Could the Whitehaven Coal share price double again?

Whitehaven Coal Ltd (ASX: WHC) has seen its share price soar 66% over the past three months, as more than double since February when the share price fell as low 35 cents.

The coal miner has obviously suffered as coal prices have plunged by more than 50% over the past few years and there are concerns that coal prices may never recover.

That sentiment isn’t shared by Whitehaven, with the company saying in February,

Whitehaven remains very positive about the medium and long term outlook for high quality coal,” adding, “Our coal is highly sought after by customers and countries that have an appreciation for the critical role high quality coal can play in creating an economically competitive, low emissions future.

Other major diversified resources companies like Rio Tinto Limited (ASX: RIO) appear to be getting out of the sector too.

Still, Whitehaven says it is on track to meet its guidance of selling around 20 million tonnes of coal in the 2016 financial year (FY16) at a cost of around $57 a tonne. However, the company doesn’t say what that figure does or doesn’t include.

If it’s a bare bones cash cost, then the miner’s all-in sustaining costs will be much higher.

Around 85% of sales in the last quarter were comprised of thermal coal, with the remainder metallurgical coal. Whitehaven achieved average prices of US$61.77 a tonne in March from metallurgical coal and expects slightly higher prices in the June quarter of between US$64 and US$67 a tonne. Thermal coal achieved an average price of US$51.56 a tonne (8% higher than the benchmark price due to higher quality).

Interestingly, most of Whitehaven’s thermal coal is sold to Japan and 61% of metallurgical coal is sold to India, with demand expected to increase.

The International Energy Agency (IEA) is forecasting coal demand to soar between now and 2040, based on electricity demand over that period. That’s a brave view, considering the advances renewable energy is making.

IEA Coal Demand

Source: Whitehaven Coal presentation

Obviously, Whitehaven is highly dependent on where the coal price goes from here, and if demand increases as expected, the company could see earnings soar and its share price follow.

The biggest danger is that coal prices remain at low prices for an extended period – particularly for companies like Whitehaven with large amounts of debt. Whitehaven had $925 million of net debt at the end of December 2015, and will need coal prices to rise to repay that debt.

Foolish takeaway

Whitehaven’s share price could easily double or halve from here – mostly dependent on where coal prices go. That’s not a bet I’d be willing to take on.

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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

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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