South Walker Creek Expansion And Cost Discipline Will Support Stronger Long Term Coal Earnings

Catalysts

About Stanmore Resources

Stanmore Resources is a metallurgical coal producer with operations including South Walker Creek, Poitrel and Isaac Plains in Queensland.

What are the underlying business or industry changes driving this perspective?

• Step change in ROM output at South Walker Creek following completion of MRA2C and broader expansion work, with upgraded CHPP capacity and higher yielding pits expected to support higher saleable volumes and potentially higher revenue and earnings quality over time.
• Consistently strong production profile at Poitrel, including higher ROM volumes and coal sales and the successful auger campaign that recovered more than 200,000 tonnes of coal previously considered unviable, which can support coal sales, unit cost efficiencies and overall margins.
• Recovery in Isaac Plains productivity after weather issues, with ROM volumes up 60% quarter on quarter and large, back ended ROM volumes expected from Pit 5 North, providing scope for higher second half production and improved absorption of fixed costs, which can help unit costs and net margins.
• Portfolio wide cost and capital discipline, including deferral of some capital expenditure, cost reduction initiatives such as labor optimization and a focus on cash preservation, which, together with positive operating cash flows of about US$90 million in the quarter, can support future earnings resilience and balance sheet strength.
• Exposure to metallurgical coal demand from regions such as India, where low inventories, safeguard measures on steel imports, coke import quota extensions and ongoing blast furnace commissioning are expected to support coal demand post monsoon, which can influence realized prices, revenue and ASP driven earnings.

Assumptions

This narrative explores a more optimistic perspective on Stanmore Resources compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Stanmore Resources's revenue will remain fairly flat over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.2% today to 6.7% in 3 years time.
• The bullish analysts expect earnings to reach $134.5 million (and earnings per share of $0.15) by about January 2029, up from $4.7 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 bullish analyst cohort, the company would need to trade at a PE ratio of 21.8x on those 2029 earnings, down from 404.6x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 27.6x.
• The bullish 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 8.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Metallurgical coal pricing was described as suppressed and range bound, with Chinese steel exports at record levels and pressure on steel margins globally. If this softer demand backdrop persists or worsens, Stanmore's realized prices and consolidated average sales price, currently referenced at US$127 per tonne, could remain under pressure, which would weigh directly on revenue and earnings quality.
• Several operational comments highlight back ended production, yield impacts from limited blending, and sequencing constraints at Isaac Plains and Isaac Downs North. If these issues recur through future wet seasons or pit sequencing, the company could face ongoing yield pressure and higher unit costs, which would compress net margins and earnings.
• The company has already slowed work on Eagle Downs and is deferring some capital. If coal prices remain soft for an extended period, further deferrals or a reduced investment case for new projects could limit long term production growth options, which would cap future revenue potential and the ability to scale earnings.
• Stanmore is contesting a stamp duty assessment that came in well above the US$2 million to US$3 million range initially expected. A prolonged or unfavorable outcome, along with the need to preserve cash in a weaker market, could redirect liquidity away from reinvestment or debt reduction, which would affect future free cash flow and net earnings.
• The comments on competition from Mongolian coal into China and a historically low relativity for certain indices such as Tier 2 low vol hard coking coal and API 5 thermal prices point to ongoing pricing pressure from alternative supply and weaker thermal coal benchmarks. If these relativities fail to recover, Stanmore's mix of coking and thermal byproduct coals could continue to realize lower prices, putting sustained pressure on revenue, consolidated ASP and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Stanmore Resources is A$3.7, which represents up to two standard deviations above the consensus price target of A$3.17. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.7, and the most bearish reporting a price target of just A$2.7.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $2.0 billion, earnings will come to $134.5 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of A$3.06, the analyst price target of A$3.7 is 17.3% higher.
  
• 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.