Whitehaven Coal is optimistic about its future and so are investors, but are they too optimistic?

Whitehaven Coal (ASX:WHC) shares are off their all time highs, but still exponentially ahead of their early 2020 lows. We can understand why it has re-rated, because coal prices have and Whitehaven has such high quality assets.

The company, traditionally a specialist in thermal coal, is doubling down and is making a big move into new territory – coking coal, which is essential for making steel.

This shift comes with their massive $6.4 billion purchase of BHP’s Blackwater and Daunia mines. It’s not just about growing bigger; it’s a smart change in direction. Whitehaven is mixing things up, aiming for a more varied and adaptable presence in the ever-changing coal market.

Looks like a good deal

Whitehaven Coal’s recent strategic shift has garnered a positive response from the financial sector. The company’s acquisition of the BHP mines was notably met with high interest from lenders, resulting in an oversubscription (in other words more money offered than needed). This level of oversubscription for the $1.1 billion loan underscores the confidence lenders have in Whitehaven’s new direction. Pleasingly, it did these deals taking on extra debt, reflecting the company’s solid financial planning and execution.

The deal for Whitehaven to buy the BHP mines has an interesting payment plan. It needs to pay $2.1 billion right away in April, and then they have three years to pay another $1.1 billion. This step-by-step approach is really helpful for Whitehaven. It lets the company manage its money better and keeps things running smoothly as it bring these new mines into their business. There’s also a twist in the fineprint: it might have to pay BHP an extra $900 million later, but that depends on how coal prices move. So, the final cost of the deal can change, depending on how the coal market goes.

Whitehaven coal investors are Happy!

Whitehaven Coal has faced its fair share of hurdles, like issues at its Narrabri mine and a big train derailment in New South Wales. Despite these setbacks, they’ve stayed on course with their production goals. The cool part?

Investors are really taking notice. They see how well Whitehaven is handling these challenges and are feeling good about where the company is headed. This confidence shows in the company’s share price, which jumped to $8.16, almost 5% since the beginning of this year itself. It’s a clear sign that the market is upbeat about Whitehaven’s strategic decisions and their ability to keep things moving forward.

But too happy?

We think investors are forgetting two things. First, coal prices are coming down. And second, the commodity is on the way out. Even sell-side analysts covering the company can see that.

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.

Then there’s the question of what will happen to these companies when coal is phased out, which could occur as early as the mid to late 2030s.

There are some warning signs. During the second quarter, Whitehaven Coal noticed a dip in its raw coal production. The company, eager to keep a positive face ramped up its sales game, selling more coal than before. Obviously, the lower coal prices go, the lower their margins. Investors don’t appear to be taking note just yet, but soon they might.

In Whitehaven’s defence, it is not as if it is the coal stock facing this dilemma and investors have their heads in the sand over it.

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