LW Bogdanka (ticker LWB on Warsaw Stock Exchange), a Polish steam coal mine, is most probably the cheapest mining stock in the world currently trading at <0 EV/EBITDA and <1 P/E 2023E.
Share performance should be supported by three important factors:
Share performance should be supported by three important factors:
1)Economies of scale which are underestimated by investors
2)Supportive Polish coal market dynamics
3)Appealing earnings momentum and strong balance sheet
2)Supportive Polish coal market dynamics
3)Appealing earnings momentum and strong balance sheet
The most important catalyst driving equity story and supporting the factors mentioned above are coal price hikes for the upcoming (2023) and following years which were reported on 30th of December by LWB and as of now are only partially discounted by the market.
Business description:
Lubelski Węgiel Bogdanka (LWB) is one of the largest underground thermal coal mines in CEE and 2nd largest thermal coal producer in Poland (8.4mt in 2022 expected to rise to over 10mt in 2024).
Lubelski Węgiel Bogdanka (LWB) is one of the largest underground thermal coal mines in CEE and 2nd largest thermal coal producer in Poland (8.4mt in 2022 expected to rise to over 10mt in 2024).
It is also the only one located in Lublin coal basin (SE part of Poland). LWB sells c95% of its coal to domestic clients (of which vast majority to utilities). LWB is the lowest cost producer of thermal coal in Poland and the most efficient one.
It results from a favourable geological structure and higher productivity per employee than in the Silesian basin (main coal mining region of Poland).
LW Bogdanka sells majority of it’s production (>80%) under three long term contracts to:
LW Bogdanka sells majority of it’s production (>80%) under three long term contracts to:
-Enea - polish state controlled utility and current majority owner of LW Bogdanka (c75-80%) – contracts for Kozienice power plant (until end of 2036) and for Połaniec power plant (until end of 2028)
-Grupa Azoty – polish state controlled fertilizer producer (c5-7%) – one contract for Pulawy industrial power plant (until 2027)
These contracts are indexed annually based on confidential formulas most probably linked (contracts with Enea) to PMSCI1 index – it is a Polish national utility coal price index. LWB is a price-taker on Polish market with prices set by Silesian coal mines.
LWB long term contracts were indexed already for 2023 and onwards with above-expectations price hikes implying c110% YoY blended price increase.
Please note that the reported price hikes for those contracts were lower on full contract basis but that calculation included already realized parts of the contracts which might be misleading.
1) Underestimated economies of scale and output potential.
2023 will most probably be the first year where LWB will show it’s operating leverage potential based on the estimated c110% YoY coal price increase (estimate calculated based on the current reports from LWB on 30th Dec) over expected 8.3mt volume.
Net income impact of the expected price increase during only this year (2023) is equal to a mind blowing 110% of current market cap of LWB.
LWB as most of the mining stocks has a very high operating leverage due to a high fixed cost base and lower marginal production costs (if current production is lower than maximum capacity).
For years this leverage was not fully realized mainly due to Polish coal market specifics (long term contracts) which until now prevented LWB from realizing full upside potential of high spot coal market prices in Poland. This year should change that.
In my view, market also underestimates LWB potential to increase coal output beyond currently assumed 8.3mt for 2023 which even LWB states as “conservative”. Furthermore, in 2024 LWB should be able to reach c10mt output and show further leverage on the cost side.
Furthermore, market seems linearly extrapolate costs for LWB while in reality less than 50% of costs are fixed thus creating and LWB should benefit from economies of scale next year.
2) Supportive Polish coal market dynamics
Coal prices to PL utilities which drive LWB results are after recent price hikes still c20% lower than front month ARA prices and even if domestic market rebuilds inventories should be supported in following years by Polish Mining Group (PGG; price maker in PL) inefficiency.
PGG last week shared that for 2023 it's qualified unit costs are at 39PLN/GJ which is 14PLN higher than in 2022 and c40% higher than the estimated LWB selling price in 2023.
Given planned decrease in output in PGG in the coming years and social pressure these costs will most probably increase. Such increase should be directly transferred into Polish utility coal market index (PMSCI1) and allow LWB to increase (contrary to consensus) prices further.
3)Appealing earnings momentum and strong balance sheet
Major price hike for 2023 and upcoming volume increase in following years should translate into a massive earnings momentum given the described efficiency and operational leverage (assumptions below).
Major price hike for 2023 and upcoming volume increase in following years should translate into a massive earnings momentum given the described efficiency and operational leverage (assumptions below).
Risks
There are several risks to the equity story of LWB. Main risk stated by many investors is the takeover of majority stake from current owner Enea by the Polish State.
There are several risks to the equity story of LWB. Main risk stated by many investors is the takeover of majority stake from current owner Enea by the Polish State.
Main fears are around potential lower than potential dividend payments and potential cash burning investments (low IRRs).
However, with new owner LWB should be more flexible in planning and selling marginal volumes to the highest bidder which at the moment was prevented by Enea.
However, with new owner LWB should be more flexible in planning and selling marginal volumes to the highest bidder which at the moment was prevented by Enea.
Recent price hikes suggest that the State will most probably allow LWB to become a much bigger mining enterprise in the eastern part of Poland which one can read between the lines. LWB is already the biggest employer there.
Another risk are coal prices. Should ARA prices fall to historical averages (for that we would gas to fall significantly and below fuel switch levels in Europe though) it can create pressure to the Polish coal market even considering a sustained PGG inefficiency.
Over mid/long term EUA prices should pressure coal generation in Europe but given Polish energy mix dependent fully on coal it does not change, in my view, the favourable equity story for which next 2-3 years are key.
Cost pressure from the employees should be also present given high coal prices and good results but even inflation linked salary increases are not a major risk as growing production from 2024 onwards should mitigate them (economies of scale).
Long story short why you should analyze LW Bogdanka? Because FCF to be generated in the next 2 years justifies >x2 share upside. Then 2025 onwards can be treated as a free (although very valuable) option.
This thread is not an recommendation, investment advice and any part of it shouldn't be used to justify investment actions. It might be full of errors. Please use it as an analitycal challenge analyze the stock yourself. #GPW #LWB
*This thread is not a recommendation or investment advice and no part of it should be used to justify investment actions. It might be full of errors. Please use it as an analitycal challenge to analyze the stock yourself. #GPW #LWB
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