Miner is now a cash machine

Coal may be a dirty word, but thanks to limited supply and high prices, it's rewarding investors with strong capital gains and generous dividends

- GAURAV SODHI

Coal is the most despised asset in the world. Investors don’t want to touch it, banks won’t lend to it, insurers won’t cover it and everyone is sure miners are on the path to extinction. When the very thought of investing in the sector makes your stomach churn, you’re probably onto a good thing.

Back in October 2020, we believed Whitehaven was one of the cheapest big stocks on the ASX. Trading at just 30% of book value, the company’s Maules Creek mine – its largest asset – was worth $2 a share, twice its share price at the time.

Capable of producing 20 million tonnes of coal a year, Whitehaven, in 2019, generated operating cash flow of $800 million and a net profit of $500 million. It also paid $300 million in dividends. Back then, coal prices were slightly above long-term averages and Whitehaven looked scandalously cheap.

The company produces some of the best quality coals in the market and gets a premium to benchmark prices. As we said in 2019, when Whitehaven joined our buy list at a price of 98 cents, “If coal prices recover, it could move explosively as profits and production both rise.”

So it has proved. Printing cash is a cliché that is often used and is often wrong. Yet no other term adequately describes what is happening in the coal sector as underinvestment joins soaring demand to drive sensational prices.