As shown in the chart below, Whitehaven Coal<\/strong> started making significant returns to shareholders in late 2017, by paying dividends. For FY 2018, the Company paid an interim dividend of A$0.13, a final dividend of A$0.14, and a special dividend of A$0.13, for a total dividend return of A$0.40. The share price traded at a high of A$5.89 in 2018, providing a yield, no worse than, 6.8% for that year.<\/p>\n\n\n\n Covid lockdowns understandably led to a curtailment of dividends through the later half of 2020 and into 2021, but then, as demand returned after lockdowns started to ease, coal prices took off and Whitehaven<\/strong> had another excess cash problem.<\/p>\n\n\n\n In early 2022, Indonesia’s ban of coal exports and Russia’s invasion of Ukraine sent coal prices higher still. Whitehaven<\/strong> responded by paying dividends again but it was generating so much cash this time that it decided to begin a share buy back program. In October 2022, the Company announced that between March 2022 and October 2022 it had bought back 103.3million shares at an average price of A$5.69, representing 10% of the share capital. On 26 October 2022, Whitehaven sought shareholder approval at their AGM to buy back 240 million shares (about 25% of the share capital) over the following 12 months.This time they really meant business. In FY 2023 (12 months to 30 June 2023), Whitehaven returned A$1.6billion to shareholders through dividends and buybacks.<\/p>\n\n\n\n The preferred use for excess cash often causes heated debate. And I’m going to throw my 2 pence worth into the hat too. I usually prefer resource companies to pay dividends but it ultimately depends on the situation.<\/em> It’s not that I don’t like share buy backs, it just depends on the best use of the cash given the options available. In addition, resource companies have a tendency<\/em> to act pro-cyclically rather than counter-cyclically. Ie. They buy back shares when the commodity price is high. But this is a big debate for another article perhaps.<\/p>\n\n\n\n This is how Warren Buffett described share buy backs in Berkshire Hathaway’s 2022 Annual letter. As background, Berkshire Hathaway had repurchased 1.2% of Berkshire Hathaway shares that year:<\/p>\n\n\n\n Ultimately, as Buffett points out, it’s down to price.<\/p>\n\n\n\n For Whitehaven Coal, the decision about the best use for the excess cash became more involved when an opportunity to buy some major coal assets from BHP<\/strong> presented itself. Let’s take a closer look at the deal.<\/p>\n\n\n\n On Tuesday 2nd April 2024, Whitehaven Coal<\/strong> is set to complete the acquisition of 100% of the Blackwater and Daunia metallurgical coal mines<\/strong> and all of the shares in South Blackwater Coal Pty from BHP Mitsubishi Alliance<\/strong> (“BMA”). The deal, initially announced 18 October 2023, involves the aggregate cash consideration of $3.2billion cash<\/strong> comprising:<\/p>\n\n\n\n In addition, contingent payments<\/strong> of up to US$900million<\/strong>; comprised of three annual payments, dependent on realised pricing exceeding agreed thresholds, with annual contingent payments capped at US$350million.<\/p>\n\n\n\n Stamp duty and transaction costs<\/strong> are estimated at a total of US$276million<\/strong>. (According to page 10 of Whitehaven’s Transaction Investor Presentation, dated 18 October 2023).<\/p>\n\n\n\n The acquisition is set to make Whitehaven a coal producing powerhouse on the east coast of Australia, with assets close to ports in both Queensland and New South Wales. Notice how the Daunia mine is conveniently located next to Whitehaven’s Winchester South (metallurgical & thermal coal) project, scheduled to begin construction in 2026. <\/p>\n\n\n\n The deal announcement brought a halt to the second buy back. An announcement on 26 October 2023, stated that 92,779,025 shares had been bought back at a consideration of AUD723,569,883 implying a share price paid of A$7.79 per share.