We recently researched Coronado Global Resources (ASX:CRN) in The Dynamic Investor after the Company reported interim results (1H23). The shares continue to trade at a significant discount to valuation. Accordingly, we consider whether there are enough catalysts to bridge this gap.

About Coronado Global Resources

Coronado Global Resources holds a 100% interest in two mining assets. One asset is located in Australia and the other is located in the US. Both assets are located in the largest and most productive metallurgical coal basins in the world.

The Company’s Australian operations comprise the Curragh Mine complex (‘Curragh’) in Queensland’s Bowen Basin. Curragh produces a variety of high-quality low-ash metallurgical coal products and also produces thermal coal.

The US operations comprise three producing mining complexes in the Central Appalachian region in Virginia and West Virginia that produce a suite of high-quality metallurgical coal products. The three complexes are:

• Buchanan Mine Complex (Buchanan): an underground mine located in Virginia.
• Logan Mine Complex (Logan): one surface and four underground mines located in West Virginia.
• Greenbrier Mine Complex (Greenbrier): production idled complex since April 2020.

Key Fundamental Drivers

Improved Pricing Outlook

Metallurgical coal prices have weakened significantly over the last 18 months. However, several factors support an improved pricing outlook. These include stimulus in China’s housing market and China restarting purchases of high-quality Australian metallurgical coal. In context, metallurgical coal accounts for ~90% of CRN’s overall revenue. The remaining portion is comprised of thermal coal.

An improved pricing outlook for metallurgical coal supports overall sales for FY23, as the Company has maintained guidance for higher production.

Is Cost Guidance Achievable?

For 1H23, CRN incurred higher mining costs per tonne. These were attributable to inflationary pressures, and the impacts from lower production in the March 2023 quarter due to wet weather and a train derailment.

The Company expects average mining costs in 2H23 to be lower, as: i) Production plans are weighted to the 2nd half of the year, ii) Modest cost out initiatives are expected and iii) An inventory unwind is expected to be cleared in the September 2023 quarter, as railings have significantly improved in the Blackwater system.

Importantly, cost guidance by the Company implies a significant reduction in 2H23 unit costs to US$71-78/t, from US$97.2/t reported in 1H23. Unit costs have not been that low since early 2022, and mining cost inflation has persisted along with higher Queensland government royalty rates (although not included in this guidance metric).

Over the medium term, group unit costs are likely to come down. This is due to the planned underground expansion at Curragh. Once production is fully ramped up, costs are expected to lower to US$60-70/t.

Do Growth Projects Increase the Risk Profile?

The main growth project being undertaken by CRN is the North Curragh Underground Metallurgical Coal project. The latter was approved by the board in late June 2023. The project will produce 1.5-2.0Mtpa over a >10yr life and is expected to boost production at Curragh to 13.5Mtpa and group production to 20.5Mtpa by 2025. In context, Curragh currently produces ~10Mtpa of saleable coal.

There are risks in introducing an underground mining process at Curragh, into what is already a complex asset. However, it is worth noting that the Company has extensive experience in underground mining. In particular, CRN operated Longwall and Bord and Pillar operations in the US for many years.

Aside from the underground project at Curragh, the Buchanan mine expansion remains on track for completion in 2024 and should lift production from Buchanan from 4.1Mtpa to 4.5-5Mtpa. The Buchanan mine expansion is considered a lower-risk project in comparison to the Curragh underground project.

Capital Management on Hold as Acquisitions Pursued

CRN retains a strong balance sheet, with a net cash balance and adequate available liquidity. However, the key disappointment in the recently-released results for 1H23 was that the Company only declared a dividend of US0.5c per share. This dividend was the minimum bi-annual fully franked fixed ordinary dividend and was well below consensus expectations of >US3.0cps. CRN’s dividend policy is to pay out 60-100% of free cashflow (FCF) per year.

The reason for the unexpected low dividend payment is to retaining cash given reduced cash flow generation in 1H23. There is also the need for capital for organic & acquisition growth opportunities. In the absence of any value-accretive acquisitions, and provided the balance sheet remains strong; CRN reaffirmed that its capital management framework will return 60-100% of FCF over the full year.

Are Dividend Payments About to Resume?

Along with other coal producers, CRN remains engaged in BHP’s asset sale process for its Daunia and Blackwater mines. The timing of the Blackwater and Daunia sales process is unknown, however an update by CRN and BHP is expected in 2H23. For CRN, there are attractions in acquiring Blackwater. Firstly, there is the potential to materially increase the amount of saleable coal. Secondly, the likelihood of synergies between Curragh and Blackwater may further reduce CRN’s unit cost production profile.

Having said that, it is unlikely that the Company will participate in a winning bid for Blackwater. The removal of CRN as a possible acquirer of BHP’s assets would be considered a positive from two perspectives. Firstly, it removes uncertainty around execution/funding. Secondly, it allows the resumption of dividends payments in accordance with its dividend payout policy.

Fundamental View

The removal of CRN as a possible acquirer of BHP’s assets Is likely to narrow the current discount to market valuation at which the shares trade. However, the possibility of a resumption in higher dividend payments are not enough to warrant a more favourable view on the shares. Notably, there is a risk to cost guidance being achieved given that mining costs remain elevated. It is also worth noting that the shares typically trade in a volatile manner and often on low volumes.

Charting View

CRN had been recovering well since the start of June, but the sharp decline in August on high volume has put an end to that recovery for now. The last few weeks has seen it recover, but it is now finding resistance at these levels. We expect CRN to drift sideways for a bit longer and use up some more time before it is ready to head higher again. Investors can look to buy on dips near $1.50.

 

Michael Gable is managing director of Fairmont Equities.

 

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