An Important Player in Metallurgical Coal Space – Coronado Global Resources Inc.

Coronado Global Resources Inc.

CRN Details

Australia Based Curragh Mine Capable of Delivering 15 Mt by 2023: Coronado Global Resources Inc. (ASX: CRN) is involved in the development and operation of premium quality metallurgical coal mines in Queensland, Australia (Curragh) and in the states of Pennsylvania, Virginia and West Virginia (Buchanan, Logan, Greenbrier) in the United States of America. It is one of the largest metallurgical coal producers in the United States by production volumes and largest metallurgical coal producer globally by export volumes. As a reliable supplier to the steel industry, CRN contributes positively to the global economy, local economies and communities where it operates. In total, the company has eleven operating mines that are located close to the transportation infrastructure. With a diversified production base and significant Reserves and Resource, CRN is well-positioned to grow over many years to come.

Looking at the past performance over FY15 to FY18, total revenue of the company has grown with a compounded annual growth rate (CAGR) of 105.65% from $227.7 Mn in FY15 to $1,980.5 Mn in FY18. Group’s bottom-line improved from a loss of $55.2 Mn in FY15 to a profit of $114.7 Mn in FY18.

During the September quarter of FY19, the company’s performance from its Australian and US mining operations was overshadowed by export market volatility and the completion of a significant planned maintenance activity at Curragh, which is highly expected to support future incremental growth of the company. As per the comprehensive review of Curragh mine since its acquisition, CRN’s team has delivered a more advanced mine plan capable of increasing saleable production to 15 Mt by 2023 through a capital light expansion of Curragh’s CHPP, uplifting shareholders’ value for the near-term. Awarding a six-year contract to Thiess in providing mining services at Curragh’s northern operations, is expected to provide benefit to CRN under its expansion program. On Safety terms, the performance of its US and Australian operations in the third quarter of FY19 was better than the national averages.

Company’s Operational Overview for H1FY19 (Source: Company Reports)

September’19 Quarter Key Highlights: Third-quarter revenue (unaudited) was reported at $536 Mn, whereas Year-to-Date revenue (unaudited) was reported at $1,770 Mn. Year-to-Date mining cost per tonne sold (unaudited) was reported at $52.2 per tonne.

Run on Mine (ROM) production decreased by 15.7% to 7.5 Mt as compared to the previous quarter. Saleable production decreased by 2.9% to 5.2 Mt as compared to the previous quarter. This can be attributed to planned maintenance at Curragh and deferment of thermal coal production at Logan (Toney Fork). Buchanan ROM production increased by 4.5% on q-o-q to 1.9 Mt and saleable production for the quarter stood at 1.2 Mt, in-line with the previous quarter.

Sales volumes for the quarter were reported at 4.9 Mt, a decrease of 8.7% on the June’19 quarter on reduced production due to scheduled mine and rail maintenance at Curragh and higher inventories at Buchanan. Metallurgical coal as a proportion of saleable production was reported at 83.7%, a 2.2% decrease than the previous quarter. Export sales for the period were reported at 75%, a decrease of 3% than the previous quarter. This was due to a decrease in the group realized metallurgical coal price to $125.9 per tonne; and 8.6% fall in average for all grades with a mix of FOR and FOB pricing as compared to the previous quarter. During the period, CRN awarded a 6-year contract to Thiess for mining services at Curragh’s northern operations.

Net debt as on September 30, 2019 was reported at $276 Mn, following the payment of the interim distribution of $0.41 per CDI (capital return of $0.298 per CDI and dividend of $0.112 per CDI). The group successfully extended maturity of Syndicated Facility Agreement (SFA) to February 2023 and increased SFA from $350 Mn to $550 Mn.

September’19 Quarter Income Statement (Source: Company Reports)

H1FY19 Key Financial Highlights for the period ended June 30, 2019: Sales Revenue for the period increased by 10.6% to $1,234.3 Mn due to increased sales volumes and a higher percentage of metallurgical coal sold. EBITDA for the period increased by 54.1% to $405.4 Mn, due to higher production, lower costs and improved realized prices. Reported Net Income After Tax increased by 92.7% to $214.3 Mn. The Board of Directors declared an interim distribution of $0.41 per CDI, where Capital Return valued at US$0.298 per CDI and dividend valued at US$0.112 per CDI.

H1FY19 Key Metrics (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 84.58% of the total shareholding. Coronado Group LLC and BlackRock Investment Management (UK) Ltd. hold maximum interests in the company at 79.99% and 1.93%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin, EBITDA margin and net margin for Q3FY19 stood at 43.9%, 28.0% and 12.9%, better than the industry median of 7.5%, 3.3% and 1.9%, respectively, implying decent fundamentals for the company. Its ROE for Q3FY19 stood at 6.9%, better than the industry median of 1.1%, which implies that the company has generated better returns for its shareholders than its peer group.


Key Metrics (Source: Thomson Reuters)

Key Risks: The company has no control over uncertainties, especially external factors such as general economic conditions, international events and circumstances, competitor actions, government actions and regulations, fluctuation in commodity prices, etc.

What to Expect: The benchmark price for metallurgical coal is low in the range of $130-$132 per tonne (FOB- Free on Board). Industrial growth in Europe and Brazil has stalled and Mill Utilization rates have continued to drop. As a result, mine inventories have grown, which has led to an increase in inventory management costs and curtailment in the production. Moreover, the trade negotiations have remained unresolved as China has not granted relief on tariffs, leading to further increase in inventories. In addition, import quotas at some Chinese ports have been re-established. All these factors are affecting operating costs, which is now forecasted to be at the top end of the guidance range with revenues now expected to be lower than the previous period due to a 3% reduction in saleable production along with lower realized prices. FY19 Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) is now expected to be in the lower end of the range of the prior guidance of $687 to $737 Mn.

Although current market conditions are challenging with robust long-term demand fundamentals for high-quality metallurgical coal; therefore, the company has kept its production growth expansion plans unchanged. Its balance sheet capacity and low-cost operating structure have positioned CRN to withstand these weaker market conditions and grab growth opportunities in important markets.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Approach

EV/EBITDA Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The stock price fell by 27.64% in the past six months and posted a negative YTD return of 17.41%. Despite increased inventory and reduced sales volumes in the September quarter due to subdued demand from Europe and Brazil for metallurgical coal; and halt in shipment towards China due to tariffs on US coal leading to margin erosion for coal producers globally, CRN is continuously looking for new marketing channels via leveraging its global customer base. Moreover, the company is committed to follow a disciplined approach under its capital allocation strategy to reap competitive advantage through the business cycle.

Extension of syndicated facility by the banks reflects the stability and strength of the Company’s balance sheet, the quality of its assets and more importantly the resilience of its underlying project cash flow. This facility is expected to help the company to deliver Curragh’s expansion targets along with the strategic acquisition of accretive and quality assets. Considering a highly experienced management team, a fundamentally low-cost asset base that delivers a competitive advantage and aforesaid facts, we have valued the stock using a relative valuation method, i.e., EV/EBITDA multiple, and arrived at a target price of double-digit growth (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$1.940 per share, up 0.258% on December 4, 2019.

CRN Daily Technical Chart (Source: Thomson Reuters)