Morningstar | Earnings are strong but with coal prices well above the marginal cost, we don't think they can last.
Whitehaven has aggressively expanded production through the commodities boom, but the firm was relatively late to the party, with the flagship Maules Creek mine only starting in 2015, in time for the sharp drop in commodity prices. The subsequent recovery in coal prices in 2016 to 2018 helped to generate much-needed cash flow to meaningfully repay debt. Maules Creek adds lower-grade metallurgical coal to Whitehaven's product mix, with the company aiming to increase it to more than 45% of the total output, from around 20% in fiscal 2017. Narrabri is Whitehaven's other major mine and is a low-cost, high-capacity underground thermal coal mine. The company aims to increase output, but we think the key driver of performance will be coal prices. China's transition from being an investment-led to a consumption-led economy and a general shift away from coal-fired power are likely to be meaningful headwinds for coal.Whitehaven Coal is principally engaged in the development and operation of coal mines in New South Wales. Co. has two reportable segments: Open Cut Operations and Underground Operations. Mining operations include Maules Creek open cut mine (75% Co. ownership and operator); Narrabri underground mine (70% Co. ownership and operator); and three smaller open cuts mines, Tarrawonga (70% Co. ownership and operator), Rocglen (100% Co. ownership) and Werris Creek (100% Co. ownership).
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