The Coal Trader

Whitehaven’s coking coal buy to send earnings up 93pc

Whitehaven Coal’s purchase of two coking coal mines from BHP and its partner, Japan’s Mitsubishi, for $US3.2 billion ($5 billion) will push earnings per share up 93 per cent by 2025, according to brokers at Citi.

The investment bank’s analysts appear to have backed the acquisition – which has been opposed by Whitehaven’s largest shareholder, London hedge fund Bell Rock Capital Management – increasing their target price on the company’s shares by more than 10 per cent to $8.45.

Whitehaven shares last traded on Friday at $7.72 each, and are down more than 10 per cent since the start of the year.

In a note to clients, Citi’s analysts said they could not see much in the way of balance sheet risk for Whitehaven despite the concerns from Bell Rock.

Whitehaven agreed to buy the Queensland-based Daunia and Blackwater metallurgical coal mines from BHP after beating out rival bidders BUMA and Stanmore Resources, The Australian Financial Review’s Street Talk column reported this month. Whitehaven and BHP are due to wrap up the transaction by the end of June.

The research analysts, however, noted there were several “delivery risks” at the Blackwater mine due to the sheer scale of the operations. Blackwater covers 80 kilometres and contains eight pits, which could increase capital expenditure requirements.

Citi described the size of the mine as “an entirely different scale of logistical challenges” to Whitehaven’s management.

The broker said capital expenditure at Daunia would average $110 million annually for the next five years. This is partly due to plans to grow Daunia’s Pandora pit, which is estimated to cost $90 million a year in the 2026 and 2027 financial years.

Financing in place

The acquisition comprises a $US2.1 billion payment once the deal closes, plus $US1.1 billion in incremental payments over three years.

Whitehaven agreed $US900 million bridge financing, which it expects to refinance at a later date, to support the purchase, along with its own cash flow. Jefferies and Bank of America are providing financing for the purchase.

The coal mining company faced opposition for the purchases of Blackwater and Daunia from shareholder Bell Rock. In September, the London-headquartered fund warned the acquisition would result in a significant change toward the company’s capital management strategy, and end what had been a generous share buyback program.

In August, Whitehaven chief executive Paul Flynn flagged that a pause in the share buyback scheme was unlikely to last for long.

Macquarie Capital advised BHP on the sale, while Rothschild advised Blackwater and Daunia’s minority shareholder Mitsubishi.