Fantastical Forecasts by Whitehaven and Aurizon

We’ve seen two instances over the past few days of major Australian companies putting out forecasts driven more by hope than evidence.

First comes Whitehaven Coal talking up the prospects for a revival in seaborne coal growth later this decade, a vision rooted in something other than the hard realities that are driving the current structural decline in oversupplied global markets.

Some of the Whitehaven nitty-gritty:

• The company reported a net loss of A$343 million in 2014-15. Significant cost reductions were achieved, with Whitehaven’s gross cash operating cost of production at A$61/t excluding royalties, down 12% on the A$69/t it recorded in 2013-14. This improvement is what’s keeping Whitehaven afloat amid collapsing coal prices and excessive financial leverage).
• Net debt rose by $250 million to a record high $936 million, adding new financial pressure to an already financially strapped company. While Whitehaven is better placed than most global coal miners in terms of it’s position on the cost curve—and the falling A$/US$ exchange is a cushion indeed—this is cold solace to investors, given the sector collapse so evident worldwide.
• Whitehaven’s reported gross cash flow per tonne of A$13 is figured before deducting A$10/t of depreciation and $5/t of interest expense, hence on a reported pretax basis Whitehaven is marginally losing money with each tonne of coal mined.

Granted, the company manages to still collect kudos here and there. In a piece last week in the Australian Financial Review (“The Great Whitehaven Hope”), columnist Matthew Stevens waxes lyrical about how great a job the company’s CEO is doing. Whitehaven stock hit a new low this week of $1 per share, and is down 30 percent in 2015, and down more than 80 percent in the last five years. Great job? Well it’s a significant outperformance relative to Peabody Energy, down 85 percent year to date and 98 percent over the last five years.

If you’re rating coal companies, fine, Whitehaven is beating most global peers, which is a low bar and whose fellow travelers includes the New Zealand- government-owned Solid Energy, which went into receivership this week, and the three major U.S. coal miners—Walter Energy, Alpha Natural Resources and Patriot Coal—that have filed for bankruptcy in the first quarter of this year.

IN THE MEANTIME, AURIZON, THE QUEENSLAND-BASED RAIL FREIGHT COMPANY THAT IS HEAVILY RELIANT ON COAL shipments, has also put out a fresh set of numbers, these showing gross revenue having increased by 1 percent in 2014-2015.

Aurizon sees a further decline in 2015-2016, a year in which the company’s performance will hinge on productivity gains and new labor agreements and one in which it forecasts its coal volumes will be flat at 210-220Mt versus 211Mt in 2014-15. Total Queensland coal-rail movements by all operators were 225.7Mt in 2014-15, up 5 percent from 2013-14, and Aurizon’s Queensland coal volumes were 168Mt in 2014-15, down 1 percent year over year (which means Aurizon lost market share).

The company’s executives continue to comment, notably, on coal-mine development in the Galilee Basin, talking specifically about the proposed joint venture with GVK as “a longer term growth option for Aurizon, with development likely towards the end of the decade.” The company says execution of documents won’t happen now until sometime next year “due to GVK debt restructuring,” a point that is newsworthy, given that GVK (an Indian conglomerate) has not actually announced any debt restructuring to the Indian Stock Exchange or to its investors. This reference, however, most likely relates to the minor issue of the outstanding US$560 million GVK was unable to pay to Hancock Prospecting, due in September 2014. It is not obvious who Aurizon executives think they are kidding by talking about Hancock as a viable project, particularly given how the company wrote off $15 million in costs associated with the proposal in 2015.

Aurizon, too, continues to cite what IEEFA would consider excessively optimistic Wood Mackenzie forecasts for 3 percent compound annual growth rate) for global seaborne thermal coal demand over the next 10 years. It’s a bullish forecast that relies entirely on Indian imports of thermal coal doubling by 2025, an outlook that is inconsistent with Indian government projections for thermal coal imports ceasing in the next few years.It also flies in the face of new evidence of a 9 percent decline in India’s coal imports in July 2015, after a stalling of growth in the preceeding quarter. This is a massive turnaround from the 20-30 percent annual growth reported in coal imports into India during the previous five years.

The Wood MacKenzie forecast also relies, unfortunately, on the assumption that China will import more thermal coal in 2025 than it did in its record import year of 2013-14, another heroically bullish forecast, especially in light of the 34 percent decline in China’s coal imports in the last seven months.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia.