An interview with Whitehaven Coal chief Paul Flynn

-- | 30/09/2020

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Lex Hall: Hi, I'm Lex Hall for Morningstar. Coal is one of Australia's key exports and Whitehaven Coal is a key producer and exporter. It's also in Morningstar's best ideas list. To discuss its fortunes and its future we're joined by managing director and CEO of Whitehaven Coal and by Morningstar analyst, Matt Hodge.

Hodgey, let's start with you. What is Whitehaven Coal and why is it on the best ideas list?

Mathew Hodge: Yeah. So, it's a coal company we've been covering it for a while, mainly produces thermal coal. It's got a few operations in New South Wales, relatively low-cost producer. Really, the coal industry is not making money at the moment and that's reflected in the share price as all our concerns about the outlook and we think that's discounted in the shares and we think the market is probably being a bit unrealistic in its outlook for the future for this business. So, it's trading at a steep discount to our fair value estimate. So, that's why we're here, and that's why we're talking about Whitehaven Coal.

Hall: All right. Paul, let's turn to you. Welcome to Morningstar. Thanks for coming along. Let's talk about the results first. It was a bit of a rough result and the shares have sold off since then, that was sort of late August, by about 30%. What's your take on how the market reacted to that?

Paul Flynn: Yeah, look, I think it was a tough day and the subsequent days have been tough trading also for the stock since that time. Look, I think there's – the concerns are more about the outlook really, not so much the numbers we printed. And although it is a large transition from the previous year 2019, which was a record on the higher level, and you feel like very quickly we're back at the low levels of a trough in a relatively short space of time. But I think it's the outlook what most people are focused with their concerns.

Hall: And it's been a year like no other, obviously?

Flynn: Well, there's been much, much to do in our business, I can tell you that. It's been – we've had ongoing droughts, which had been very severe and difficult for us, but we dealt with that without stopping production at all right through that drought, which was great. We actually had some flooding rains unfortunately in February, which is great to bring water supply back into the region for everybody's purposes. And then, of course, COVID on top of that, which is quite extraordinary. So, you can imagine what January – January seemed quite normal, although COVID was in the background. February started to ramp up. By the time March came around everybody was scrambling, you know, how do we keep our operations going and manage the risk of infection and so on in our operations and the community more generally.

Hall: And Mat, what about you? How did you see the market's reaction?

Hodge: Yeah, I think there's a lot of concern about the outlook. I mean, that's predominantly where the share price action is and with the coal price where it is, the company isn't going to make a lot of money this year, but I guess it's about what are you paying for and you are paying for a future earnings stream that's not just a single point in time. So, I guess, that's where we would disagree with the market. So, yes, there are some concerns. I think balance sheet is probably a primary one, and we'll talk about that. But this business was in worse shape in 2015, in my view, and it's got a more productive capacity and better ability to earn its way out of the debt position that it's in. So, I think given then – and they didn't need to raise capital in 2015, I think the odds favor upside from here.

Hall: Okay. Paul, on that, are you being conservative? Do you see any upside to other unit costs or volumes?

Flynn: Lex, I think the market reaction to our guidance has been less enthusiastic. And I think these are times when a little bit of conservatism is warranted. The outlook is uncertain. You'd be a ballsy bunch to put some sharp-edged guidance out. And so, we have taken a conservative position both on volumes and costs, and I think that's the right posture to have at this time because there are some moving pieces here and nobody's crystal ball is working exactly as they'd like it to at the moment.

Hall: That's right. All right. Well, let's turn to the balance sheet. Debt is pretty high right now, and that's unfortunately corresponding with the downturn in the coal price. How confident are you that Whitehaven Coal has sufficient funding to weather this unprecedented downturn?

Flynn: Yeah, look, it's fair to say that there's a lot of focus on the balance sheet capacity and our liquidity at the moment is just under the $500 million mark between our drawable capacity from our facility and cash in the bank. So, that's a lot better than the last cycles as Mat has referenced. So, we feel much more comfortable that we got, as you say, a bigger production base with which to earn our way out of this. And we're doing all the things that you would expect us to do at this point of time in terms of metering out the capital very parsimoniously, obviously screwing our cost base down as quickly and as hard as you can without doing any damage to the long term. All those things will see us through this period. And our view is that we don't need equity. And so, we're quite comfortable in that regard. The banks are very supportive.

Hall: Yeah, I wanted to ask you that. Have you had any lenders sort of step away from coal?

Flynn: Look, we refresh our facility every two years. We go through an amend extend process and we did that just in November past. So, add another two years onto our facility…

To hear the interview in full, register for the Morningstar Individual Investor Conference, to be held on 29-30 October.

This report appeared on 2022 Morningstar Australasia Pty Limited

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