%. Given the 19% discount to fair value at which the shares trade, we think share repurchases would be value-accretive and worth consideration. However, despite a strong balance sheet, with net cash and liquid investments of roughly AUD 400 million, New Hope currently prefers dividends to buybacks, given the legal uncertainty over its New Acland Stage 3 mine in Queensland. Environmental groups continue to oppose New Acland. While we think they are unlikely to prevail, until this issue is resolved New Hope’s capital management policy seems sensible.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

New Hope offers exposure to global energy demand via increasing thermal coal production at a time when many other miners are winding down or selling their thermal coal assets. The strategy relies on demand for high quality thermal coal remaining robust longer-term. The purchase of a further 40% interest in the Bengalla coal mine in New South Wales in 2018 took its ownership of Bengalla to 80% after the company purchased its initial 40% stake in 2016. Along with the development of New Acland Stage 3, this sees New Hope reliant on thermal coal. We forecast equity salable thermal coal production to rise to about 13 million metric tons in fiscal 2027, up from about 8 million in fiscal 2023, driven by the ramp up of New Acland Stage 3.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

New Hope offers exposure to global energy demand via increasing thermal coal production at a time when many other miners are winding down or selling their thermal coal assets. The strategy relies on demand for high quality thermal coal remaining robust longer-term. The purchase of a further 40% interest in the Bengalla coal mine in New South Wales in 2018 took its ownership of Bengalla to 80% after the company purchased its initial 40% stake in 2016. Along with the development of New Acland Stage 3, this sees New Hope reliant on thermal coal. We forecast equity salable thermal coal production to rise to about 13 million metric tons in fiscal 2027, up from about 8 million in fiscal 2023, driven by the ramp up of New Acland Stage 3.

We raise our fair value estimates for no-moat-rated coal miners Glencore, New Hope, and Whitehaven after updating our assumed near-term thermal and metallurgical coal prices. Our updated fair value estimates also incorporate our latest foreign exchange rate assumptions along with higher coal royalty rates imposed by the New South Wales government. New South Wales will scrap the cap on domestic thermal coal prices effective July 1, 2024, which will be replaced with a 2.6% increase in state coal royalties from that date. However, higher royalties are more than offset by improved near-term thermal and metallurgical coal prices and weaker exchange rates versus the U.S. dollar. Our fair value estimate for Glencore increases by 4% to GBP 530 per share and Whitehaven by 3% to AUD 9.80 per share. Our New Hope forecasts already incorporated the new royalty assumptions; however, we increased our New Hope fair value estimate by 3% to AUD 6.30 per share given higher near-term thermal coal prices and the lower AUD/USD exchange rate.

New Hope offers exposure to global energy demand via increasing thermal coal production at a time when many other miners are winding down or selling their thermal coal assets. The strategy relies on demand for high quality thermal coal remaining robust longer-term. The purchase of a further 40% interest in the Bengalla coal mine in New South Wales in 2018 took its ownership of Bengalla to 80% after the company purchased its initial 40% stake in 2016. Along with the development of New Acland Stage 3, this sees New Hope reliant on thermal coal. We forecast equity salable thermal coal production to rise to about 13 million metric tons in fiscal 2027, up from about 8 million in fiscal 2023, driven by the ramp up of New Acland Stage 3.

New Hope’s fiscal 2023 earnings were strong despite wet weather in the first half dampening volumes from the Bengalla mine. Underlying EBITDA rose 11% to AUD 1.7 billion versus fiscal 2022, with higher thermal coal prices offsetting 14% lower volumes. We maintain our fair value estimate of AUD 6.10 per share for no-moat New Hope. We raise our expectations for near-term future coal prices and expect a faster increase in volumes from Bengalla. However, we expect a slower start for New Acland stage three with environmental court delays lowering our near-term volume forecasts there.

New Hope offers exposure to global energy demand via increasing thermal coal production at a time when many other miners are winding down or selling their thermal coal assets. The strategy relies on demand for high quality thermal coal remaining robust longer-term. The purchase of a further 40% interest in the Bengalla coal mine in New South Wales in 2018 took its ownership of Bengalla to 80% after the company purchased its initial 40% stake in 2016. Along with the development of New Acland Stage 3, this sees New Hope reliant on thermal coal. We forecast equity salable thermal coal production to rise to about 13 million metric tons in fiscal 2027, up from about 8 million in fiscal 2023, driven by the ramp up of New Acland Stage 3.

