Good Health

Australian coal miners are in some of the best financial health that Ord Minnett has seen, leading us to reiterate our positive view on Whitehaven Coal and South 32.


For Whitehaven, we reiterate our Accumulate recommendation and our target price of $3.50. The stock offers compelling valuation metrics, is one of the few miners delivering production growth, and has strong operational performance. Longer-term catalysts include the sell-down of Vickery, and the likelihood of dividends.


For South32, where coal contributes around 25% of FY18E earnings, we reiterate our Buy recommendation and target price of $3.40. The company’s Illawarra mine has suffered some operational setbacks, but we do not view the problems as structural and we remain positive on the stock. The stock has the best balance sheet in the sector – we expect FY17 net cash of US$1.6 billion – and capital management is firmly on the agenda.


We maintain our preference for Rio Tinto (RIO, Accumulate) over BHP Billiton (BHP, Hold), although coal is an immaterial contributor to the former’s future earnings.


On prices, hard coking coal is back to pre-Cyclone Debbie levels, given supply has bounced back, although Chinese metallurgical coal imports have almost doubled year-on-year to circa 80 million tonnes per annum, which remains supportive for prices. Meanwhile, China domestic thermal coal has drifted down on higher local production, but seaborne prices have been resilient, rising slightly despite Chinese imports falling year-on-year.

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