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Where next for New Hope shares as the coal price slides?

New Hope delivered a solid operational performance in interim results, though profits sunk with the coal price.

coal mining Source: Bloomberg

New Hope (ASX: NHC) shares have fallen by 31% from $6.47 in mid-October 2023 to just $4.45 today. The ASX coal mining company recently delivered mixed interim results, whereby it reported a strong operational performance amid a sinking coal price.

For context, Newcastle coal futures had coal trading at more than $400 per tonne in December 2022, and this has now fallen to just $127 per tonne today. New Hope has arguably been one of the more popular ASX dividend shares over the past few years, and the falling share price still leaves the company with an index-beating 8.5% dividend.

And nevertheless, the company remains up by 48% over the past five years. Where next?

New Hope shares: interim results

In the six months to 31 January 2024, New Hope saw saleable coal production rise by 28% year-over-year to 4.1Mt — and generated its first coal sold from New Acland Stage 3.

However, as a result of the falling coal price, underlying EBITDA fell by more than half to $424.8 million, while net profit after tax cratered from $668.6 million to $251.7 million. Accordingly, net cash from operating activities fell to only $130.6 million from some $983.5 million in the same half last year — though this comparable was of course affected by Russia’s invasion of Ukraine.

The company is paying out a 2024 interim dividend of $143.7 million, worth $0.17 per share, on 1 May 2024.

CEO Rob Bishop noted that ‘consistent operational performance, delivery of our organic growth plans, and disciplined cost control have allowed us to maintain strong margins despite coal prices retreating from record highs.’

Where next for New Hope shares?

While two relatively mild Northern winters have seen demand for thermal coal fall, New Hope now argues that a combination of lower quality API-5 pricing and 6000kcal Newcastle quality coal will support exports, especially as the Bengalla mine is capable of switching between the grades.

For context, the company noted that ‘high energy products have seen greater demand destruction compared to the API-5 price which has remained stable due to strong Chinese demand for lower energy coal supply.’

It’s worth noting that the company has managed to reduce costs by 4% to just $80 per tonne before state royalties. And as volumes increase, it expects costs to be between $72 and $81 per tonne for the full year.

In the period, the ASX coal company acquired the ‘AL19’ West Muswellbrook Assessment Lease, and also progressed significant exploration work at exploration lease EL9431 — both assets are located to the west of Bengalla and could provide long-term optionality.

The miner also increased its interest in Malabar Resources, which boasts several high-quality metallurgical coal assets in the Hunter Valley.

Bishop enthuses that the company’s ‘low-cost coal assets, and targeted organic growth, will favourably transition New Hope to take advantage of the demand for high-quality coal expected through the energy transition…Performance during the half has demonstrated New Hope’s resilience to price volatility and the potential of our growth pipeline.’

Like many Australian miners, New Hope may be bound to Chinese demand over the longer term. At present, concerns continue to linger over the communist country’s demand for power — with China remaining the world’s largest coal consumer.

Recent PMI data indicates that China has seen a fifth consecutive month of contraction in its all-important construction sector, which analysts consider is worth up to 40% of the country’s GDP. And with consumer sentiment declining amid wider concerns over the property sector, there may be further macroeconomic headwinds to come.

On the other hand, coal prices still remain historically elevated despite the price fall, and the combination of a lower entry point, reasonable dividend, and arguably operational excellence could see New Hope shares consolidate through 2024.

Past performance is not an indicator of future returns.

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