Groundhog Day for Excel trio at Whitehaven

Whitehaven Coal was founded by Keith Ross, former managing director of AMCI, in 1999.
In 2007, an IPO priced at $1 a share introduced a roster of big name coal investors. Amongst these were Tony Haggarty, Allan Davies and Andy Plummer, three Midas men who struck it big when Excel Coal, in which they were major shareholders, was sold to Peabody Energy for $2bn in 2006.
 

The former Excel trio look set for another big pay day at Whitehaven, with the company on the blocks and Andy Plummer confirming at the Gunnedah Coal Conference in March 2011 that “there has been a bit of an auction process over the last six months” and “there’s been a lot of detailed due diligence”. Any sale will reward Messrs Haggarty, Davies and Plummer handsomely with Whitehaven’s share price around $6 as AJM went to press.
 

While the Whitehaven story began in Gunnedah with the Canyon mine, it is now the quartet of producing mines – Tarrawonga, Sunnyside, Rocglen and Werris Creek – that are underpinning the ambitious growth options provided by the two major new mines, Narrabri and Vickery.
 

Going public in 2007 marked an important change in culture at Whitehaven.
 

“Whitehaven was a private concern for seven years, therefore there was no need for the reporting of JORC resources and reserves to shareholders,” said Andy Plummer, executive director, Whitehaven Coal.
 

“Therefore, when we started, we unleashed the drills to understand what we’ve got and our resources and reserves have grown significantly over five years.”
 

In a revised JORC statement in February 2011, Whitehaven reported coal resources of 1,750mt and reserves of 366mt, with Narrabri (200mt reserve) and Vickery (57mt reserve) the biggest contributors.
 

Importantly, the Gunnedah Basin delivers high quality coal, with, to the east of a fault through the area, semi-soft and PCI coal, and to the west high energy, low ash thermal coal. Allied to this, yields in Gunnedah are over 90%, compared to mid-70% in the Hunter Valley, which, according to Plummer, “would make up for the distance differential.”
 

The advent of the Narrabri and Vickery projects will also see an increase from 25% to 50% in Whitehaven’s production of higher priced metallurgical coals, leading to fatter profit margins.
 

Narrabri promises 6mtpa of production from 2013, although this will come from riskier longwall production. According to Plummer, this is where Whitehaven’s stable of lower risk open cut production is a real asset.
 

“With longwalls things can happen either wonderfully well and you make a lot of money or it doesn’t happen at all,” he said.
“It can be quite a binary outcome, so when you have a longwall you need to have flexibility in your system. Touch wood, nothing goes wrong, but if it does we do have four open cuts – with lots of different coal qualities – and we can fill the gap.”
 

Whitehaven has been working at Narrabri for around three years, with plans encompassing a modest stage one using continuous miners, and stage two a more ambitious longwall operation. Overall, the $500m project is 90% complete, with nearly all surface infrastructure built and a longwall ordered – from supplier Joy – and expected to be installed at the end of 2011.
 

Stage one of the project is underway, with three continuous miners operating and around 100,000 tonnes of coal already produced. All continuous miners are deployed on development for the longwall installation.
 

Looking to stage two, which will mine a 4.2m metre bottom section of a nine metre seam, Plummer sounded a positive note on ground conditions.
 

“The seam cuts beautifully and the wall stands up perfectly, it’s just like cutting a cake with a knife” he said. “We’re happy with the underground conditions and there’s only a little bit of faulting.”
 

In terms of risks, inevitable with any underground coal project, Whitehaven has identified a number including gas drainage, spontaneous combustion and roof loading.
 

“Narrabri can be subject to gas outburst and we identified this at the start two or three years ago,” said Plummer. The company is pre-draining gas using surface to in-seam (SIS) and underground in-seam (UIS) drilling. This is successfully draining longwall development roads and panels and building up an inventory of drained coal ahead of longwall development and extraction.
 

“The coal can spontaneously combust, that’s well known, and we’re using established mitigating practices and don’t expect any problems,” said Plummer.
 

In terms of issues with roof loading, the company won’t have a fuller understanding until it gets in with the longwall. The mine has a cap of hard conglomerate on top of the coal seam.
 

“We have had the best rock mechanics people in and we are doing hydro-fracking testing on the conglomerate,” said Plummer.
 

Until recently, Whitehaven experienced real problems in getting skilled underground employees to move from the coast to the Narrabri region. However, Xstrata’s problems at Ulan, where it declared force majeure due to flooding, and at Blakefield South, closed because of a fire, have benefited Whitehaven. Underground contractor UGM Australia, active at the Xstrata operations, has moved crews and a continuous miner to Narrabri. “What was an issue is no longer one,” said Plummer.
 

Looking to the future, Narrabri has potential for top coal caving, a mining technique pioneered in China and used in Australia to date only at the Chinese-owned Austar coal mine (previously Southland). Using top coal caving, Whitehaven could recover most of the nine metre seam and boost production from 6mtpa to 9mtpa. It would also reduce gas management, although subsidence could be a bigger issue.
 

“If you get the geometry and rock mechanics right, top coal caving can be spectacularly successful,” said Plummer, who cited a Chinese operation that he had visited producing 18mtpa from one face. “We’ve spent $10m so it can be retrofitted after moving panel one or two. We’re ready, we hope that it works but if it doesn’t our base case remains 6mtpa.”
 

As regards infrastructure, Whitehaven is comfortable that track upgrade opportunities identified by ARTC will solve rail capacity issues. However, company graphs charting production against the company’s port capacity entitlement seem to indicate a shortfall for the period from 2013 to 2016.
 

“The elephant in the room is port capacity,” explained Plummer. “Our mines will be putting through more coal than we have port capacity but that’s not a terribly bad place to be because we expect deals with other producers whose development hasn’t come on as quickly as expected to fill the four year gap.”
 

Financially, Whitehaven, capitalized at around $3.4bn, is well placed to fund its new growth opportunities. Its major cash needs of $104m to finish Narrabri and $30m for open cut expansions are more than covered by $334 of cash sources. In profit and loss terms, however, the company lost $35m in the first half of 2011, with long ago written coal-contracts-gone-bad, worth $68m, the culprit.
 

“A cross we’ve had to bear is legacy coal contracts from seven years ago,” explained Plummer. “They seemed like a good idea at the time and provided early finance for the private company without shareholders having to put their hands in their pockets. But rising coal prices have meant we’ve had to deliver high cost production into low price contracts.
 

“There is light at the end of the tunnel – these contracts fall away over the next year or so and we’ll have a clear run from the end of 2012.”
 

Despite the development of several new projects in the Gunnedah Basin, from BHP Billiton, Shenua, Aston and Coalworks, Plummer took comfort from Whitehaven’s first mover advantage.
 

“We take solace in having been there for a long time,” he said. “It’s not easy to develop mines. We’ve been slogging away for 5 years – Whitehaven for 12 years – and since Tony, Allen and I got involved we’ve taken production from 1.5mtpa to 5.5mtpa. It’s been hard work.
 

“No doubt other projects in the neighbourhood will come on stream but you can’t underestimate the amount of effort that’s required to bring projects on.”
 

As AJM went to press, Yanzhou Coal and Aditya Birla were names mentioned in connection with a possible bid for Whitehaven, although market watchers noted a worrying lack of bidding tension.