Company Reports

Commodity prices generally fell in the September-ending quarter, except for gold. Concerns about weak China end-user steel demand affected iron ore and other steelmaking commodities, while base metals prices fell on worries over slower economic growth in China and elsewhere.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. It purchased Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi in April 2024, but has agreed to sell a 30% stake in Blackwater to two Japanese steelmakers, likely effective early 2025. Equity output is expected to grow to 32 million metric tons by fiscal 2029, split roughly between 60% coking coal and 40% thermal coal.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. It purchased Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi in April 2024, but has agreed to sell a 30% stake in Blackwater to two Japanese steelmakers, likely effective early 2025. Equity output is expected to grow to 32 million metric tons by fiscal 2029, split roughly between 60% coking coal and 40% thermal coal.

The highlight of no-moat Whitehaven Coal’s fiscal 2024 result is the sale of a 30% stake in its Blackwater metallurgical coal mine for about USD 1.1 billion—AUD 1.6 billion—to two Japanese steelmakers. It values Blackwater at USD 3.6 billion (100% basis) compared with the total of up to USD 4.1 billion that Whitehaven has agreed to pay no-moat BHP for Blackwater and the smaller Daunia mine. This includes up to USD 900 million in contingent consideration, most of which is likely to be paid to BHP based on our assumed near-term metallurgical coal prices. Blackwater accounts for roughly three quarters of sales from the two mines over our forecast period and has three times the mine life of Daunia, so we think this is a fair price.

Shares of most of our global mining coverage fell during the quarter, and the average price/fair value estimate has fallen modestly to 1.05 at July 8, 2024 from 1.07 last quarter. While our coverage is close to fairly valued on average, there is a wide dispersion, with no-moat mineral sands miner Iluka the cheapest, trading 30% below fair value at that date. Mineral sands prices are lower, on reduced demand from China’s property sector. Rising interest rates and slowing housing markets in the West are also a near-term headwind. However, longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices. Its proposed rare earths refinery in Eneabba is an option, on elevated rare earths prices and potential Western tariffs on Chinese production.

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its purchase of the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi in April 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly half thermal coal and half coking coal.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its purchase of the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi in April 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly half thermal coal and half coking coal.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

While well down on the first half fiscal 2023, adjusted net profit after tax of AUD 373 million, or AUD 0.46 per share, in the first half of fiscal 2024, was solid. Whitehaven is on track to meet our full-year forecast of AUD 838 million, AUD 1.00 per share. Yes, the company made AUD 1.8 billion net profit in the same half last year, but this half eclipses all others until the 2022 coal price bonanza. Importantly, Whitehaven is in strong financial health with AUD 1.5 billion net cash at the end of December 2023. This is key given the imminent acquisition of the Daunia and Blackwater mines from BHP. The deal is on track to close in early April 2024 as planned.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its agreement to buy the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi, effective from the June quarter 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly half thermal coal and half coking coal.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its agreement to buy the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi, effective from the June quarter 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly 50/50 between thermal and coking coal.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales, Australia. Salable coal production expanded from 10 million metric tons in fiscal 2014 to about 14 million metric tons in fiscal 2022, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Driven by its agreement to buy the Blackwater and Daunia metallurgical coal mines in Queensland from BHP and Mitsubishi, effective from the June quarter 2024, equity output is expected to grow to 36 million metric tons by fiscal 2028, split roughly 50/50 between thermal and coking coal.

No-moat Whitehaven Coal has agreed to buy the Daunia and Blackwater metallurgical coal mines from BHP and Mitsubishi for at least USD 3.2 billion (AUD 5 billion), one third of which is vendor-financed. Up to USD 900 million (AUD 1.4 billion) additional funding is payable if metallurgical coal prices stay elevated for three years after the closure of the deal, likely in the June 2024 quarter. BHP will retain exposure to the profit and cash flow from these mines until the deal closes.

We maintain our fair value estimate for no-moat BHP of AUD 41 per share as fiscal 2024 first-quarter sales met our expectations. BHP also reiterates fiscal 2024 guidance. BHP’s share of sales from its Western Australia iron ore operations, the main driver of its earnings, was 64 million metric tons, up modestly on the previous quarter and the same period last year. BHP’s WAIO business is on track to meet our unchanged forecast for fiscal 2024 of roughly 255 million metric tons, its share, around 3% higher than last year. An average price of USD 98 per metric ton was modestly lower than our forecast for fiscal 2024 of about USD 102, but futures prices are higher. We continue to forecast WAIO unit cash costs of around USD 18 to USD 19 per metric ton for fiscal 2024. BHP’s iron ore business accounts for about 60% of our forecast fiscal 2024 EBITDA of roughly USD 30 billion.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.