All eyes on the debt re-fi



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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) 7 3334 453 E tom.sartor@morgans.com.au WHC15115 Vol m 2.2 2. 1.8 1.6 1.4 1.2 1. 2 15 1 5 Price Close Relative to S&P/ASX 2 (RHS) Jan-14 Apr-14 Jul-14 Oct-14 Source: Bloomberg 17. 98.7 9.3 82. 73.7 65.3 57. 52-week share price range 1.21 1.11 2. 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) 618 622 755 82 1,266 Operating EBITDA (A$m) 149.2 (11.1) 75.3 88.6 274.7 Net Profit (A$m) 62.54 (82.16) (38.39) (61.47) 26.82 Normalised EPS (A$).14 (.8) (.4) (.6).3 Normalised EPS Growth (5%) (157%) (54%) 6% NA FD Normalised P/E (x) 8.64 NA NA NA 47.4 DPS (A$).53.... Dividend Yield 43.8%.%.%.%.% EV/EBITDA (x) 8.16 NA 26.2 25.38 7.82 P/FCFE (x) 2.16 NA 73.31 NA 12.49 Net Gearing (1.9%) 14.3% 21.4% 31.% 27.5% P/BV (x).37.38.4.4.4 ROE 6.52% (2.47%) (1.19%) (1.94%).85% % Change In Normalised EPS Estimates (26.5%) (3.1%) Normalised EPS/consensus EPS (x) 1.18.78 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.

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$1.25-2.84 per share, explaining how WHC is managing to polarise short versus long term investors. Chart 2: US$ LV PCI coal price scenarios 15 16 95 85 75 65 65 63 66 74 8 85 85 15 14 13 12 11 1 9 8 92 9 1 115 128 135 14 55 214 215 216 217 218 219 22 7 214 215 216 217 218 219 22 Base - 3 yr Recovery Bull Bear Base - 3 yr Recovery Bull Bear Chart 3: NPAT scenarios Chart 4: Total Net cashflow scenarios 25 2 15 1 5-5 -1-15 1.9 27. -38.4-59.9 214 215 216 217 4 35 3 25 2 15 1 5-5 -1 257.8 167.6 76.2-7.3-41. 214 215 216 217 218 Base Bull Bear Base Bull Bear

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 1 9 8 7 6 5 4 3 2 1 1.4 1.2 December 15 covenant test date 2.8 214 215 216 217 218 4. 3.5x 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 12 966 1 865 8 685 672 6 472 39 4 2-2 -4-6 213 214 215 216 217 218 NOPCF Dividends Capex Net debt Chart 7: NPV sensitivities to coal price assumptions 3. 2.84 2.5 2. 1.84 1.5 1.25 1..5. Bear Base Bull

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$2.ps) which we now equate to our target price. We believe that WHC will source alternative debt arrangements, and/or JV funding to alleviate balance sheet risks in FY15. Table 1: Changes to earnings and NPV. 214A 215F 216F 217F NPV Earnings revisions NPAT normalised previous -48.6 27.7 151. 2. NPAT normalised revised -38.4-59.9 27. 1.9 1.84 Change -11.3 -.6-5.1 -.16 Change (%) 23.2% -2.3% -33.2% -8.% Market assumptions 214A 215F 216F 217F 218F AUD Exchange Rate.93.86.82.84.85 Thermal Coal (US$/t) 65. 63. 66. 74. 8. LV PCI (US$/t) 91.5 9. 1. 115. 127.5 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.

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 622.2 755.4 857.1 1266.4 154.1 Total revenues 633.5 763.9 865.1 1274.4 1512.1 Valuation summary A$m A$ps DCF Inputs EBITDA -11.1 75.3 97.4 274.7 411.1 Narrabri 857.7.84 Rf 5.25% Depreciation & amortisation -58.5-79.5-13.9-136.9-163.5 Gunnedah Ops 247.8.24 Rm-Rf 6.% EBIT -69.6-4.2-6.5 137.7 247.6 Werris Creek 285.9.28 Beta.99 Net interest expense -45.5-52.2-79.1-99.1-13.5 Maules Creek 1525.9 1.49 CAPM (Rf+B 11.2% Pre-tax profit -115.1-56.3-85.5 38.6 144.1 Vickery 8.3.8 Tax rate (t) 3.% Tax expense 33. 17.9 25.7-11.6-43.2 Coal exploration 6..6 WACC 1.% Abnormals - pre-tax..... Total operations 357.7 2.98 Shares 125.7 NPAT -82.2-38.4-59.9 27. 1.9 Net cash (FY15F) -966.2 -.94 Abnormals - post-tax..... Corporate -2.1 -.2 Minorities..... Total valuation 1891.4 1.84 Reported NPAT -82.2-38.4-59.9 27. 1.9 Growth ratios 213A 214A 215F 216F 217F Coal sales (Mt) - 1% 214A 215F 216F 217F Sales growth 21% 13% 48% 19% Thermal coal sales 8.9 11.3 14.4 15.3 Operating cost growth 7% 12% 31% 1% Metallurgical coal sales 2. 2.5 3.4 4. EBIT growth -94% 55% #N/A 8% Total Sales (Mt) 1.8 13.8 17.7 19.3 NPAT growth -53% 56% #N/A 273% Coal purchases.5.3.3.3 Cash flow statement 213A 214A 215F 216F 217F EBITDA -11 75 97 275 411 Key assumptions 214A 215F 216F 217F Cash flow from operations -32 19 24 164 264 USD / AUD exchange rate.93.86.82.84 Capex -288-314 -35-63 -72 Export thermal coal (US$/t) 65. 63. 66. 74. Disposals Low Volatile PCI (US$/t) 91.5 9. 1. 115. Acquisitions -155 Semi-soft coking coal (US$/t) 14.34 92. 15. 115. Cash flow from investing -432-32 -35-63 -72 Incr/(decr) in equity Per share data 214A 215F 216F 217F Incr/(decr) in debt 17 229 26 No. shares 142.6 142.6 142.6 142.6 Ordinary dividend paid -29 EPS (normalised) (cps) -.4 -.6.3.1 Other financing cash flow -16-25 -2-25 -25 DPS (cps).... Cash flow from financing 61 24 24-25 -25 Dividend yield (%) % % % % Inc/(decr) cash -43-7 -41 76 168 Equity FCF -32-25 -281 11 193 Balance sheet 213A 214A 215F 216F 217F Operating performance 214A 215F 216F 217F Cash & deposits 111 13 62 138 36 Normalised EPS growth -54% 56% #N/A 273% Intangible assets 1 16 16 16 16 EBITDA margin (%) 1% 11% 22% 27% Fixed assets 3115 3385 366 3532 344 EBIT margin (%) -1% -1% 11% 16% Other assets 612 557 557 557 557 Net profit margin (%) -5% -7% 2% 7% Total assets 4182 4282 4463 4465 4541 Return on net assets (%) % % 2% 4% Interest bearing debt 582 788 128 13 978 Net debt / (cash) (A$m) 685 966 865 672 Total liabilities 884 176 1316 1291 1266 Net debt/equity (%) 21% 31% 27% 21% Share capital 3146 3146 3146 3146 3146 Net interest/ebit cover (x) -.1 -.1 1.4 2.4 Other reserves 71 35 35 35 35 ROIC (%) % % 2% 4% Retained earnings 7 12-48 -21 8 Total equity 3297 327 3147 3174 3275 Comparable multiples (x) 215F 216F 217F Minority interest 13 13 13 13 13 Whitehaven Coal EV/EBITDA 2.8 7.9 3.9 Total shareholders' equity 3284 3193 3134 3161 3261 Year to 3 Jun PE 81.4 45.6 8.4 Total liabilities & SE 4182 4282 4463 4465 4541 New Hope Corporation EV/EBITDA 16.8 1.3 7.2 NPAT Sensitivities NPV 215F 216F 217F Year to 31 Jul PE 81.4 36.4 22.7 Export thermal coal (+US$1/t).1 8.1 1.5 11. Metallurgical coal (+US$1/t).1..6.9 USD : AUD (-1c).12 6.5 1.2 12.1 Valuation sensitivity to discount rate (A$/share) Total revenues and EBIT (A$m) 9. 16 8. 14 7. 6. 5. 4. 3. 2. 12 1 8 6 4 2 1.. WACC.% 5.% 1.% 12.5% 15.% -2 213A 214A 215F 216F 217F Total revenues EBIT

QUEENSLAND ORANGE (2) 6361 9166 BRISBANE - HEAD OFFICE (7) 3334 4888 PORT MACQUARIE (2) 6583 1735 BRISBANE - EDWARD STREET (7) 3121 5677 SCONE (2) 6544 3144 BRISBANE - TYNAN PARTNERS (7) 3152 6 SYDNEY LEVEL 7 CURRENCY HOUSE (2) 8216 5111 BUNDABERG (7) 4153 15 SYDNEY LEVEL 9 (2) 8215 5 CAIRNS (7) 4222 555 SYDNEY HUNTER STREET (2) 9125 1788 CALOUNDRA (7) 5491 5422 (2) 9615 45 EMERALD (7) 4988 2777 SYDNEY REYNOLDS EQUITIES (2) 9373 4452 GLADSTONE (7) 4972 8 WOLLONGONG (2) 4227 322 GOLD COAST (7) 5581 5777 IPSWICH/SPRINGFIELD (7) 322 3995 ACT KEDRON (7) 335 9 CANBERRA (2) 6232 4999 MACKAY (7) 4957 333 MILTON (7) 3114 86 VICTORIA MT GRAVATT/CAPALABA (7) 3245 5466 MELBOURNE (3) 9947 4111 NOOSA (7) 5449 9511 BRIGHTON (3) 9519 3555 REDCLIFFE (7) 3897 3999 CAMBERWELL (3) 9813 2945 ROCKHAMPTON (7) 4922 5855 CARLTON (3) 966 32 SPRING HILL (7) 3833 9333 FARRER HOUSE (3) 8644 5488 SUNSHINE COAST (7) 5479 2757 GEELONG (3) 5222 5128 TOOWOOMBA (7) 4639 1277 RICHMOND (3) 9916 4 TOWNSVILLE (7) 4725 5787 SOUTH YARRA (3) 8762 14 YEPPOON (7) 4939 321 TRARALGON (3) 5176 655 WARRNAMBOOL (3) 5559 15 NEW SOUTH WALES SYDNEY (2) 8215 555 WESTERN AUSTRALIA ARMIDALE (2) 677 33 PERTH (8) 6462 1999 BALLINA (2) 6686 4144 WEST PERTH (8) 616 87 BALMAIN (2) 8755 3333 BOWRAL (2) 4851 5515 SOUTH AUSTRALIA CHATSWOOD (2) 8116 17 ADELAIDE (8) 8464 5 COFFS HARBOUR (2) 6651 57 NORWOOD (8) 8461 28 GOSFORD (2) 4325 884 HURSTVILLE (2) 957 5755 NORTHERN TERRITORY MERIMBULA (2) 6495 2869 DARWIN (8) 8981 9555 NEUTRAL BAY (2) 8969 75 NEWCASTLE (2) 4926 444 TASMANIA NEWPORT (2) 9998 42 HOBART (3) 6236 9 DISCLAIMER The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual s relevant personal circumstances. 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