The Coal Trader

Sin-binned coal stocks

Investors ready to hold their nose over environmental concerns can pocket strong dividends from coal stocks in 2024, as the miners shunned by the mainstream investment community boost production and buy assets from their rivals.

Whitehaven Coal said this year’s $US3.2 billion ($4.8 billion) acquisition of BHP’s Daunia and Blackwater metallurgical coal mines would be 70 per cent earnings per share accretive in financial 2024 and increase its total coal resources 75 per cent to 4.6 billion tonnes, although it will be forced to cut short-term dividends to finance the deal.

“It’s a really good acquisition,” said Robert Gregory, founder of Glenmore Asset Management. “It wasn’t the bargain price that Stanmore Resources got when they bought Poitrel and South Walker Creek off BHP, but it was still a decent price.

“If you’ve got a medium-term time horizon the reward for Whitehaven investors should be a significant step-up in earnings power and dividends.

“For coal the big attraction is the lack of supply coming on-stream as it’s so hard to get permitting and financing for new mines.”

Research house Morningstar agrees that Whitehaven’s recent coal mine purchase was a “good deal” for investors priced on an enterprise value of 1.8 times the mines’ financial 2024 operating income.

The broker said Whitehaven shares were worth $10 each, some 38.5 per cent higher than Tuesday’s market price of $7.22. On Morningstar’s forecasts, the coal company also offers an estimated yield of 4.7 per cent plus the tax benefits of full franking credits.

The forecast dividend payout of 34¢ per share in financial year 2024 is significantly down on the 74¢ per share in the year ended last June 30, and reflects Whitehaven’s need to finance its transformational acquisition, alongside thermal coal prices that tumbled from boom time levels of $US400 a tonne at the end of 2022 to $144 a tonne on Tuesday.

Bargain hunting

“We like Whitehaven, you’ve got strong demand for its thermal coal and on the supply side, longer term, all the big miners are trying to get rid of met coal assets or not expand supply,” said Morningstar’s analyst Jon Mills.

In November, Canadian mining giant Teck Resources sold a majority stake in its met coal assets to Swiss miner Glencore for $US6.9 billion ($10.9 billion), with plans to hive off the business to private investors. The deal followed Stanmore’s $US1.35 billion acquisition of two met coal mines from BHP in 2021 and Whitehaven’s October BHP deal.

“No matter what they say at COP28, the world’s on track to burn more coal this year, than last year,” said Mr Mills. “Metallurgical coal is driven by steel production in China and India, so you have strong demand and longer-term supply constraints.”

Even so, this month’s COP28 summit of 198 countries backed a landmark deal that calls for concerted global action to “transition away” from fossil fuels and bringing oil and gas into the almost 30-year-old climate treaty’s ambit for the first time.

While the COP28 document echoed COP26’s explicit call to “phase down” unabated coal power, it did drop the idea of countries agreeing not to permit any new coal-fired power stations.

For income seekers in 2024, Morningstar rates the $4.3 billion thermal coal miner New Hope Corporation, ahead of Whitehaven.

Morningstar thinks New Hope will pay dividends of 27¢ per share in financial 2024, before that rises to 38¢ per share in financial 2025. This places the Bengalla producer on an estimated fully franked dividend yield of 5.3 per cent in financial 2024 and 7.5 per cent out to financial 2025.

The miner’s stock has advanced 58 per cent in five years before accounting for the cash value of dividends, with Morningstar valuing it at $6.10 on 12.2 times estimated earnings of 50¢ per share in financial 2024.

Prices for high-energy thermal coal produced by New Hope and Whitehaven for consumption in Japan and South Korea have tumbled from boom time levels of $US400 a tonne at the end of 2022 to $142 a tonne this week.

New Hope shares have lost almost 20 per cent in the last 12 months to trade at about $4.12, while Whitehaven Coal has lost 30 per cent to $7.23. That compares with a 10 per cent rally for the world’s biggest mining company, BHP, and a 7 per cent gain for the S&P/ASX 200.