Earnings accretive or value destructive? What might a BHP deal mean for Whitehaven shares?

This could be a big deal for Whitehaven.

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The Whitehaven Coal Ltd (ASX: WHC) share price has seen plenty of movement over the past two years. The next big catalyst could be a possible acquisition of some Queensland coal mines from BHP Group Ltd (ASX: BHP).

Whitehaven itself confirmed earlier this week that it's participating in the coal mine sale process that has been started by BHP Mitsubishi Alliance (BMA) for the Daunia and Blackwater metallurgical coal mines.

This potential deal fits in with the company's announcement in August that it was pausing its share buyback while it considers the application of its capital allocation framework "in light of growth opportunities."

Would this be good for Whitehaven shares?

According to reporting by The Australian, Whitehaven is interested in both assets and it's the favourite to win, whereas the other bidders only want one mine or the other – for example, Stanmore Resources Ltd (ASX: SMR) is reportedly only bidding for Daunia.

The newspaper reported on UBS analysis that has put a US$2.5 billion value on Blackwater which has a 50-year mine life, while Daunia has a US$800 million value, which has a 17-year mine life.

Whitehaven has reportedly been talking with international investors and said that it'd only buy the asset if it added to earnings, rather than diluting earnings. One of the ASX coal share's investors, Bell Rock Capital, said:

Given the enormous cash balance held by Whitehaven, it is easy to make a deal look earnings accretive but this approach can still be value destructive for shareholders, which is our strong concern.

Broker Citi thinks that Whitehaven shares are trading at a 20% discount, so this is a good time to be buying back shares. The suggestion is that Whitehaven needs to buy the BHP mines at a 20% discount to what the mines are truly worth to be faithful to the idea that this deal is earnings accretive.

The Australian reported that analysts have suggested that if these mines are bought at a good price and funded with debt, it could at least double Whitehaven's earnings.

The newspaper noted that analysts believe Whitehaven would need to pay a value of 2 times earnings before interest, tax, depreciation and amortisation (EBITDA) to the enterprise value.

UBS analysts have suggested the two mines will sell for more than US$3.3 billion and deliver BHP US$1.7 billion in gross proceeds, stripping out remediation cost liabilities (with US$1 billion of rehabilitation liabilities for Blackwater and US$250 million for Daunia).

Valuation snapshot

According to the ASX, the market capitalisation is $5.6 billion. Profit projects on Commsec put the current Whitehaven share price at 7 times FY25's estimated earnings and under 8 times FY24's estimated earnings.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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