Is Whitehaven Coal a buy at today’s share price?

Whitehaven Coal Limited (ASX: WHC) has seen its share price sink 65% in the past 12 months on the back of falling coal prices and a weak outlook for the commodity.

But one broker may have gone bonkers, naming the miner as one of its top 6 share picks for 2016. Credit Suisse analysts have picked Whitehaven and whacked a $1.00 price target on the company – suggesting the share price could rise by 140% this year.

Credit Suisse says Whitehaven’s high-quality coal makes it one of Australia’s best operators, and the company is even forecasting earnings before interest, tax, depreciation and amortisation (EBITDA) of more than $100 million for the first six months of the 2016 financial year (FY16).

Unfortunately for Whitehaven and its shareholders, that doesn’t necessarily translate into a solid profit after tax, nor does it mean long suffering shareholders might see a dividend.

Whitehaven produces both coal used in steel making and coal used as an energy source, but the outlook for both is poor. China’s steel production is slowing thanks to a glut of steel globally, as well as the country transitioning away from an infrastructure economy to one led by consumer spending.

Energy coal is on the nose, and while demand might stay relatively high, many countries around the world are investing more and more towards renewable energy. Giant miner Rio Tinto Limited (ASX: RIO) has acknowledged the trend away from coal, divesting many of its coal assets recently.

One of the biggest threats to coal is that electric power use is decreasing.  As an example, the US Energy Information Administration estimates that US coal production declined by 109 million tons (11%) in 2015 – the largest decline ever recorded and is expected to continue declining in the years ahead. US coal consumption is also falling thanks to cheaper natural gas.

Foolish takeaway

Credit Suisse analysts rate Whitehaven as an ‘Outperform’ – in other words a ‘Buy’. But Foolish investors might want to ignore their advice unless they feel like taking on a huge risk and the likelihood of losing their dough on Whitehaven in 2016.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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