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Whitehaven shareholders revolt over reckless growth plans

Whitehaven Coal faced a monumental revolt from major investors and community members at its annual general meeting, held in Sydney yesterday.

Published by Market Forces: 27 Oct 2023

Despite record profits this financial year and a multi-billion dollar growth acquisition, over 40% of the company’s shareholders rejected the company’s remuneration plan, which incentivises a reckless ‘growth at all costs’ approach. This vote of no confidence leaves Whitehaven at risk of having its board spilled at next year’s AGM.

Almost a fifth of Whitehaven’s shareholders also voted for a Market Forces-coordinated resolution demanding the company stop expanding and start managing down coal production in line with a net zero emissions by 2050 pathway.

A major protest vote was also recorded against the reelection of long standing director Raymond Zage, who only received 75% support when these votes typically attract more than 95%.

The company and its shareholders were met with a demonstration outside and probing questions inside the AGM, calling out Whitehaven’s greenwashing and contribution to the climate crisis by failing to align its business with global climate goals.

This is the fourth year now that Market Forces has coordinated a shareholder resolution calling on Whitehaven Coal to manage down coal production. Despite being somewhat overshadowed by the broader shareholder backlash, a fifth of a company’s shareholders telling it to wind down production and return capital needs to be taken seriously by management.

Whitehaven was at a crossroads. It chose massive coal expansion

This year Whitehaven has demonstrated more clearly than ever that it is betting everything on the failure of the world to limit warming to 1.5°C, breaking ground on a new thermal coal mine and adding two operating coal mines and more mining tenements to its portfolio of existing and planned projects.

Just a month ago, Whitehaven had almost $2.7 billion in cash after a surge in coal prices following Russia’s invasion of Ukraine. These windfall profits dragged Whitehaven out of years of debt – Whitehaven was almost $1 billion in the red before the war.

Rather than use this cash to fix its debt position, then pass the rest onto investors (as many shareholders desired and have been vocally demanding for months), Whitehaven has decided to gamble it all on buying up and building new coal mines. This strategy not only risks shareholder value, but also our chances of a stable climate future.

In April this year, Whitehaven used its war profits to fast track work on the devastating new ‘Vickery’ thermal coal mine in the Gunnedah Basin, NSW, rapidly clearing the site and expecting to deliver first coal in mid 2024.

Then just last week, Whitehaven splurged US$3.2 billion on two second rate metallurgical coal mines ditched by BHP-Mitsubishi, completely disregarding shareholders’ objections, a decision which has massively come back to bite them at this AGM.

Whitehaven sees the acquisition of these new coal mines for steel production as a way to mitigate the risk posed to its business by the global energy transition and shift away from thermal coal use. However, the purchase increases the company’s thermal coal production capacity as well. Further, the science tells us that to reach net zero emissions by 2050, metallurgical coal demand must also fall this decade.

Under the NZE Scenario, global coal demand falls by 44% to 2030. While demand for metallurgical coal under this scenario is projected to decline at a slower rate than thermal, it is still rapidly phased out, declining 25% by 2030.

New Market Forces analysis also reveals the company plans to also roughly double production from its existing portfolio this decade by spending approximately $4.4 billion to develop three new or expanded coal mining projects – full-scale Vickery, Winchester South, and Narrabri Stage 3. The analysis finds that Whitehaven’s business plan relies on current industry coal price forecasts consistent with catastrophic global warming of more than 2.5°C (more on that below).While Whitehaven’s AGM played out, the very real and devastating effects of fossil fuelled climate change are being felt more and more. As CEO Paul Flynn, in a not uncommon act of doublespeak, talked of the ‘crucial role Whitehaven’s coal plays in helping countries lower their emissions’, bushfires continue to rage across Queensland and New South Wales, and Victorian communities continue to pick up the pieces of their lives after being wiped out by destructive bushfires that were followed immediately by devastating floods earlier this month. Even Whitehaven’s own operations have been significantly hampered by more extreme weather events due to climate change. Flynn blamed flooding and labour constraints for “a 15% reduction in coal exports through the Port of Newcastle.”

Community members call out Whitehaven at AGM

Market Forces worked with allies Lock the Gate and Move Beyond Coal to facilitate community members impacted by Whitehaven’s mines to ask questions at the meeting.

Concerns about Whitehaven’s role in fuelling climate change and its push to expand coal production at all costs were raised, as well as its direct impacts on the local environment and its prosecution for environmental breaches.

Chairman Mark Vaile and CEO Paul Flynn seemed shaken and frazzled as they attempted to address questions on a range of issues from impacted community members and concerned shareholders.

