Company Overview: Coronado Global Resources Inc. (ASX: CRN) is primarily engaged in the development and operation of premium quality metallurgical coal mines in Queensland, Australia and Virginia and West Virginia in the USA. The company has a total of eight operating mines at three locations that are close to transportation infrastructure. The company is one of the largest producers of metallurgical coal, providing high-quality output with its market-leading expertise. Coal provided by the company is used in the manufacturing of every-day steel-based products.


CRN Details
 


Increased Operational Efficiencies from the Curragh Mine: Coronado Global Resources Inc. (ASX: CRN) is primarily engaged in the development and operation of premium quality metallurgical coal mines in Queensland, Australia and Virginia and West Virginia in the USA. The company employs over 1,700 people and 1,400 contractors at its operations in two of the largest and most productive metallurgical coal basins in the world. It possesses a diversified production base, with reserves sufficient for at least 20 years of production, demonstrating decent growth prospects for the years to come. During the financial year ended 31^st December 2019, the company depicted a resilient performance in a difficult operating environment arising out of fluctuations in global demand and trade restrictions between the US and China. The performance was backed by the geographical exposure of the company with an effective hedge against the current challenges. Moreover, the company has responded proactively to the global headwinds by taking firm steps to control its operating costs and maintain a strong balance sheet. During the year, the company reported an increase of 80.9% in net income after tax to US$305.5 million. Since its listing, the company has delivered an amount of US$720.1 million as total distributions to shareholders.


Distributions (Source: Company Reports)
 
Over the years, the company has acquired a leading position as a provider of metallurgical coal, with a track record of value accretive acquisitions, increased production and sales on the back of a unique portfolio of assets. The company focuses on optimising its product-mix and increasing operational efficiencies and is well placed for long-term growth with reserves and resources of over one billion tonnes. Increased efficiencies across the platform have improved the financial health of the company to take advantage of both organic and inorganic opportunities that lie ahead.

Financial Highlights: During FY19, the company reported ROM production of 30.8 Mt as compared to production of 30.7 Mt in the prior corresponding year. Saleable production for the period remained in-line with the previous year and stood at 20.2 Mt. Sales volume decreased by 1% and stood at 19.9 Mt during the year. Metallurgical coal sales for the period accounted for 78.8% of the total sales. Operating costs per tonne sold, went down by 6.6%, depicting the result of optimisation of its assets and product, along with increased efficiencies during the period, resulting from the acquisition of the Curragh Mine. Revenue for the period came in at US$2,215.8 million as compared to US$2,297 million in FY18. Adjusted EBITDA came in at US$634.2 million, up 5.9% on FY18 value of US$598.6 million. During the period, net cash from operating activities went up by 30.9% to US$477.4 million.


FY19 Results Snapshot (Source: Company Reports)
 
Segment Performance: Total revenues from the Curragh mine stood at US$1,465.9 million, down 1.1% on pcp. Coal revenues from the mine decreased by 1.3%, due to softer coke coal market conditions. Operating costs decreased by 5% and stood at US$55.5 million. Efficiencies in operations led to a reduction in operating costs per tonne. The company has developed an acceleration plan for the mine and has secured the necessary rail and port infrastructure for the same. In addition, the company reconfigured its Logan Mine Complex in the US to introduce three new sources, which provided metallurgical coal revenues of US$250 million, up 28.2% on pcp. Total revenues from the mine stood at US$289 million, up 23% on pcp. Total revenues for the Buchanan mine stood at US$405.4 million, impacted by a decline in average realised price per tonne and lower sales volume. At Greenbrier, revenues came in at US$55.4 million, down 20.3% on pcp.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 84.86% of the total shareholding. 


Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During the quarter ended 31^st March 2020, the company reported a gross margin and EBITDA margin of 31.3% and 11.5%, respectively. Current ratio for the quarter stood at 1.27x, up from the previous quarter’s ratio of 1.09x. Debt to Equity multiple for the period came in at 0.62x.


Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: Some of the key risks that can impact the company’s performance, include Commodity Price Risk which can impact the realised price of sale of coal products and, in turn, the company’s revenues; Operational Risk with respect to geological factors, equipment failure, reserves risk, cost pressures, etc; Infrastructure and Transport Risk, including rail and ports that can impact the delivery of product; and Climate Change Risk. 

COVID-19 Impact: The company has witnessed the impact of COVID-19 on its operations and has taken the necessary preventive measures across all mines. The Curragh Mine continued to operate under strict regulations and the mines in the US were temporarily idled due to a contraction in demand. However, lately, the company has announced regarding the restart of mining operations in the US from 1^st June 2020. Both the mines will provide production levels to address the domestic metallurgical coal contracts, with limited exposure to the volatile European and Brazilian markets. Due to the uncertainty regarding the timing and potential recovery from the global impacts of COVID-19, the company has reduced its 2020 capital expenditure by ~40%, including the deferral of Curragh expansion plans. At the current juncture, the company aims to protect its financial position and withstand a low-price environment through a low-cost operating structure and a disciplined approach to investment. To boost the financial flexibility across the platform, the company has recently concluded an agreement with its lenders in the Syndicated Facility Agreement (SFA)to waive compliance with the financial covenants for the period, from 25^th May 2020 to 28^th February 2021. The agreement, with maturity due February 2023, comprises a multicurrency revolving credit facility of US$550 million and a multicurrency revolving bank guarantee facility of US$130 million.

Outlook: The company enjoys a leading position in the market, with a diversified production base, significant reserves and resources, and a low-cost operating model, that will enable it to deliver sustainable returns to shareholders. The company is focused on the new Curragh mine plan which is targeted to increase the mine’s saleable production to 15 Mt by 2023. The company has executed the required infrastructure contracts for the above plans, which will deliver incremental production growth of 2.0 Mt in Curragh in the near term. It is also planning to sign a resolution to resume the trade of metallurgical coal from the Buchanan mine to China and is also eyeing alternate customers to diversify the mine’s sales. 

Coal Market Outlook: Over the past 1 year, demand for seaborne metallurgical coal has been impacted by a slowdown in the economy, with high raw material costs impacting steel producers in Europe and Brazil. This, in turn, has led to a moderation in prices. Steel producers in China continue to pursue Australia’s high­-grade coking coal products, as a relaxation in port restrictions resulted in renewed demand. Outside China, there has been a slowdown in steel demand. The company expects the Phase One Trade agreement between the US and China to pave the way for US metallurgical coal exports in the near term. In India, demand for steel making raw material is expected to rise, with India remaining the largest growth market for the company with compounded demand for seaborne metallurgical coal anticipated to rise by 5% over the next five years.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
 

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company corrected by 15.23% in the last one month. Currently, the stock is trading close to its 52-week low level of $0.935, proffering a decent opportunity for accumulation. The company has a strong track record in making value accretive acquisitions and is targeting a leading position as a supplier of metallurgical coal to promote the growth of the steel sector globally. It is continuously reviewing opportunities in the form of inorganic investments, along with a continued focus on the expansion of its current operation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Whitehaven Coal Ltd (ASX: WHC), New Hope Corporation Ltd (ASX: NHC), Yancoal Australia Ltd (ASX: YAL), etc. Considering above factors, along with the performance in FY19, recent update regarding the restart of mines in the US, modest outlook, and a strong position in comparison to competitors, we give a “Buy” recommendation on the stock at the current market price of $1.08, up 4.854% on 27^th May 2020.

 
CRN Daily Price Chart(Source: Refinitiv, Thomson Reuters)

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