Whitehaven's results have slightly missed our expectations which were determined by the revised guidance issued by the company on the 5th of December. Whitehaven revised their guidance down to an annual production figure of 20-22 million tonnes for the financial year. This figure was skewed with 40% projected to be produced in the first half and the balance to be produced in the final half of the financial year. The downgrade only affected production from their flagship Maules Creek mine.

On actual results, Whitehaven underperformed their production guidance by a little over 6%, achieving managed ROM coal production of only 7.5 mt vs 8 mt. The production fall was primarily due to labour shortages at Maules Creek their flagship mine, drought conditions and negative mining conditions at the Narrabri mine.

The largest impact in financial terms was the fall in realised coal prices (down around 40% over 12 months), along with lower sales volumes and higher costs. Whitehaven's fortunes, as a resource company, will always be aligned with coal spot prices which have been weaker this financial year relative to the previous comparable period. We believe there may be more short term pain for coal spot prices however, we feel there are strong longer-term fundamentals for the coal industry in general.

We note that net debt rose significantly driven by capital expenditures, lease liabilities and dividends paid. Our philosophy as a firm is that dividends should only be paid out of cashflow, and debt should not be incurred by the company to keep up distributions to shareholders. As such we consider that the resultant large increase in the company's debt position as effectively 'borrowing' from the company's future, so a negative for us.

Whitehaven looks fairly valued at present, but we believe the current price does not account for future growth potential or improvements in operational capacity. In addition, Whitehaven has some of the highest quality coal assets globally making it somewhat susceptible to potential corporate action.

Some key catalysts needed to progress the business are:

Operational improvements: The business has been affected by skilled labour shortages and drought impacts at the flagship Maules Creek mine. Whilst skilled labour takes time to train and develop, we expect this to become less of an issue over time. This will feed through to increased productivity via improvements in equipment usage, and hence lower expected costs.

Alleviation of the drought issues that have affected Maules Creek: These have been partially rectified by recent rains in the area. Whilst it's too early to judge if the drought has broken, we anticipate that Whitehaven will be better placed to manage potential water shortages in the future having experienced some negative consequences.

Increases in mine equity: Whitehaven has been selectively acquiring minority interests in its mine assets via accretive deal structures. For example, it recently acquired an additional 7.5% of its Narrabri Mine for an initial US$17 million with an additional US$55 million payable over 5 years. This was a very canny acquisition considering that the mine's life could potentially extend till the year 2045 at a higher level of production than it is producing today. We expect other minority interests to gradually be acquired over time.

Project permitting: We expect some further progress towards Vickery and Winchester South project approvals. Whitehaven are attempting to obtain permits to produce a cumulative 25 million tonnes of coal per annum for over 20 years from these two projects. The progression of the approvals process is critical to its longer-term growth aspirations.

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