Decarbonisation And Oversupply Will Constrain Coal Markets Despite Minor Recovery

Key Takeaways

• Exposure to pricing volatility, regulatory risks, and customer concentration threatens revenue growth and earnings prospects as global decarbonisation accelerates and steel industry shifts emerge.
  
• Operational improvements and sector consolidation offer some support, but future profitability is challenged by rising compliance costs, stranded asset risks, and evolving market preferences.
  
• Decarbonisation trends, weak steel demand, high project costs, increased competition, and regulatory challenges threaten Stanmore Resources' profitability, pricing power, and long-term coal asset viability.

Catalysts

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

• While ongoing infrastructure development and urbanisation in Asia, particularly India and Southeast Asia, is poised to underpin robust future demand for steel and therefore metallurgical coal, Stanmore Resources is highly exposed to oversupply risk and pricing volatility driven by unpredictable Chinese steel exports and competition from alternative coal suppliers, threatening revenue growth and sales price realisation in key years ahead.
  
• Despite recent improvements in production volumes, operational efficiency, and recovery from weather disruptions-with South Walker Creek and Poitrel both delivering strong output-the company faces the persistent threat of global decarbonisation policies and accelerating investment in green steelmaking technologies, which could structurally erode long-term demand for coking coal and compress Stanmore's earnings trajectory.
  
• The company continues to benefit from cost optimisation initiatives and an improving net debt position, but its relatively concentrated customer base among Asian steelmakers introduces significant revenue risk should these customers accelerate the shift away from coal-based steel production or reduce offtake due to policy or market changes.
  
• While supply chain diversification trends and resource security strategies among major economies have the potential to support Australian coal exporters, ongoing delays or hesitation in committing to new lower-carbon or diversified resource assets could leave Stanmore exposed to stranded asset risk and future write-downs, undermining the return on invested capital.
  
• Although consolidation in the coal sector and industry discipline may favour established, low-cost producers, rising regulatory costs, tightening mine permitting requirements, and looming carbon taxes in export markets could increase compliance costs and erode margins, challenging Stanmore's ability to sustainably grow earnings or return capital to shareholders in the long run.

Stanmore Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Stanmore Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Stanmore Resources's revenue will decrease by 8.0% annually over the next 3 years.
• The bearish analysts are not forecasting that Stanmore Resources will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Stanmore Resources's profit margin will increase from 8.0% to the average AU Metals and Mining industry of 16.2% in 3 years.
• If Stanmore Resources's profit margin were to converge on the industry average, you could expect earnings to reach $302.4 million (and earnings per share of $0.34) by about July 2028, up from $191.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, down from 6.5x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 12.4x.
• 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 7.97%, as per the Simply Wall St company report.

Stanmore Resources Future Earnings Per Share Growth

Risks

• Ongoing global decarbonisation trends and energy transition policies are likely to curtail long-term demand for metallurgical and thermal coal, which would directly reduce Stanmore Resources' revenue and future earnings potential despite short-term operational improvements.
  
• Persistent demand softness in the steel industry, exemplified by record Chinese steel exports and pressured global steel margins, poses a risk that prolonged weakness in coal pricing will compress Stanmore's net margins and limit profitability even if production volumes improve.
  
• High capital intensity and dependence on new project developments, such as Eagle Downs, increase Stanmore's exposure to funding challenges and cost overruns, particularly as institutional investors and lenders continue to lessen fossil fuel exposure-potentially elevating financing costs and constraining investment needed for growth.
  
• Increasing price competition from substitute suppliers, including Mongolian and domestic Chinese coals, and the volatility in price realization for Stanmore's products (with recent sales at only 70% of benchmark indices) threaten to erode pricing power and could weaken average selling prices, thereby negatively impacting gross and net profit margins.
  
• The industry-wide risk of technological disruption, such as the adoption of hydrogen-based steelmaking, and stricter regulatory requirements around mine permitting, emissions, and land rehabilitation may raise operational costs and threaten the medium
• to long-term viability of coal assets, leading to potential asset write-downs and lower returns on invested capital.

Valuation

• The assumed bearish price target for Stanmore Resources is A$2.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Stanmore Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.35, and the most bearish reporting a price target of just A$2.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $302.4 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of A$2.13, the bearish analyst price target of A$2.3 is 7.4% 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.