Black gold: Rising coal prices lead to increase in fair value estimates
Higher royalties are more than offset by improved near-term thermal and metallurgical coal prices and weaker exchange rates.
We raise our fair value estimates for no-moat-rated coal miners Glencore (LON:GLEN), New Hope (ASX:NHC), and Whitehaven (ASX:WHC) after updating our assumed near-term thermal and metallurgical coal prices. Our updated fair value estimates also incorporate our latest foreign exchange rate assumptions along with higher coal royalty rates imposed by the New South Wales government. New South Wales will scrap the cap on domestic thermal coal prices effective 1 July 2024 and replace it with a 2.6% increase in state coal royalties from that date.
However, higher royalties are more than offset by improved near-term thermal and metallurgical coal prices and weaker exchange rates versus the US$. Our fair value estimate for Glencore increases by 4% to £530 per share and WHC by 3% to $9.80 per share. Our NHC forecasts already incorporated the new royalty assumptions; however, we increase our fair value estimate by 3% to $6.30 per share given higher near-term thermal coal prices and the lower A$/US$ exchange rate.
Exhibit 1: Thermal coal prices (US$ per metric tonne)
Source: Morningstar, Morningstar estimates
Thermal coal prices remain elevated compared with historical values and cost support as the Russia-Ukraine war reinforces the importance of energy security. We now assume thermal coal averages around US$175 per tonne from 2023 to 2025, up from about US$165, based on the futures curve. We also raised our mid-cycle thermal coal price to US$100 from our prior estimate of roughly US$90 per tonne.
This is based on our updated estimate of the marginal cost of production given elevated mining industry inflation is pushing up and steepening cost curves. It also incorporates likely impacts on supply from both higher New South Wales royalty rates and due to environmental, social, and governance (ESG) concerns, led by governments’ aspirations of net zero emissions. Difficulties in obtaining regulatory approval to build new mines or expand existing ones also support long-term prices in our view.
We also raised our assumed average metallurgical coal prices from 2023 to 2025 to around US$285 per tonne, up from about US$250 prior, based on the latest futures curve. However, we maintain our assumed mid-cycle price of about US$150 from 2027, which is also based on our estimate of the marginal cost of production. We think green steelmaking technologies are unlikely to be economic for the foreseeable future, with metallurgical coal likely to remain in demand for blast furnace/blast oxygen method steelmaking for many years.
On the supply side, ESG investors lump metallurgical coal in with its dirtier cousin thermal coal, with none of the major miners keen to buck ESG concerns and expand their metallurgical coal production. Queensland’s royalty hike is also likely to increase the price required to incentivise new supply, also supporting long-term prices in our view.
Our updated fair value estimates for NHC and WHC also reflect a weaker A$/US$ exchange rate while our higher Glencore valuation reflects a weaker £/US$ exchange rate. The decline in these currencies versus the US$ provides a modest tailwind to these companies’ fair value estimates.
