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Maules Creek expansion approved for Whitehaven, leading to fresh protests

On 4 July Whitehaven Coal (ASX: WHC) announced that it had finally received approval for the controversial Maules Creek project in the Gunnedah Basin. The mine is approved to produce 13 million tonnes of coal per annum, and once in production could prove to be a significant boon to the company’s bottom line.

Whitehaven Coal owns and operates coal mines in the Gunnedah basin, producing thermal coal as well as the more expensive metallurgical coal. The latest expansion project at Maules Creek gained notoriety when activist Jonathan Moylan made a fools of some market participants by issuing a fake press release, claiming ANZ (ASX: ANZ) had withdrawn funding support for the company.

Whitehaven’s share price has recovered to over $2.25 since hitting lows of $1.78 in May, and directors have been buying shares on the market. However, the share price has fallen over 60% since 2011. The company reported a loss last half, and in FY2012 reported a profit of less than $60 million. Shareholders must see significant profit growth on the horizon to justify the current market capitalisation of over $2.3 billion. Even if profit were to double to $120 million in FY2013, that would still represent a P/E ratio of almost 20.

Certainly, Whitehaven Coal is keen to impress investors with its growth plans. In a company presentation to UBS, the coal miners project production of 23 million tonnes per annum in 2017. Furthermore, the company will stand to benefit from the falling Australian dollar, which will ease the pain caused by the falling price of coal, which caused competitor New Hope Coal (ASX: NHC) to announce cuts to production (and jobs) in March.

Whitehaven has signed take-or-pay contracts for port capacity for coal it had expected to be producing from the contentious expansion, forcing it to pay millions for capacity it will not use, since exports are now not expected until October 2014. The Australian reported that Managing Director Paul Flynn described that situation as a “very visible and painful demonstration of what these delays can do to you.”

This will no doubt be of some comfort to opponents of the mine. Indeed, the Maules Creek Community Council today announced that “Over fifty Gomeroi Traditional Owners, Senior Elders, Elders, Aboriginal and non-Aboriginal community members and families have formed a picket line at Whitehaven Coal near Gunnedah in north-west NSW this morning amid a stop work action in protest of the Maules Creek Coal Mine and the incomplete and disrespectful cultural heritage process.”

While the company may be capable of crushing protesters, the ongoing strife at Maules Creek is symptomatic of an industry facing some serious headwinds. As former chair of the Australian Coal Association, Ian Dunlop wrote for the Business Spectator; “If our current expansion policies are implemented, it will leave Australia with a stack of stranded assets in mines, ports and railways within a decade…”

UBS commodities analyst Tom Price has discarded China’s plan to peak coal usage in 2015 as ‘a nice academic exercise.’ Whether or not China reaches that goal on schedule, there is a good chance that coal imports to China will reach their peak by 2020. Miners have their fingers crossed that India will pick up the slack.

Foolish takeaway

Many believe that Australia will be able to increase coal exports at attractive prices for many years to come. However, investors should ask themselves whether long-term growth is as likely as share prices suggest. While individual companies may prove to be good investments at the right price, the long term outlook is, in my opinion, uncertain.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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