Whitehaven admitted that as well as securing the operating Duania and Blackwater mines from BHP, the deal came with a range of “other assets”. This includes tenement rights to the entirely separate greenfield Blackwater South coal mine, a project that BHP unsuccessfully attempted to secure approvals to mine until the year 2116. It’s scary to think what a company like Whitehaven will try to do with such a potentially devastating ‘asset’.

When answering a question on the potential impact of the safeguard mechanism across Whiteahven’s portfolio – particularly given that Narrabri and its stage 3 extension is the gassiest mine in Australia, emitting five times more than estimated at time of approval and with fugitive emissions calculated at 100 million tonnes of CO2-e – Paul Flynn stumbled and said the quiet bit out loud a couple of times. 

Under the mechanism “there is differential treatment of open cut vs underground. Underground have the unfortunate attribute of being able to measure very accurately their emissions of all forms … whereas open cut mines use estimates, underground mines one might argue are treated a little bit more differentially by virtue of the fact that they have accurate information to use.”

It’s a sorry reality that while Whitehaven loathes that their underground mines can be accurately measured for their emissions, they don’t see this as a hindrance to expand and emit more methane from a project like Narrabri. Flynn essentially stated that Whitehaven are able to massage the emissions numbers across their whole business and simply buy ineffective offsets.

Flynn’s answer also suggests Whitehaven’s open cut mines are grossly underestimating their emissions. For the safeguard mechanism to be an effective tool for curbing climate change, this loophole needs to be urgently addressed.

Lock the Gate campaigner Nic Clyde pressed Whitehaven on its outrageous record of environmental breaches which has seen Whitehven clock up “in excess of 100 breaches and convictions over the last ten years.” 

“We are shareholders of a company that consistently breaks the rules as part of doing business” Mr Clyde said, asking “when will the company take these environmental breaches and community impacts seriously? When will a remuneration disincentive be put in place for executives?”

Chairman Mark Vaile struggled to put together a response, other than to trot out that (despite still currently being in court for environmental breaches) this year there were no ‘enforceable actions’ and that’s why Mr Flynn deserved his performance bonus. However, shareholders took a very different view on the performance of Paul Flynn and the company this year.

Shareholders revolt

Shareholders also utterly rejected Whitehaven’s growth push, making their anger known by voting down the company’s remuneration report and demanding a roadmap to wind down its coal mining operations and return capital to shareholders.

Over 40% of investors voted against Whitehaven’s remuneration report – an eye-wateringly high rejection number for an ASX-listed company, anything above 25% against constitutes a ‘strike’. If Whitehaven isn’t able to repair relationships with its outraged shareholders, and start managing their money rationally and responsibly, then it risks receiving another strike at next year’s AGM which would invoke a vote to potentially spill the board of executives – a move which could prove highly disruptive for the company. Additionally, the resolution pertaining to CEO Paul Flynn’s incentive payments also received a massive 38.5% protest vote.

With all the drama of the remuneration defeat, it was significant that the last resolution of the meeting also received firm support. Just under one fifth of shareholders voted for the resolution calling on Whitehaven to start managing down coal mining in line with a net zero emissions by 2050 pathway. This is a clear demonstration to Whitehaven’s management that a significant proportion of investors want the company not to spend its windfall on making the climate crisis worse, but rather return capital to shareholders while ensuring a just transition for workers and the community.

Whitehaven’s ongoing failure to assess the risks posed by the energy transition

For years investors have asked Whitehaven to demonstrate to shareholders how its business plan performs against a 1.5°C warming scenario and time and again the company refuses to make this information available to investors. 

This year Market Forces analysts used Whitehaven’s own assumptions and data, as well as those of the winder industry, to model the company’s resilience under multiple scenarios. Market Forces then produced a report and disseminated it with shareholders in the lead up to the AGM. 

Whitehaven’s plans quickly stop making financial sense even under small downward shifts to coal prices, compared to the very optimistic industry price forecasts that Whitehaven relies on to validate its aggressive growth and expansion plans. These industry price forecasts are completely incompatible with even the existing policies countries have adopted to restrict climate change, let alone the further policy shifts that must be enacted for countries to meet their commitments to the Paris Agreement’s climate goals.

Whitehaven’s expansion strategy is clearly being undermined by policies in its core markets. 78% of Whitehaven’s financial year 2022 (FY22) revenue was derived from sales to Japan, Korea and Taiwan, countries with legislated net zero by 2050 commitments. Japan is planning to close around 100 of its 140 coal-fired power plants by 2030 and has cancelled plans for any new coal power stations. South Korea is planning to reduce coal-fired power generation by 40% by 2030. The pipeline of proposed capacity in Southeast Asia more than halved from 2015 to 2021.

