The turning of the coal-worm

IF THE outlook for the coal industry is as bad as the green movement says it is, Hogsback wonders why some of the world’s top investment banks are tipping rising profits and higher dividends from one of Australia’s leading coal producers.

Staff Reporter

Whitehaven Coal, a frequent target of anti-coal protestors, is the miner winning the approval of analysts at banks such as UBS, Macquarie and Credit Suisse.

In their latest assessment of Whitehaven all three rate it as a stock to buy because they expect its profits to rise, along with its share price.

In the case of Macquarie the tip is for a share price over the next 12 months of $3, which represents a 66% increase on recent share trades at $1.80. Credit Suisse reckons $2.75 is a fair target, and UBS sees $2.30 as the next stop.

None of those views, from people with hard noses and sharp pencils, sit at all comfortably with the protest movement, which argues that coal has no future in the modern world.

However, before going further with the number crunching there is another document floating around that makes the anti-coal brigade look even more like a group wilfully ignoring the facts in order to promote a political agenda.

Last week, as the brainless protests continued, a report was sent to the Australian government outlining why coal was not just part of the world’s overall energy mix but rather a critical part of the mix.

The document, compiled by an adviser to the International Energy Agency argues coal will remain the dominant fuel for the electricity industry for at least the next 25 years despite attempts to demonise it by green activists.

According to what The Hog read last week, carbon dioxide capture technologies are evolving and that even if coal loses market share in advanced western economies it will enjoy strong demand growth in emerging economies because it is the winner on price.

Report author Ian Cronshaw was described in a report carried in The Australian newspaper as a consultant in the office of the chief economist at the IEA.

In a wonderful example of fighting fire with fire, the Cronshaw paper used emotional arguments to support its pro-coal position pointing out that coal-fired electricity would help lift hundreds of millions of people out of poverty by allowing them to use refrigerators, do homework and run small businesses.

These arguments are never heard from the green movement, which is made to look like a rich man’s lobby group determined to protect its power advantage by championing expensive energy sources that only the rich can afford.

UBS and the other investment banks are not at all interested in playing an emotional card. They simply look at the financial appeal of coal stocks and tell clients to buy because the sector has been oversold and is poised for a rebound.

What UBS particularly likes about Whitehaven is the development of the Maules Creek mine after years of inquiry and objections, all of which have been exposed as nonsense.

“We think Whitehaven continues to deliver against its objectives and see near-term positives including a rising thermal coal price, increasing cash-flow and the commencement of Maules Creek to justify our buy rating,” UBS said.

Analysts at the bank were impressed with Whitehaven’s higher-than-expected rate of coal production in the final quarter of 2013 thanks to strong output from the company’s Narrabri mine. While that will dip during a longwall move the coal price is moving in Whitehaven’s favour, and costs are trending down.

The net result is that UBS reckons Whitehaven is on track to lift revenue from last financial year’s $622 million to $818 million, enough to flip the company from a pre-tax loss of $70 million to a profit of $33 million.

Better performances are expected in future years thanks to the triple-header effect of rising production, rising price and a falling Australian dollar against the US dollar, which will make all Australian coal more competitive in future.

In the 2015 financial year, Whitehaven’s revenue is expected to hit $956 million while pre-tax profit will rise to $77 million. In the following year, revenue soars to $1.45 billion, pre-tax profit to $169 million and shareholders get the reward of a return to dividends, admittedly at a modest 2c a share. However, once payouts restart they will trend up over future years.

None of this, the IEA-linked paper, nor the investment bank reports will sit comfortably with the anti-coal movement, but it will sit very comfortably with investors as they consider a return to the sector – and with the truth, which has been a victim of the propaganda spread by enemies of the coal industry.

Coal 1. Greens 0.

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