I have been following Infant Turd Powder (@zhanginu) on Twitter since I discovered #CoalTwitter. ITP (currently, I believe he’s “Infant Turd Bull”) has excellent knowledge of coal — especially Australian companies — and has offered to come on a future High-Energy Tuesday to discuss New Hope.
Before that appearance, ITP thought it best to give a quick overview of the company and the thesis, which is presented below.
Inspired by the magnificent Whitehaven Coal (http://WHC.AX) Twitter Space appearance by the Koala of Yellow Life Capital, I thought it prudent to write about another well-known Aussie coal company, New Hope Coal ($NHC on the ASX, $NHPEF on the U.S. OTC).
I would not dare introduce New Hope to international audiences if there wasn’t something special here. A further disclaimer that NHC represents my second largest position behind WHC.
So what does NHC have that could allow it to compare to the now ubiquitous Whitehaven? The answer is lies in New Acland, a wholly-owned coal mine 100 miles west of Brisbane in Queensland.
New Acland had recently reached the end of its mining life, despite a 15-year herculean effort to seek an approval for a life extension. The brownfield extension, named New Acland stage 3 (NA3), would only need a capital expenditure budget of less than $500M AUD to restart, with first coal possibly by end of June 2023. Most of the capex relates to relocating a rail spur that doesn’t need to be built straight away.
If approved, the mine provides 5M tonnes per annum of thermal coal of Newcastle quality for 15 years. And despite being in located in Queensland, a loophole in the law means 70% of the royalties actually belong to New Hope rather than to the Government.
The operating costs for New Acland are comparable to Bengalla (NHC’s 8 Million Tonnes Per Annum [MTPA] flagship mine in NSW), with lower strip ratio and similar rail costs. Both mines would be considered Tier-1 assets with lowest quartile costs. Importantly, most brokers have NOT factored in NA3 into their valuations.
When will it be approved? After 15 years of court processes and delays, things finally got moving this year. The Queensland Government has recently approved the mining lease and the environmental authority.
The final step in the process is a water licence from the Queensland water minister. My belief is that the honourable minister Glenn Butcher, a blue-collared man with 20-years’ industry experience will likely provide the final sign-off soon.
How does NHC compare to its big brother WHC? At $5.50 AUD per share, I estimate that NHC trades on a 68% FCF yield at spot. This is slightly lower than the 74% FCF yield you would currently receive from WHC. However, that is before NA3.
If we include NA3, and assume its up and running, NHC starts to trade at a ridiculous ~114% FCF yield.
Another way to look at this:
• WHC produces 14.5 MTPA and has a market cap of ~$7.8B AUD.
• NHC could produce 13 MTPA and only has a market cap of ~A$5.1bn.
Of course, there’s always the risk that NA3 approvals are delayed or something goes wrong during the start-up phase of the new mine. We would also need to consider that WHC will be printing a lot more $$ than NHC over the next 9 months while NA3 is being built.
What else do I get with NHC?
NHC has a lot of other bits of assets that the market doesn’t really care about.
- For starters, NHC is sitting on 10,000 hectares of rural land which if re-zoned is rumoured to be worth several hundred million bucks. Then throw in 2,000 head of cattle that graze on the land.
- Then there’s the bulk export terminal in Brisbane with a daily loading capacity of 48,000 tonnes per day.
- There’s also a wholly-owned oil and gas explorer / developer
- A 20% interest in an underground met coal mine in development phase and royalties / loans to a fellow coal miner.
The company is in good hands: New Hope is effectively controlled by Washington H Soul Pattison, an ASX-listed investment company (WHSP). WHSP is often seen as Australia’s Berkshire-Hathaway. Total shareholder returns from WHSP is ~13% per annum over 20 years. These guys are among Australia’s most-respected capital allocators.
In 2008, New Hope sold the New Saraj coal project to BHP for $2.45B AUD. A fair chunk of that capital was given back to shareholders via special dividends that year. Management knows how to buy low and sell high.
Speaking of special dividends, New Hope’s preferred method of capital returns is to give cash back to shareholders rather than buyback its own shares. To avoid double taxation, the Australian tax system allows dividends a mechanism called “franking” so that Australian shareholders could receive tax advantages in the form of franking credits and in some cases, boomers can receive cash back if they hold shares in a superannuation fund.
This is a double-edged sword for NHC. On one hand, the boomers that own the stock don’t want to sell. On the other, international investors don’t enjoy being disadvantaged and traditionally prefer WHC. That’s not to say that NHC would need international capital on its register. The register is already fairly tight with WHSP’s controlling stake and a faithful legion of boomers who can’t wait till their next fully franked sugar hit.
-- ITP
Cheers. As you know, the final licence was recently granted. I live in this country and I'm completely flummoxed (that's being polite) by the red tape that needs to be overcome in order to get a mine off the ground. Glencore's recent Hunter mine expansion application was blocked on "cultural" grounds.