All eyes on the debt re-fi

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1 Coal Mining Australia Whitehaven Coal WHC AU / WHC.AX Current A$1.21 Market Cap Avg Daily Turnover Free Float Target A$1.84 US$1,8m US$3.64m 15.% Prev. Target A$2. A$1,241m A$4.29m 1,26 m shares Up/Downside 52.1% COMPANY NOTE Tom SARTOR T (61) E tom.sartor@morgans.com.au WHC15115 Vol m Price Close Relative to S&P/ASX 2 (RHS) Jan-14 Apr-14 Jul-14 Oct-14 Source: Bloomberg week share price range Current Morgans Analyst(s) Target 1.83 All eyes on the debt re-fi 2Q production was in line with our expectations. The planned debt re-financing, assisted by the rapid de-risking of Maules Creek, is key to alleviate market concerns around the balance sheet in 215. WHC remains a higher risk counter-cyclical Buy. Our valuation revises to A$1.84ps (from A$2.ps) which we equate to our target. Our base case assumes WHC will source alternative debt arrangements to alleviate balance sheet risks in FY15. Strong 1Q production 2Q Production and sales were in line with our expectations, with WHC drawing down coal inventories to smooth out the sales profile during the November longwall changover. Our FY15 sales forecasts are conservative in our view given that Maules is now ramping up ahead of schedule. Thanks to the declining AUD and lower costs, we calculate that WHC is holding its cash margins around steady in the high single digit A$ per tonne range. We forecast WHC to generate around A$4m in EBITDA at the upcoming 1H15 result which should neither overly thrill nor concern investors in itself. Catalysts to watch We look toward completion of the planned debt refinancing as a key trigger to ease investor concerns around the balance sheet in 215. Available terms for a possible refinancing into the US debt market Conviction appear to be prohibitive given the upheaval in credit markets servicing the US hydrocarbon industries. However we believe that domestic banking syndicates are not out of the picture and infer that a timely ramp-up (and de-risking) of Maules Creek will greatly assist WHC in securing debt refinance from mid 215. Investment view WHC is still 2 years away from generating meaningful profitability from its A$1.4bn market cap, but is successfully insulating itself from the worst of the coal price cycle. To Buy WHC here, investors must agree with our baseline assumptions that; 1) production and costs performance can be sustained (recently strong) ; 2) Maules Creek ramps-up on schedule (on track); and 3) coal pricing enjoys a modest recovery within the next 2-3 years (perhaps too tenuous for comfort). Our detailed sensitivities from Page 2 show that WHC is a Buy for higher risk, counter-cyclical investors. Financial Summary Jun-12A Jun-13A Jun-14A Jun-15F Jun-16F Revenue (A$m) ,266 Operating EBITDA (A$m) (11.1) Net Profit (A$m) (82.16) (38.39) (61.47) Normalised EPS (A$).14 (.8) (.4) (.6).3 Normalised EPS Growth (5%) (157%) (54%) 6% NA FD Normalised P/E (x) 8.64 NA NA NA 47.4 DPS (A$) Dividend Yield 43.8%.%.%.%.% EV/EBITDA (x) 8.16 NA P/FCFE (x) 2.16 NA NA Net Gearing (1.9%) 14.3% 21.4% 31.% 27.5% P/BV (x) ROE 6.52% (2.47%) (1.19%) (1.94%).85% % Change In Normalised EPS Estimates (26.5%) (3.1%) Normalised EPS/consensus EPS (x) SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT.

2 We show that WHC s earnings, balance sheet and NPV leverage is uncomfortably high. Projected net debt and WHC s ability to service it is the crux of the issue for potential WHC investors in our view. Chart 1: US$ Thermal coal price scenarios Balance sheet and Valuation sensitivities We stress test WHC s earnings, balance sheet and NPV under 3 coal price scenarios. Our base case forecasts apply steady improvements to FY15-17 coal prices but still sees WHC failing its Dec-15 covenant (ICR > 3.5 times). In this scenario, WHC s net debt and gearing peaks at around A$1bn and 3% respectively (D/E) in FY15. The Interest Cover Ratio improves strongly from 1.4 times in late 215 to ~5 times in FY17 which supports the idea that providers of longer dated debt are seeing solid incentives to lend to WHC. However, we show that earnings and balance sheet leverage to both stronger and weaker coal markets is high. Each US$1/t movement in thermal coal prices in FY15-16 varies NPAT by A$7-1m. In our a Bear case coal price scenario, we show that WHC would only cover its Interest liabilities by 1.6 times in FY16. This is cutting it fine for the comfort of equity investors and places higher pressure on production and cost delivery. Similarly, we show that the variance in NPV from Bearish to Bullish price scenarios ranges from A$ per share, explaining how WHC is managing to polarise short versus long term investors. Chart 2: US$ LV PCI coal price scenarios Base - 3 yr Recovery Bull Bear Base - 3 yr Recovery Bull Bear Chart 3: NPAT scenarios Chart 4: Total Net cashflow scenarios Base Bull Bear Base Bull Bear

