South32 to benefit from TC Debbie: Macquarie

SOUTH32’s Illawarra Metallurgical Coal operations in New South Wales could benefit from Tropical Cyclone Debbie.
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South32's Dendrobium coal mine in NSW.

Lou Caruana

According to Macquarie Wealth Management the New South Wales coking coal producer is in the box seat if the monster storm causes material impacts to mine production in Queensland’s northern Bowen Basin that lead to near-term strength in spot coking coal prices.

“We note that a 10% move in coking coal prices translates to 6-9% upgrades to our forward earnings estimates for S32 and 9-10% for BHP, but only 1% for RIO,” Macquarie said.

“BHP and S32 have similar earnings leverage to coking coal; however, it is likely BHP would suffer a production hit from the cyclone.”

Macquarie believes negotiations for the second quarter calendar 2017 coking coal contract and annual Japanese thermal coal contract are nearing completion.

It said the timing of Tropical Cyclone Debbie could impact the outcome.

“We currently expect the 2QCY17 coking coal contract to settle at $US175 per tonne, down from $285/t for the 1QCY17.

“Our forecast for the Japanese thermal coal benchmark is $87.50/t, although we note that spot price averages are fast becoming the main pricing source in both coking coal and thermal coal.”

Macquarie also notes that Whitehaven Coal’s revenue mix is 70-30 thermal-coking, while New Hope Coal is 100% thermal.

 

“There is some risk to NHC’s New Acland operation should rainfall head further south, while WHC’s NSW operations are unaffected,” Macquarie said.