We raise our fair value estimates for thermal coal miners due to continued strong thermal coal prices. Of our coverage list, no-moat Whitehaven Coal is the most impacted, and we increase our fair value estimate to AUD 12 per share, up from AUD 9. We also recommend shareholders vote in favour of the company’s proposal to buy back up to 240 million more shares over the next 12 months. With Whitehaven shares trading at a 31% discount to our increased fair value estimate, we think the proposed buyback is likely to be accretive. We also raise our fair value estimate for no-moat New Hope Corporation to AUD 8 per share, up from AUD 6.30, and reduce our fair value Uncertainty Rating to High from Very High. No-moat Glencore is the other company we cover with material exposure to thermal coal, and we raise our fair value estimate to GBX 700 per share, up from GBX 570. About GBX 35 of the increase is due to a weaker GBP/USD rate.

Commodity prices have generally fallen over the second quarter of 2022 as central banks try to regain control of inflation, raising interest rates faster than many investors expected. This has led to fears of recession and lower demand for many commodities, with China’s attempts to contain COVID-19 also a drag. After updating our commodity price assumptions, the fair value estimates for most miners on our coverage fall. We think gold miner Newcrest remains cheapest, trading at around a 40% discount to our unchanged fair value of AUD 33 per share.

The outbreak of war in Ukraine, and the subsequent sanctions levied on Russia, has sent shockwaves through commodity markets. As we saw with Vale’s tailings dam failure in 2019, supply shocks can materially affect the outlook for prices and valuations. But the impact of supply shocks is not always intuitive. There’s one major difference between the current largely sanctions-driven supply disruptions and Vale’s tragedy. The supply capacity being disrupted is still intact in Russia. An outbreak of peace and a political agreement could see Russian commodity supplies return to the global market relatively quickly. Given that, there is considerable uncertainty as to how long any potential supply disruption will last.

We increase our fair value estimate for no-moat New Hope by 5% to AUD 3.00 per share following the release of its January 2022 quarter activities report. New Hope released unaudited year-to-date underlying EBITDA of AUD 552 million, well above the AUD 81 million reported in the previous corresponding period. Thermal coal prices have surged and currently sit around USD 250 per tonne, well above February 2021 levels which were around USD 80 per tonne. We have increased our fiscal 2022 EBITDA forecast by 16% to AUD 1 billion having adjusted our model for the stronger than expected first-half result. Our longer-term outlook remains unchanged, we assume long-term demand for New Hope’s thermal coal is underpinned by the economic development of economies throughout Asia. We forecast a nominal midcycle coal price of USD 79 per tonne in 2025. Shares in New Hope currently screen at a 11% discount to our revised fair value estimate.

We maintain our AUD 2.70 per share fair value estimate for no-moat rated New Hope following the release of fiscal 2021 results. Full-year washed coal sales of roughly 10 million tonnes broadly tracked our expectations as production rebounded strongly in late fiscal 2021 following the completion of the mid-life shutdown at Bengalla.

With realised coal prices modestly outstripping our expectations in New Hope’s final quarter of fiscal 2021, New Hope’s full-year fiscal 2021 result announcement eclipsed our forecast by 6%. The late fiscal 2021 rally in thermal coal price saw full-year fiscal 2021 EBITDA rise 26% year on year to AUD 372 million. Full-year washed coal sales of 10.1 million tonnes broadly tracked New Hope’s prior guidance as production at Bengalla rebounded strongly in late fiscal 2021 following completion of the mid-life shutdown and maintenance of the mine’s dragline. With the recent effervescence of the thermal coal price expected to persist near-term, the outlook for fiscal 2022 is rosy. Nonetheless, with our midcycle thermal coal price assumption of USD 69 per tonne unchanged, we retain our AUD 2.70 per share fair value estimate for the no-moat stock. New Hope shares screen as undervalued, trading at a 28% discount to our valuation. New Hope will deliver its fiscal 2021 result in full in late September 2021.