Australia's Whitehaven to test patience of top shareholder

Sun Nov 3, 2013 4:00pm EST

* Weak coal price, mine delay and debt burden hit Whitehaven shares

* Court ruling on Maules Creek project due in December

* Hedge fund manager Ray Zage takes up board seat

By Sonali Paul

MELBOURNE, Nov 4 (Reuters) - Delays on a major growth project and weak coal prices have pummelled shares of Whitehaven Coal to 4-1/2-year lows and could pressure the Australian firm to raise equity in 2014, putting its top shareholder in a tricky position.

U.S. hedge fund Farallon Capital Management, with a near 17 percent stake, and its Asian chief Ray Zage will be in the spotlight at Whitehaven's annual shareholders' meeting on Monday where investors will want to hear how Australia's second-largest independent coal miner plans to face several challenges.

Whitehaven's long-delayed Maules Creek mine project is now being held up by objections from green groups, coal prices are near four-year lows and it is saddled with A$1.2 billion ($1.14 billion) in debt that may be tough to manage.

Those factors have combined to slice nearly a fifth of its market value in October alone to A$1.65 billion, leaving Farallon's investment in the red.

Whitehaven is likely to put on the best face possible at its first shareholder meeting since coal tycoon Nathan Tinkler was forced to give up his one-fifth stake in the company to settle most of a $634 million debt.

Tinkler's exit in June was a relief for management and investors who had feared he might dump his stake to pay off the debt at a time when he was selling off everything, including his prized race horses, to stave off creditors.

All eyes will be on Zage, who made bullish bets on coal backing Tinkler and Indonesia's Bakrie family when coal prices were on the rise. He was appointed to the Whitehaven board in August and is up for election at the annual meeting.

He has been supportive of Whitehaven, according to Managing Director Paul Flynn, but investors are eager to know how patient Zage will be.

"People are focusing on this stock overhang and the debt," said Matthew Trivett, an analyst at Patersons Securities. "That's a concern in the back of everyone's mind."

Zage could not be contacted immediately by Reuters.

BACK OR BLOCK SHARE SALE?

The main worry is how Whitehaven manages its debt while building the A$767 million Maules Creek mine, now expected to start exporting coal only in the first quarter of 2015.

"That (timing) is looking increasingly ambitious as time ticks over and significant development at Maules Creek hasn't commenced," said Michael Evans, an analyst at CIMB.

"The balance sheet could be a little bit stretched in 12 to 18 months' time, depending on the coal price."

Whitehaven is confident the Federal Court in New South Wales will knock down a challenge by an environmental group that wants the federal government to review its approval of the Maules Creek project, but has to wait until December for a decision.

If the decision doesn't go its way, the federal government will have to look at the Maules Creek approval again, which Flynn has said should be a quick process.

The environmental challenge is over concerns Maules Creek, an open-pit mine, could destroy forests, deplete groundwater and spread coal dust on farms.

Like other Australian coal miners, under pressure from sliding prices, rising costs and the strong local dollar, Whitehaven posted a loss of A$82 million for the 2013 financial year. Analysts are expecting a much smaller loss of A$3 million for the year to June 2014, helped by higher production from Whitehaven's Narrabri mine and cost cuts.

If Whitehaven's balance sheet becomes stretched, analysts say the company may have to raise funds through a sale of new shares, another worry weighing on the stock.

The key question is whether Zage would be willing to pour more money into Whitehaven in an equity raising or whether he would stand in the way of a share sale that would dilute Farallon's stake.

The problem for Zage is that Whitehaven's shares have already lost a quarter of their value since the debt-for-equity swap with Tinkler, sliding to A$1.605. The stock would need to trade above A$3 for Farallon to recoup its loan to Tinkler.

Farallon suggested in June it would hold out for a recovery in Whitehaven's shares. "Farallon looks forward to growth in shareholder value over time," the hedge fund had said then.

Shareholders at the annual meeting will be looking for further clues. ($1 = 1.0560 Australian dollars) (Editing by Muralikumar Anantharaman)