Is the party well and truly over for ASX 200 coal shares?

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The S&P/ASX 200 Index (ASX: XJO) coal shares have suffered a sell-off over the past couple of months.

Since 20 January 2023, the New Hope Corporation Limited (ASX: NHC) share price has dropped by 16% and the Whitehaven Coal Ltd (ASX: WHC) share price has sunk 24%.

The ASX 200 has only fallen by 1.9% over that same period. So these two ASX 200 coal shares have significantly underperformed.

But, it’s worthwhile to keep in mind the meteoric rise of both of these ASX mining shares over the past year. The New Hope share price has gone up by around 100% and the Whitehaven share price has risen by around 80%.

Coal prices have sunk

According to reporting by The Australian, the global benchmark for coal prices has dropped heavily since the last quarter of 2022.

Coal was trading at US$450 per tonne in September. It had dropped by 13% to US$392.82 per tonne on 3 January 2023. But this week, Newcastle Coal futures trading on the ICE exchange had dropped to US$179.25 per tonne.

This means that since September, the coal price has fallen by around 60%.

What’s the reason for this huge decline?

The Australian reported that coal prices have fallen amid a warm European winter which had “cooled down fears held by many investors that the continent faced a potential energy crisis as a result of the Russian invasion of Ukraine”.

This can have a major impact on the monthly profitability of ASX 200 coal shares. I don’t think many investors were expecting coal prices to stay above US$400 per tonne for the long term. But the speed of their rapid decline may have been a surprise.

It costs miners roughly the same to mine its resource each month, so extra revenue for that same tonne of a commodity is mostly extra profit for the business. But, it also means that a lower coal price largely wipes off profitability.

Is the party over for ASX 200 coal shares?

The coal miners’ share prices are still much higher than they were 12 months ago. At the current coal price, both of the coal miners can still make strong profits and pay dividends.

Commsec numbers suggest that the New Hope share price is valued at less than 4x FY23’s estimated earnings with a possible grossed-up dividend yield of 29%.

The analyst estimate also suggests that the Whitehaven share price is valued at less than 3x FY23’s estimated earnings with a grossed-up dividend yield of 13.3%.

However, profit is expected to drop by FY25.

But, a key question for these ASX 200 coal shares could be whether the coal price holds up for a while, or whether it keeps dropping over the rest of 2023. Time will tell.

The post Is the party well and truly over for ASX 200 coal shares? appeared first on The Motley Fool Australia.

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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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