We look for coal prices to remain high
for the next five years
We retain our Overweight (V) rating on
XTA and raise target price to GBp4,750
We retain our Neutral (V) rating and
target price of GBp3,800 on AAL
Coal prices move to a new level
Raising coking price forecasts. Hard coking coal prices for
2008 have been settled at cUSD300/t, up 206% on last
year’s USD98/t level. We argue that tight conditions in the
coking coal market will ease through 2008 and we expect to
see contract prices fall 33% in 2009e to cUSD200/t. That
said, looking to 2010e we see demand growth averaging 5%
pa and we do not expect to see hard coking coal prices back
below USD100/t in the next five years.
Raising thermal coal price forecasts. We assume that
thermal coal contract prices will be set at USD125/t in 2008.
Crisis conditions have passed and we expect spot thermal
coal prices to moderate over the balance of the year, and
contract prices to fall 25% to cUSD94/t in Japanese fiscal
year 2008 (JFY2008). That said, given infrastructure
constraints in Australia and South Africa, we think thermal
coal prices will still be at cUSD80/t in JFY 2010.
Coal price benefits maximised in 2009. Anglo American
and Xstrata have reduced exposure to high 2008 coal prices
through forward sales. On our price forecasts, coal price
benefits are maximised in 2009e, with coal EBIT for AAL
and XTA at, respectively, USD4.46bn and USD5.75bn.
EPS and valuation impact. We have raised our 2008e and
2009e EPS estimates for XTA 6.6% and 10.4% to USD8.81
and USD10.83. Our AAL 2008e estimates are largely
unchanged given the inclusion of forward sales, but we have
raised 2009e EPS 18.7% on the impact of revised coal and
platinum prices.
Xstrata our preferred coal exposure. In 2008e coal will
generate approximately 30% of EBIT for Xstrata and 15%
for Anglo American, on our estimates. In addition, Xstrata
has a more profitable coal business: we forecast 2008e EBIT
at USD38/t compared with USD19/t for Anglo American.
Coal prices to a new level
While coal prices should fall from current high levels as crisis
conditions pass, we expect coking and thermal coal to be
USD150/t and USD80/t in 2010e
We are raising our 2008e and 2009e EPS estimates for XTA by
3% and 8% and 2009e EPS for AAL by 19%
Xstrata has a more profitable coal business than Anglo and has
higher mid-term volume growth
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