It is perhaps not surprising then that at this year’s AGM, Chairman Mark Vaile stated, “The board does not consider it in the best interest of shareholders to limit business strategies to a single scenario which is subject to considerable uncertainty.” That’s because when tested under any of the International Energy Agency (IEA) scenarios (STEPS 2.5°C, APS 1.7°C or NZE 1.5°C), Whitehaven’s  planned growth projects face unacceptable financial risk. This is even before considering the massive increase in production costs and royalties the company is keen to ignore. No wonder shareholders are livid. From a purely financial standpoint, Whitehaven’s growth strategy simply does not make sense.

Whitehaven’s ‘diversification’ into coal for steel not the answer

For Whitehaven, the AGM was another opportunity to reiterate its propaganda lines, that the acquisition of Dania and Blackwater mines “turns Whitehaven into a long-life low cost metallurgical coal producer.”

But Whitehaven pinning its ‘long-life’ hopes on rising demand for metallurgical coal is deeply misplaced for two reasons; 1) metallurgical coal demand is set to shrink as the world mitigates climate change and rapidly transitions to clean alternatives, and 2) Whitehaven’s idealised growth markets are grossly exaggerated by the company.

Under the NZE Scenario, global demand for metallurgical coal declines 25% by 2030.

Fatih Birol, executive director of the IEA stated in April, “The project pipeline for producing steel with hydrogen rather than coal is expanding rapidly. If currently announced projects come to fruition, we could already have more than half of what we need in 2030 for the IEA’s net zero pathway.” This sentiment is being echoed by the Australian steel industry with Mark Vasella, Chief Executive of BlueScope admitting in September “the technology” to cut carbon emissions out of steel production is “moving faster than he had predicted just two years ago.”

India, one of the key markets that Whitehaven held up at the AGM as a key future consumer of its coal, is actively working to reduce it’s reliance on Australian metallurgical coal. In FY22 India sourced 70% of its metallurgical coal imports from Australia, in FY23 this decreased to 50%, a trend that the Indian government’s secretary of the ministry of steel deemed “successful”.

Paul Flynn also said that by diversifying the company’s portfolio into metallurgical coal Whitehaven appears more ESG-friendly and will more easily access all of the financial services that it requires to operate its business.

“We expect this transformation to broaden our ESG credentials, also making the business easier to finance, insure and lower our cost of capital.”

This move is to combat the fact that mainstream financiers are turning their back on Whitehaven and the coal industry as further reinforced by Chairman Mark Vaile:

“To alleviate, if you like, a lot of the ESG type concerns and impacts on our business, that’s part of the reason that we are moving the business into having about 75% of the business in metallurgical coal.”

This is however quite exaggerated. Whiteahven does not have a genuine transition plan, does not disclose scope 3 emissions, and has multiple new coal projects in pursuit that are completely incompatible with the Paris climate goals.

Earlier this year, Whitehaven conceded it had failed to renew its $1 billion corporate loan facility first set up in 2013, after months of telling analysts and shareholders that they expected banks to renew it. Whitehaven could not convince the 13 banks on the loan to renew, including Australia’s big banks NAB and Westpac.

Australia’s largest bank, CommBank updated its fossil fuel lending policy in August of this year, stating that clients would be expected to have published ‘Paris-aligned’ transition plans that cover Scope 1, 2 and 3 emissions transition plans by 2025. Any client that does not have an acceptable transition plan will be unbankable.

Even if we were to take Whitehaven’s claims that once they have completed the acquisition, the company will generate 70% of its revenue from metallurgical coal that still means it will generate 30% of revenue from thermal coal. Just honing in on this one fact alone and disregarding all the other questionable factors of banking a company like Whitehaven, mainstream financial lenders are not going to be eager to provide finance. Large mainstream banks are increasingly limiting lending to companies that generate even as much as 5% of their revenue from thermal coal, a target also set by the Net Zero Banking Alliance, a coalition of banks representing over 40% of global banking assets committed to net-zero by 2050.

Whitehaven is unlikely to secure finance from mainstream lenders and will have to go further afield and into more far more expensive markets if it wants to secure credit, further making the business case for expansion harder to justify.

To conclude

Whitehaven’s AGM, as it always is, was a demonstration of spin and shallow salesmanship. Talk of exciting potential growth, of new markets and horizons, new products and demand, all the while ignoring calls for reason and sense. The reality is, the closer the world gets to mitigating climate change and entrenching those efforts in policies, as is happening right now, the more irrelevant the company becomes and the more risk Whitehaven, its shareholders, workers and their communities are exposed to.

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