MARKETS

Hold it up to the mirror

ONE way or another, Australia’s coal industry is facing a fresh round of ownership shuffles thanks to the financial pain of low prices, which <i>Hogsback</i> believes to be the root cause of trouble brewing at Whitehaven Coal and elsewhere.

Staff Reporter

Falling profits, pit closures and delayed developments are, so far, the obvious effects of the fall in price for both thermal and metallurgical coal.

Behind the reduced income streams and the obvious disquiet of the blue-collar workforce though are management scuffles developing as senior executives fight for the perks of their jobs and the power that goes with running a business.

What is happening has been seen before in other industries hit by reduced revenue. It is called contraction, with companies forced to act to survive.

Every possible action by coal companies is being considered from more mine closures to mergers-of-convenience that will deliver lower costs and the chance of survival until higher prices return.

Quite simply, this is a time when animal instincts rule. It is a case of “fight or flight” because there is less room in the industry today for the number of mine operators in the coal business than yesterday.

Understand those pressures and it becomes clear Whitehaven’s woes are a window on the problems that run right through an industry that has been whacked around the ears by falling prices, rising costs and unfriendly government actions.

Whitehaven’s problems consist of an unhappy major shareholder who is reportedly carrying a heavy debt load; operating mines that have had their profitability stripped back thanks to falling coal prices; mine development plans being postponed or jammed up in a slow-moving approvals process; and a share price that has fallen by 50% in less than six months.

On their own each of the issues should be manageable.

Taken together they are a cocktail of trouble guaranteed to destabilise the strongest business.

While Whitehaven is the subject of this analysis it is a template for most other coal companies hit by falling prices and rising costs.

On the first point, a disgruntled major shareholder, it does not matter why the biggest shareholder is discontented, or whether his problems are self-inflicted or not – as appears to be the case with Nathan Tinkler, Whitehaven’s 21% owner who has reportedly called for a widespread management shake-up.

The cause of the disconnection between Tinkler and Whitehaven’s management team is said to be the speed at which projects are being developed and possibly the way capital is being allocated.

A more generous dividend policy would help Tinkler service his debts, as would a share buyback that would enable him to raise cash.

However, because he is not on the Whitehaven board and only has his views conveyed by delegates, a communications breakdown has developed.

That means Whitehaven’s actions and plans for the future might not be in accord with what its biggest shareholder wants (and needs), hence the storm clouds gathering in the boardroom.

The other three points of trouble (falling profits caused by lower coal prices, shelved development plans and halved share prices) are all largely beyond management’s control. Not that all shareholders in coal companies are prepared to take that lying down.

That is when the fireworks start because tough times often trigger a conflict between what shareholders want and what management wants.

Put another way, what the owners of a business want is not always what the hired help wants, and by hired help The Hog means management and the blue collar workforce.

At Whitehaven, and at other coal companies with a lower public profile, there are tensions simmering that will eventually boil over because the two sides of the business are being pulled apart by the pressure of reduced income.

That is a direct result of lower coal prices.

Last year was the time of labour exerting its muscle with industrial action, including strikes, as part of a demand for more money from a shrinking pot.

This year, it is capital exerting its right to seek more money from the same shrinking pot, either by demanding higher dividends or share buybacks, or by forcing mergers-of-convenience to cut costs and boost profits.

Whitehaven is where all of the pressures are bubbling to the surface and something has to give.

It will either be Tinkler or the board that seems to be standing between him and the cash he needs.

In this situation there cannot be two winners.

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