Want to invest in ASX coal stocks in 2024? Here’s what you need to know

Nick Spencer Nick Spencer, February 28, 2024

Investing in ASX coal stocks in 2024 is not at all vogue or woke, but could it be moneymaking? Not if you believe coal is on the way out in the medium term, but it could still be money-making in the short-term, and perhaps even beyond.

Look at how earlier this month, the Queensland Government granted environmental approval to Whitehaven Coal’s (ASX:WHC) Winchester South Project. With Winchester one of Australia’s largest proposed greenfield coal mining projects, it’ll be interesting see if it can place some much-needed upward pressure on the share price of Whitehaven, and perhaps other ASX Coal stocks.

 

Plenty to be excited about with Whitehaven

Winchester is quite the behemoth Whitehaven needs to get itself back on good footing. The project is a proposed new open-cut coking coal mine set to produce 17 million tonnes per annum of run-of-mine (ROM)unprocessed commodity to supply the global marketplace with.

In addition to the mine itself, Winchester will encompass a new coal processing plant and a rail loop to interlink all of its operations within Central Queensland.

Whitehaven also signed an agreement with both BHP and Mitsubishi Development to acquire 100% of the Daunia and Blackwater coal mines, another two healthy additions to the company’s Bowen Basin empire.

 

Active on the M&A front

An earnings accretive acquisition with plenty of synergies, both Blackwater and Daunia are projected to deliver around 40 million tonnes per annum in ROM production in total with pro-forma revenues of around 70% metallurgical coal and 30% thermal coal. Daunia and Blackwater play a large significance given global trends surrounding coal.

The future doesn’t look promising for thermal coal used for energy and electricity production, but demand for metallurgical coal will likely prove itself more resilient, given its importance to steel. As such, Whitehaven is making moves to place a greater emphasis on the former within its supply composition rather than the latter.

Whitehaven’s purchase is also testament to sustained plentiful activity on the M&A front, an inspiring signal to investors about the direction of its share price.

 

Not as liquid as we’d like

Let’s take a gander at Whitehaven’s figures, shall we? The most important one, its share price, currently sits at $6.97 AUD, down 36.4% from its all-time high of $10.96 in October 2022 when coal prices shot the roof globally. Now that coal supply has and continues to ease up, coal prices have normalised in conjunction with Whitehaven stock.

Its top line is looking reasonably healthy, with net income up 36.7% and its net profit margin up 10.9% in FY 23 on FY 22. Its sales growth however, decreased 89.23% in the same time frame, leading us to conclude that the only factor contributing to the company’s impressive net income and profit figures was coal’s sky-high price spurred by geopolitical instability. In other words, Whitehaven has been selling much less of a product whose value has exponentially increased.

The trend of its share price to be perfectly fair, isn’t one idiosyncratic to Whitehaven alone but has proved itself an industry wide phenomenon. We saw this with similar recent downturns realised by Whitehaven’s contemporaries South32 (ASX:S32), Coronado Global Resources (ASX:CRN), Bowen Coking Coal (ASX:BCB) and Stanmore Resources (ASX:SMR).

 

Dig deeper

However, if you ‘dig deeper’, you might notice some potential issues. One thing that we noticed is that the company’s positive accrual ratio of 0.26. Think of an accrual ratio as a company’s ‘non-free-cash-flow (NFC) profit ratio’. It measures how much of a company’s profits are in cold hard liquid cash compared to accrual earnings, revenue that has been earned but is yet to be received e.g., income outstanding, capital gains etc.

What’s our point here? The company is not making as much cold-hard cash as you might think, if you’re unfamiliar with the difference between cash and accural accounting. Also consider that the company produced FCF of $356m in FY23 while its profit was over $1bn.

We’re not suggesting illegal accounting tactics, it is perfectly legal to use accrual accounting, although some investors who may not know the difference may be misled.

 

What’s in store for coal – and ASX coal stocks in 2024?

As mentioned before, coal prices continue to normalise. They have had ample time to dip since their all-time peak of $438.13 USD/T ($667.31) in September 2022 amidst Russia’s invasion of Ukraine when Western trade embargoes cut off the world’s second largest supplier. So, don’t get too excited about the recent sky-high earnings and reported profits from many coal stocks given they were directly linked to a very transient supply bottleneck.

However, it’s also important to render a lot of the assertions surrounding coal as highly contentious, especially those that don’t see a future for the commodity at all. Let’s be mindful of a clear distinction we must make between both coking (metallurgical) and thermal coal.

In our view, it is fair to say that thermal coal will likely be phased out as nations across the world attempt to fulfill their pledges to deliver net zero emissions by 2050.

 

Artificially uncompetitive?

If Australia is any guide to the future policy prescriptions of other net zero allegiants, thermal coal will be made artificially uncompetitive by mandates against it and the subsidisation of alternate energy sources like renewables. However, it’s also important to recognise the low likelihood of metallurgical coal coal used for the production of steel being phased out anytime soon.

This is because alternative technologies used to produce steel are still incredibly primitive and unaffordable. Take green steel steel made from hydrogen for example. It will likely remain highly uncompetitive given the round-trip losses from converting sunshine or wind into hydrogen.

As Bowen Coking Coal’s Executive Chairman Nick Jorss has said “There are only two things that will stop so-called ‘green steel’, created from renewable hydrogen, displacing steel created using coking coal via a blast furnace: 1. Physics, 2. Economics.”

 

The China factor

There’s also the sobering reality that copious amounts of steel are needed for the transition to net zero in the form of wind turbines, solar panels, hydroelectric dams, wave energy devices, electric vehicles…the list goes on.

It is fair to say that aside from the fundamentals listed above, demand even for Australian coking coal has and will continue to face some tailwinds over the next few years spurred by macroeconomic and geopolitical factors.

Up until 2020, China implemented a ban on importing Australian coal after then Prime Minister Scott Morrison called for an investigation into the origins of COVID-19. After lifting the ban in 2023, Chinese demand hasn’t reached its pre-ban levels given an economic downturn in the Middle Kingdom.

Since China implemented its ban, Australia has been exporting most of its coal to Japan, India, South Korea and Taiwan, three of which have all pledged their commitments to net zero. Not to mention India’s industrial capacity is currently too feeble to rival China’s demand for our prized coking coal.

 

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