Is Whitehaven Coal a Buy at This Share Price?

What happened to the Whitehaven Coal share price?

Only six weeks ago, I wrote how the share price of Whitehaven Coal [ASX:WHC] had tripled since scraping an all-time low of 35 cents in February this year. From mid-February to June, the share price rocketed to over a $1.

Mind you, for a stock that traded at over $7 five years ago, it’s been a horrid ride for long term shareholders. Over the last month, though, Whitehaven’s share price has jumped again, hitting a recent high of $1.60.

Nearly five times the price it traded at just five months ago!

Why did WHC shares rise?

There are two things driving Whitehaven’s share price. First: coal prices have firmed up over the last six months. As an asset class written off as a ‘sunset industry’, the value of coal had dropped to a price that was non-viable for the miners.

This lead to mine cutbacks and closures. And with little prospect of new capacity coming on anytime soon, the supply-demand curve is more balanced than it’s been for most of the last decade. The low price of coal has also triggered a return to the building of coal-fired power stations in emerging countries.

The second driver of Whitehaven’s share price is that it’s once again covering its costs — recording a profit (albeit a small one) in February this year. In addition, it recently confirmed that its production had grown 30% over the last 12 months.

What now for Whitehaven Coal?

The future of Whitehaven Coal will be determined by the coal price. For a company that has undertaken some painful restructuring, there is only a limited amount of costs that can be stripped out of its business.

Another problem will be a flood of new coal supply coming onto the market, as others join in to take advantage of the stronger coal price.

While the supposed demise of the coal industry has been widely reported, the reality is that demand for coal will run well into the coming decades.

Matt Hibbard,
Money Morning

Money Morning Australia