Cash-rich coal firm seen hiking dividend

VANCOUVER/ TORONTO • Cash holdings at Westshore Terminals Investment Corp., backed by billionaire Jim Pattison, are near a record high, raising speculation the company may be readying to boost its dividend.

The owner of a coal export terminal south of Vancouver has surged 142 per cent in Toronto this year, making it the best-performing stock on the S&P/TSX Industrials index. Business has boomed as North American miners boosted shipments amid one of the steepest rallies ever for the fuel, helping replenish Westshore’s coffers.

“The question is, what do you do with the free cash flow?” said James Thorne, senior portfolio manager and chief capital market strategist at Caldwell Investment Management in Toronto. Because the company has no debt to pay down and doesn’t have scope to expand much more, “I think it’s possible they raise their dividend.”

Thorne sees the terminal benefiting from improving seaborne coal trade amid Chinese production restrictions, a potential U.S. infrastructure boom that could boost demand, and environmental protests that have stalled rival terminals from being built on the U.S. West Coast.

His firm, which manages about $1.5 billion, began buying shares of Westshore in the second quarter.

Westshore is the largest coal-loading facility on the Pacific coast of the Americas and its biggest customer is Vancouver-based miner Teck Resources Ltd., which produced a record seven million tonnes of metallurgical coal, used to make steel, in the third quarter. Westshore gets paid a handling charge for placing coal on ships, earning more as export volumes increase.

Last year, Westshore slashed its dividend as customers shipped less, in some cases halting exports entirely, amid depressed coal prices.

Cutting the payout was probably unwarranted given that the company’s cash balance has almost doubled since earlier this year, RBC Capital Markets analyst Walter Spracklin said in a note. “It is likely that a dividend increase is in the cards (or a meaningful share repurchase).”

Westshore’s free cash flow gives it the financial capacity to boost its dividend by as much as six cents to 22 cents a quarter in 2017, and to about 26 cents the following year, according to Daryl Young, a Toronto-Dominion Bank analyst.

Westshore declined interview requests, saying no one was available to speak.

Coal prices have skyrocketed this year as China’s government forced its miners to curtail output, an effort intended to support slumping prices. It worked: prices of metallurgical coal shot above US$300 a tonne for the first time since 2011 earlier this month. In 2015, 68 per cent of the coal handled by Westshore was metallurgical.

Prices of thermal coal — the kind burned by power stations — have also surged to a level that has made it profitable again for some U.S. producers to begin shipping to Asia. Lighthouse Resources Inc. said last month it began exporting coal through Westshore to South Korea. Cloud Peak Energy Inc., which was paying quarterly penalties to Westshore for cutting the amount of coal it’s obligated to ship through the terminal, said in a filing last week that it has a 1-million-ton export contract through February.

Prime Minister Justin Trudeau’s government said Monday it was speeding up Canada’s planned elimination of coal-fired power plants. The announcement came after U.S. presidentelect Donald Trump said during the campaign he wanted to boost coal output.

Caldwell’s Thorne said that while Canada may be moving away from coal as a power source, those plants are still the mainstay of electricity generation in developing markets.

Westshore’s biggest investor is Vancouver billionaire Pattison, Canada’s sixth-richest person with a net worth of US$5.9 billion, according to the Bloomberg Billionaires Index. He’s been invested in Westshore since at least the first quarter of 2007, when the share price averaged $11.56, according to data compiled by Bloomberg. The shares closed Wednesday at $27.24 in Toronto.

Westshore’s recent rise could still go into reverse.

China is expected to boost coal production again to some degree, said Jim Truman, director of global metallurgical-coal markets for Wood Mackenzie. Australian underground mines, which had been undergoing output problems, are also expected to start to return online toward year’s end, and some North American mines are slated for expansion. Together, those changes will put downward pressure on prices, he said.

“So much depends on the rate at which Chinese domestic production comes back on-line,” Truman said by phone from Morgantown, W. Va. “It’s a bit of black box.”

Westshore’s fortunes, to be sure, have been dependent on Chinese demand for decades. The company profited during the so-called commodity supercycle as hunger for coal, oil and metals from a rapidly industrializing China powered a bull market for about a decade until 2011.

“I don’t think we’re going back to the heady days of two decades ago, but at the same time the industry won’t be left for dead,” Thorne said.

“So 2017 should still be a pretty good year for the coal industry.”

2017 SHOULD STILL BE A ... GOOD YEAR FOR THE COAL INDUSTRY.