New Hope unlocks Bengalla value

New Hope Corporation returned a significantly improved financial result for the latest financial year ending 31 July, with a significant turnaround in profitability led by both volume growth and higher thermal coal pricing.

Company filings show a net profit after tax (NPAT) before non-regular items of A$128.71m, compared with A$5.03m in the previous year. The result comprised of a $133.1m profit from its coal operations, and a A$4.4m loss from their oil operations.

Overall the company's balance sheet remains strong with no debt recorded and cash reserves of around $237m at balance date.

In particular, the results reflect the first full year of production since the company acquired a 40% stake in the Bengalla thermal coal mine in New South Wales.

Total coal sales for the year reached 8.50 mt, including 3.40 mt from Bengalla, up 23% year on year from 6.90 mt.

The company's longer-term expansion prospects remain a big question as the future of the Acland mine balances precariously on the unsteady shoulders of future thermal coal pricing, Queensland politics and court proceedings.

As reported previously, in May the Queensland land court recommended Environmental Authority and Mining Leases not be granted for the development. New Hope has initiated a judicial review of that finding, with a hearing date set for 19 March 2018.

But whether that review comes back favorable or not, the decision rests upon the judgment of the state mining minister, who will decide on their mining lease, and the Chief Executive of the Department of Environment, who will decide on their Environmental Authority.

New Hope says it will work with the government of the day to progress the project, but with an election looming any alliances with existing MPs could quickly change.

There is no secret to the fact Acland Stage 2 is running out of coal, sources say. New Hope was expected to begin drawing down production levels at the mine in the second quarter this year, but the company managed to mine additional blocks of economic coal by targeting lower seams that weren't previously mined due to their higher strip ratio during the low pricing environment of 2012-16.

The company has indicated it will assess a number of other possible resources areas at Acland in 2018, while also extending mining at the nearby Jeebropilly operations to 2019, where the turnaround in the coal market has made additional reserves more economic.

But how long New Hope can continue to target these more difficult to mine seams in the absence of Stage 3 approval is market dependent, CEO Shane Stephan told IHS Markit.

"We're expecting stable production and employment from Acland this financial year, but based upon current pricing 2021 will be challenging."

"But of course that's assuming that these current high pricing levels continue, because we are mining seams that we historically would not have mined and it's because of these high prices that we're able to do that and that is extending the economic life of Acland," he said.

In brighter news for New Hope though, their recent acquisition of parts of Peabody's mothballed Burton metallurgical coal mine in Queensland has materially improved the economic viability of the proposed New Lenton coal project which is contiguous with the Burton operation.

The Burton purchase acquisition, expected to be completed early next year, was for $14m in cash. It is understood the estimated financial assurance for the rehabilitation is around $52m, on a 100% ownership basis (New Hope will own 90% as part of a joint venture with Formosa Plastics Group).

New Hope has taken on the mining leases in the northern part of the Burton mine and Peabody has retained the southern part. The deal delivers New Hope crucial infrastructure, including the Coal Handling and Processing Plant, the associated water and power infrastructure and the haul road down to the train load out.

"The key things from our perspective,…are we've looked at the potential replacement cost of that sort of infrastructure being in excess of $300m, so it's materially improved the economic viability of Lenton," Stephan said.

The New Lenton project was expected to come into production around 2022, but by purchasing the Burton leases and associated infrastructure, New Hope will negate having to conduct the construction and potentially get into production faster, sources say.

But whether New Hope will also take the opportunity to mine economic coal from Burton seams will remain to be seen.

"There is a project team being put together in the company now to look forward at what we can do at Burton and Lenton, and we'll look at all of the opportunities that are available to us - but it's still early days," Stephan said.

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Eric Thorpe is a Senior Research Analyst at IHS Markit.
Posted 29 September 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.