<\/p>\n\n\n\n Now that we know the price tag for the coal assets, let’s look at what Whitehaven shareholders will get for their money. We’ll begin by looking at a 10 year history of coal production for the two key mines; Blackwater<\/strong> and Daunia<\/strong>. <\/p>\n\n\n\n Page 6 of the Investor Presentation on the Transaction (18 October 2023) suggests that ‘Based on FY24-FY28 expected production averages’ that Blackwater will produce approximately 12.4Mt of saleable production per annum and Daunia will produce 4.9Mt per annum. <\/p>\n\n\n\n To be on the safe side, I’m going to estimate that Blackwater produces 10Mt of saleable production in the first 12 months of ownership and that Daunia will produce a mere 3Mt.<\/p>\n\n\n\n Next let’s look at the all important<\/em> commodity prices. Whitehaven have provided the following slide in their deck on coal prices. The slide shows the two main price indexes that we’re going to need; Platts Premium Low Volatility (PLV) Hard Coking Coal (HCC)<\/strong> and Platts Low Vol (LV) Premium Coal for Injection (PCI)<\/strong>. Notice the price spike in mid 2021 through into 2022 that led to over A$1.0billion being returned to shareholder in FY 2022.<\/p>\n\n\n\n In June 2022, the Queensland state budget was presented by Treasurer Cameron Dick. He declared the existing royalty rate ‘not fit for purpose’ and announced an increased royalty burden on coal production. The revised tiered royalty rate would be calculated as follows; <\/p>\n\n\n\n I’ll refrain from comments about preferring to keep things simple<\/em> and plug some numbers into a spreadsheet. In the example below, if a coal producer in Queensland sells their coal product for an average price of A$378\/T then the state of Queensland will receive A$80.7 in royalty.<\/p>\n\n\n\n It was this increased royalty, ‘without consultation’, that was the final straw for BHP<\/strong>. In their Interim report for the 6 months to 31 December 2022 they commented that Queensland had “become less conducive to long-life capital investment as a result of changes to the royalty regime.<\/em>“. And eventually announced the deal with Whitehaven on 18 October 2023. <\/p>\n\n\n\n While BHP appeared unimpressed by the royalty increase. In reality the sale of Blackwater and Daunia was the continuation of BHP offloading its intermediate-quality coking coal mining assets while retaining those that produce higher-quality coking coal. The Daunia and Blackwater sale followed BHP\u2019s earlier divestment in 2021, when it sold its 80% share in the South Walker Creek and Poitrel metallurgical coal mines to Stanmore Resources<\/strong> for about A$1.82billion.<\/p>\n\n\n\n Page 30 of Whitehaven’s 18 October 2023 Transaction Presentation provides some very useful information for the Blackwater<\/strong> mine, including product mix, price realisation versus coal indices, FOB (Free On Board) cash costs and sustaining capex forecasts. <\/p>\n\n\n\n With the data we’ve looked at so far, we can start performing some back of the envelope calculations. Let’s start with the Blackwater mine. I’m going to work in US$, so that we can compare to the deal price which we’ve discussed in US$.<\/p>\n\n\n\n For simplicity, I’ve ignored thermal coal production at Blackwater, which according to BHP’s Reserve statement is approximately 2% of total production. <\/p>\n\n\n\n For simplicity, I’ve ignored thermal coal production at Daunia, which according to BHP’s Reserve statement is approximately 8% of total production.<\/p>\n\n\n\n For the Blackwater and Daunia mines, I use conservative saleable production schedules (Blackwater: 10Mt, Daunia: 3Mt) using Whitehaven’s FOB cash cost per tonne projection FY24-FY28 AVERAGE (Blackwater: A$119\/T or US$98\/T, Daunia: A$122\/T or US$79\/T). I’m assuming that these FOB cash cost projections (taken from Whitehaven’s October 2023 presentation) do NOT include royalty payments, which is why I deduct royalties from the gross revenue line. I also assume Benchmark pricing of PLV HCC FOB Australia: US$300\/T and PLV PCI FOB Australia US$177\/T. The Blackwater and Daunia mines are expected to produce in the first 12 months of ownership approximately US$1.3billion in operating cash flow AFTER sustaining capex requirements<\/strong>.<\/p>\n\n\n\n To fully think this through, we need to consider what cash will be left after paying the tax man. This time, the federal tax man<\/strong> not the state tax man. I’m going to make a guesstimate that there’s a 12 month depreciation charge available against these two assets equivalent to the sustaining capital invested in 2024. ie. US$180.7m (US$109.2m + US$71.5m). I’m not assuming that this sustaining capex is all depreciated immediately but assuming that there is some capital investment that has not been fully depreciated on acquisition.