Upgraded Wash, Isaac Downs Expansion Will Shape Operations Despite Risk

Key Takeaways

• Strategic operational improvements and cost reductions are set to enhance production efficiency and boost profitability, supporting stronger revenue and earnings.
  
• Expansions and upgrades, like Isaac Downs and the wash plant, will increase capacity and future sales, contributing positively to financial health.
  
• Dependence on volatile coal markets and high net debt, exacerbated by extreme weather and project delays, threatens revenue and financial stability.

Catalysts

Engages in the exploration, development, production, and sale of metallurgical coal in Australia.

• The recovery and resilience of operations, despite challenging weather conditions and subdued coal demand, are expected to improve production efficiency and sales, positively impacting revenue and earnings.
  
• The successful ramp-up of the upgraded wash plant and the substantial completion of the MRH to South Creek diversion project are expected to enhance production capacity and efficiency, contributing to higher revenues and net margins.
  
• Continued focus on cost reduction initiatives, including a 4% reduction in FOB cash cost guidance, is expected to improve net margins and overall profitability.
  
• The acceleration of the Isaac Downs expansion project and the new 52 million-ton reserve statement are poised to increase production capacity and future sales, potentially boosting revenues and earnings.
  
• Strategic deferral of certain capital expenditure projects without impact on operations signifies effective cash preservation, supporting a steady cash flow and strengthening the company's financial position.

Stanmore Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stanmore Resources's revenue will decrease by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.0% today to 2.9% in 3 years time.
• Analysts expect earnings to reach $59.4 million (and earnings per share of $0.07) by about May 2028, down from $191.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $162.9 million in earnings, and the most bearish expecting $-68.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.2x on those 2028 earnings, up from 5.9x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Stanmore Resources Future Earnings Per Share Growth

Risks

• The extreme weather conditions in the Bowen Basin have negatively impacted operations and logistics, potentially disrupting revenue and profitability.
  
• Subdued demand in the metallurgical coal markets, combined with reduced coal prices, could further impact revenue and net margins.
  
• Increased net debt from $26 million to $146 million, primarily due to dividends and capital expenditure, affects the company's overall financial stability and cash flow.
  
• Delays in projects such as Eagle Downs owing to a focus on cash preservation shift the timeline for revenue generation from new developments.
  
• Dependence on volatile coal markets and geopolitical factors, such as Chinese steel exports and trade-related uncertainties, poses risks to revenue stability and market conditions.

Valuation

• The analysts have a consensus price target of A$2.926 for Stanmore Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.1, and the most bearish reporting a price target of just A$2.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $59.4 million, and it would be trading on a PE ratio of 36.2x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of A$1.94, the analyst price target of A$2.93 is 33.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.