Blackwater and Daunia: Is this US$3.2bn deal BHP’s loss and Whitehaven’s gain? Or is it Caveat Emptor?

It has been 2 weeks since the transaction of the Daunia and Blackwater metallurgical coal mines between BHP (ASX:BHP) and Whitehaven Coal (ASX:WHC) has been completed. As the dust settles on these deals, we ask if this deal will pay off in the long-term.

Blackwater and Daunia

Blackwater and Daunia were two metallurgical coal mines that BHP owned 50% of. The former has 183Mt of Marketable Reserves and the Latter has 67Mt. BHP decided earlier this year to sell the Blackwater and Daunia projects to the highest bidder in a move to reduce its own debt, escape a forthcoming royalty increase by the state government and broaden its Investor Relations appeal by focusing more on battery metals including copper and nickel.

These projects were deemed to produce the world’s best coking coal for steel-making. And steel is a critical ingredient in industrial production. And so there were several bidders for Blackwater and Daunia including Yancoal, Coronado, BUMA and Whitehaven Coal. The latter company ended up being the highest bidder, buying not just BHP’s stake but its JV partner Mitsubishi too for US$3.2bn. US$2.1bn of this was upfront and the balance was in deferred tranches over the next three years (specifically on the first three anniversaries of the completion date).

Whitehaven is making a great pivot

Whitehaven CEO Paul Flynn told investors the deal would be a good one for his company, pivoting it towards metallurgical coal and putting it in a prime position to meet the growing demand for steel in Southeast Asia and India over the next 3 decades. ‘This is a highly attractive and materially earnings accretive acquisition, with considerable upside potential, which
we expect will deliver meaningful returns to our shareholders for many years to come,’ he declared. ‘It strengthens our portfolio of quality, long life assets in attractive locations providing geographic and operational diversification and scale benefits’.

How Whitehaven could afford it

The financial standing of Whitehaven was important in guaranteeing the achievement of the Blackwater and Daunia acquisitions. The company made its upfront payment executed in part through a $900 million bridge facility. By adhering to this capital allocation, its $2.45 billion in cash reserves as of September 30 remain unaltered. This measure also guarantees the protection of investor interests, thereby reducing the potential for dilution.

WHC’s decision to avoid aggressive debt financing reassures shareholders that the acquisition will not place an undue strain on the organization’s financial well-being. It is anticipated that the Blackwater and Daunia acquisitions will significantly increase earnings, thereby strengthening the company’s value proposition to its shareholders.

What investors and analysts expect

Whitehaven shares are down nearly 20% in 12 months but are flat in the last months. Evidently, the jury is still out so far as investors are concerned in regard to the acquisitions.

Analysts covering the company are somewhat more optimistic, with a median target price of $8.08, a premium of 10% to the current share price. Unfortunately for investors, revenue and earnings are set to go backwards substantially in FY24 as coal prices normalise. Consensus estimates call for $3.2bn in revenue (nearly half of the $6.1bn achieved in FY23) and 96c EPS (down from $3.03 a year ago). Thereafter, revenues are set to stagnate but earnings are set to go terminally backwards – reaching 50c by FY28.

The company’s P/E, at just 7.6x for FY24, may look compelling. After all, how many other companies on the ASX 200 can be bought for such low multiples? But then again, how many other energy and resources companies face such an uncertain outlook.

Whitehaven coal (ASX:WHC) share price chart, log scale (Source: TradingView)

Bottom line

The strategic purchase of the Daunia and Blackwater mines by Whitehaven Coal represents a turning point in the organization’s trajectory. The acquisition’s financial structuring exhibits prudence and a dedication to long-term sustainability. But, as with other coal stocks, Whitehaven’s outlook is uncertain with normalising coal prices in the short-term and the very place of coal in society being uncertain in the long-term.

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