<\/p>\n\n\n\n Whitehaven announced (18 December 2023) that they’ve taken out a US$1.1billion 5 year credit facility to help with the deal. I’m going to assume an interest deduction of 10% of US$1.1billion is available ie US$110million.<\/p>\n\n\n\n I’m then going to assume a Corporate tax rate of 30%. <\/p>\n\n\n\n Corporate Tax due for the first 12 months of ownership would be approximately: (US$1.3bln – US$110mln) * 30% = US$357million.<\/p>\n\n\n\n I may be wrong on these guesstimates for Interest, Depreciation and Tax. Please feel free to let me know in the comments section at the end of this article.<\/p>\n\n\n\n With cash payments for interest and tax (depreciation of course being non-cash), we can calculate an after-tax cash flow for the first 12 months of ownership for Blackwater and Daunia alone (not considering Whitehaven’s existing assets) of US$833million<\/strong>, which would go a long way to paying down the credit facility.<\/p>\n\n\n\n At this annual rate of after-tax cash generation, the assets would pay off the consideration in approximately 4 years. (Consideration: US$3.5billion (US$3.2billion + US$0.28bln (stamp + transaction costs) \/ US$833m = approximately 4.2 years).<\/p>\n\n\n\n But how long will these assets last for? Let’s take a look at the Reserve & Resource statement as set out in BHP’s FY 2023 Annual Report.<\/p>\n\n\n\n I’ve summarised the key numbers below:<\/p>\n\n\n\n Notice how Blackwater has a Reserve life of 14 years<\/strong> but an additional 1.6billion tonnes of Resources. Daunia has a Reserve life of 16 years<\/strong> with an additional 115million tonnes of Resource.<\/p>\n\n\n\n According to slide 17 of the Acquisition Investor Presentation (18 October 2023), Whitehaven note that ‘Blackwater mine life could extend beyond 50 years<\/strong>‘ (based on conceptual mine planning). This seems credible given the size of the Resource base. And that ‘Daunia production is expected to FY 40<\/strong>‘. Note: their comment on Daunia more or less matches BHP’s Reserve statement of 16 years Reserve life.<\/p>\n\n\n\n I’ve included the pages from BHP’s FY 2023 annual report, pages 228 – 231, so that you can inspect the full Reserve and Resource statement for Blackwater & Daunia yourself.<\/p>\n\n\n\n![\"Dividend](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/WHC-Divs-1024x578.jpg\")
![\"Buffet](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/Berkshire-1024x161.jpg\")
The Deal<\/h2>\n\n\n\n
\n
![\"\"](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/WHCInvestorPresentation-1024x552.jpg\")
Blackwater & Daunia: Historic Production – 10 years<\/h2>\n\n\n\n
![\"Coal](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/BlackwaterDauniaProduction-1024x574.jpg\")
Coal Prices<\/h2>\n\n\n\n
![\"Met](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/WHCMETcoalprices17Feb24InterimResultsPresentation-1024x545.jpg\")
Queensland Coal Royalty Rates<\/h2>\n\n\n\n
![\"Coal](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/QLDroyalty-596x1024.jpg\")
![\"Coal](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/04\/CoalRoyaltyQLD378.jpg\")
Blackwater: Benchmarks, Cash Costs & Capex<\/h2>\n\n\n\n
![\"Whitehaven](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/WHCInvestorPresentationP30-1024x554.jpg\")
Blackwater: Back of Envelope Calculation<\/h2>\n\n\n\n
![\"Blackwater](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/04\/BlackwaterBackofEnvelopeMM-1024x562.jpg\")
Daunia: Benchmarks, Cash Costs & Capex<\/h2>\n\n\n\n
![\"Daunia](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/DauniaPresso-1024x562.jpg\")
Daunia: Back of Envelope Calculation<\/h2>\n\n\n\n
![\"Daunia](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/04\/DauniaBackofEnvelopeMM-1024x582.jpg\")
Other Costs: Interest, Depreciation & Tax<\/h2>\n\n\n\n
Blackwater & Daunia: Reserves + Resources <\/h2>\n\n\n\n
![\"Blackwater](\"https:\/\/metallic.media\/wp-content\/uploads\/2024\/03\/WHCCoalResResourceBHP-1024x349.jpg\")