3 We think the market underestimates WHC s alternative funding options should the bear case pricing scenario play out. In this scenario, we are comfortable that WHC has a number of options before it need consider new dilutive equity. These include; 1) pursuit of replacement US debt on more lenient terms, and 2) sourcing additional JV funds from a sell-down at Vickery. Chart 5: Projected EBITDA / Net interest debt coverage vs coal price scenarios December 15 covenant test date x ICR Covenant Base Bull Bear 5.9 The latter may even be a preferred scenario over our base case given that strategic investors have a long track record of valuing long life coal assets well above our own estimates and the market. Chart 6: Base case cashflow assumptions versus net debt NOPCF Dividends Capex Net debt Chart 7: NPV sensitivities to coal price assumptions Bear Base Bull

4 Changes to earnings and NPV We have again lowered our coal price assumptions following market movements, offset but a downward adjustment to our near term AUD forecasts. Our valuation revises to A$1.84ps (from A$2.ps) which we now equate to our target price. We believe that WHC will source alternative debt arrangements, and/or JV funding to alleviate balance sheet risks in FY15. Table 1: Changes to earnings and NPV. 214A 215F 216F 217F NPV Earnings revisions NPAT normalised previous NPAT normalised revised Change Change (%) 23.2% -2.3% -33.2% -8.% Market assumptions 214A 215F 216F 217F 218F AUD Exchange Rate Thermal Coal (US$/t) LV PCI (US$/t) Valuation and risks We set our target price in-line with our DCF based valuation. Fundamental risks to our target price relate to the ramp-up of Narrabri, the efficient construction of Maules Creek, the performance of port and rail infrastructure, fluctuations in coal pricing and currency and the ability to control capital and operating costs. Company overview Whitehaven is an established coal producer and early mover the in the emerging Gunnedah basin in NSW. The company currently produces thermal, PCI and semi-soft coals from a portfolio of open cut mines with a capacity of around 9Mtpa on a 1% managed basis. The company is ramping up a high-capacity longwall at Narrabri and will move aim to construct its flagship Maules Creek asset over FY13-14, taking productive capacity toward 2Mtpa.

5 Figure 1: WHC financial summary Year to 3 Jun (A$m) AIFRS AIFRS AIFRS AIFRS AIFRS Price target (A$) 1.84 Income statement 213A 214A 215F 216F 217F Valuation (A$) $ 1.84 Divisional sales Total revenues Valuation summary A$m A$ps DCF Inputs EBITDA Narrabri Rf 5.25% Depreciation & amortisation Gunnedah Ops Rm-Rf 6.% EBIT Werris Creek Beta.99 Net interest expense Maules Creek CAPM (Rf+B 11.2% Pre-tax profit Vickery Tax rate (t) 3.% Tax expense Coal exploration 6..6 WACC 1.% Abnormals - pre-tax..... Total operations Shares NPAT Net cash (FY15F) Abnormals - post-tax..... Corporate Minorities..... Total valuation Reported NPAT Growth ratios 213A 214A 215F 216F 217F Coal sales (Mt) - 1% 214A 215F 216F 217F Sales growth 21% 13% 48% 19% Thermal coal sales Operating cost growth 7% 12% 31% 1% Metallurgical coal sales EBIT growth -94% 55% #N/A 8% Total Sales (Mt) NPAT growth -53% 56% #N/A 273% Coal purchases Cash flow statement 213A 214A 215F 216F 217F EBITDA Key assumptions 214A 215F 216F 217F Cash flow from operations USD / AUD exchange rate Capex Export thermal coal (US$/t) Disposals Low Volatile PCI (US$/t) Acquisitions -155 Semi-soft coking coal (US$/t) Cash flow from investing Incr/(decr) in equity Per share data 214A 215F 216F 217F Incr/(decr) in debt No. shares Ordinary dividend paid -29 EPS (normalised) (cps) Other financing cash flow DPS (cps).... Cash flow from financing Dividend yield (%) % % % % Inc/(decr) cash Equity FCF Balance sheet 213A 214A 215F 216F 217F Operating performance 214A 215F 216F 217F Cash & deposits Normalised EPS growth -54% 56% #N/A 273% Intangible assets EBITDA margin (%) 1% 11% 22% 27% Fixed assets EBIT margin (%) -1% -1% 11% 16% Other assets Net profit margin (%) -5% -7% 2% 7% Total assets Return on net assets (%) % % 2% 4% Interest bearing debt Net debt / (cash) (A$m) Total liabilities Net debt/equity (%) 21% 31% 27% 21% Share capital Net interest/ebit cover (x) Other reserves ROIC (%) % % 2% 4% Retained earnings Total equity Comparable multiples (x) 215F 216F 217F Minority interest Whitehaven Coal EV/EBITDA Total shareholders' equity Year to 3 Jun PE Total liabilities & SE New Hope Corporation EV/EBITDA NPAT Sensitivities NPV 215F 216F 217F Year to 31 Jul PE Export thermal coal (+US$1/t) Metallurgical coal (+US$1/t) USD : AUD (-1c) Valuation sensitivity to discount rate (A$/share) Total revenues and EBIT (A$m) WACC.% 5.% 1.% 12.5% 15.% A 214A 215F 216F 217F Total revenues EBIT

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