Investors are on notice, and have been for quite some time, that further attempts to build economically marginal coal mines in ecologically endangered ecosystems will meet with opposition. Indeed, over 100 protestors spent the weekend disrupting the operations of Whitehaven Coal Limited (ASX: WHC). Concerned citizens blocked roads, blocked the coal loader and one even locked on to the train tracks.
Those practicing civil disobedience come from diverse backgrounds. While the far left activist fringe are certainly part of the scene, it is simply incorrect to lump all opposition to the mine in that category. Earlier in the year church groups came out to support actions against Whitehaven. Indeed, as a capitalist I shudder at the thought of a large coal expansion that will flood an already oversupplied coal-market, at great expense to the State in providing security, and at unfathomable cost to future generations.
Just as there are many who are opposed to expansion of the coal industry, there are many in Australia who praise it. However, singing the praises of an 18th-century technology will not be enough to change the tide of history. It's no surprise that Whitehaven Coal shares have underperformed the ASX S&P 200 Index (INDEXASX: XJO) by 68% in the last five years. Here's why:
1. Coal prices are much lower today than they were when the Maules Creek expansion was conceived. In FY 2014 Whitehaven's average fully absorbed cost of coal sold was $69 per tonne. Management say that the Maules Creek expansion will improve profitability in part because it will produce more expensive metallurgical coal. Prices for metallurgical coal, used for steel, are also weak right now, as you would expect.
2. Chairman Mark Vaile recently sold $440,000 worth of shares, and director Philip Christensen sold over $900,000 worth of shares in May this year before resigning.
3. The company has $685 million in debt, putting its enterprise value at over $2 billion, despite still making losses. Furthermore, the company is not yet paying off debt.
Just a few weeks ago China decided to ban imports of low quality coal, and legendary investors like Warren Buffett are investing in renewable energy, which will eventually replace coal. The World Bank has taken the far-sighted decision to not finance new coal power plants and emerging economies – lead by China – are investing heavily in renewable energy. Indeed, BHP Billiton Limited (ASX: BHP) is including its thermal coal mines in the Illawarra and South Africa in the proposed demerger, although it will hold on to metallurgical coal capacity in Queensland.
On top of that, many everyday people are waking up to the fact that their fund managers are investing their funds in coal companies. This has lead to a gradual exodus from funds that invest in coal, with fossil fuel divestment one of the major investing themes of 2014. I can't predict exactly how this story will end for Whitehaven, but I don't think it's worth the risk.
