Yancoal Australia: Trading At Just 3 Times Earnings At Spot Prices

Introduction

The coal sector has seen a massive revival in the past few years, and this sparked the interest in coal companies. And what a difference that makes: last time I discussed Yancoal Australia Ltd (OTCPK:YACAF) here on Seeking Alpha in 2019, the stock was trading at A$3/share, and it had an average trading volume of 15,000 shares per day in Australia (where the stock is listed with YAL as its ticker symbol). Fast-forward to today: the average daily volume in Australia is approximately 3.7 million shares per day, which is more than 200 times higher than in 2019 when nobody really cared about coal. While I cared about coal, I sold my small long position during the COVID crisis and thus completely missed out on the excellent Yancoal Australia Ltd stock performance in the past few years.

There are currently 1.32 billion shares outstanding, resulting in a market capitalization of just over A$6.6B at the current share price of just over A$5/share.

And while Yancoal’s majority owner is Yanzhou Coal, a Chinese company, the majority of the coal is going elsewhere. Japan and South Korea are Yancoal’s largest and third largest revenue-generating countries, and combined accounted for over half of the revenue in FY 2022 and just under half of the FY 2021 revenue.

A booming coal market made the net debt evaporate

Yancoal Australia Ltd has paid a cumulative A$1.83 per share in dividends (representing about 60% of its share price when I last discussed the company), and the stock is trading at around A$5/share, so on a total return basis, the stock has performed well. That’s good to know, but it is pretty clear the “coal boom” is over and prices will gradually drift back to lower levels.

Yancoal’s Q1 results were actually still pretty good, mainly because there is a lag between the market prices and the realized coal prices. This means Yancoal was still able to benefit from “older,” higher prices in the first quarter of this year while market prices have been trending down, and the first quarter may actually be the best quarter of the current financial year.

During the first quarter of the current financial year, the company’s assets produced about 11.2 million tonnes of coal (on a 100% basis), of which 7.7 million tonnes were saleable. The attributable saleable production was 5.9 million tonnes. That’s pretty low, but the production is anticipated to increase throughout the year.

That might be the saving grace for Yancoal this year, as there’s very little chance the company will continue to be able to sell its coal at an average weighted price of A$347 per tonne. As you can see below, the average realized price for thermal coal was A$338/t, while the metallurgical coal was sold at an average price of A$383/t, which resulted in the aforementioned average of A$347/t.

The main question will be to see how the thermal coal prices will behave in the next few quarters. I’m not too worried about the metallurgical coal right now, as the prices seem to be hanging in there. I will obviously keep a finger on the pulse and an eye on the coking coal prices, but the benchmark prices seem to indicate a price north of A$350/t and even closer to A$400/t for the remainder of the year, while the futures market doesn’t seem to indicate any problems well into 2024.

The main unknown element right now is obviously the price of the thermal coal. Additionally, the NSW coal reservation requirements will have an impact as well: Yancoal will have to provide 310,000 tonnes of thermal coal per quarter at a maximum price of A$125/t. While that’s only 4% of the total quarterly saleable production rate (on an attributable basis), it will have a negative impact. Competitor New Hope published a nice chart of the coal prices. The API-5 coal price was trading at around A$150/t last month, while the gc NewC was trading closer to US$200/t, which is approximately A$300/t.

That’s actually still pretty encouraging, and Yancoal may be able to keep the damage limited, especially as the average production rate will increase in the next few quarters. The company sold less than 6 million tonnes of saleable coal but has guided for a full-year production of 31-36 million tonnes. Even if I would use the lower end of that guidance, Yancoal will have to produce 25 million tonnes in the next three quarters, which is in excess of 8 million tonnes per quarter.

Assuming 25 million tonnes of thermal coal are sold at an average price of A$225/t, 1 million tonnes of thermal coal gets sold at A$125/t as part of the NSW coal reserve direction and 5 million tonnes of coking coal are sold at…