Coronado Global Resources (ASX:CRN) is considered one of the best exposures to metallurgical coal, which accounts for >90% of revenue.
With the shares having recovered from recent lows, are current levels still an attractive entry point?
About Coronado Global Resources
Coronado Global Resources holds a 100% interest in two mining assets, one in Australia and one in the US. Both are located in the largest and most productive metallurgical coal basins in the world. CRN is the 4th largest metallurgical coal producer globally.
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. This is primarily sold domestically under a long-term contract to Stanwell, a Queensland government owned entity and the operator of the Stanwell Power Station.
Curragh is an opencast bituminous coal mining and processing operation consisting of two distinct areas, Curragh North and Curragh Main.
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 that produced 4.4Mt of low-volatile metallurgical coal in 2021.
• Logan Mine Complex (Logan): one surface and four underground mines located in West Virginia that produced 1.8Mt of high-volatile metallurgical coal, as well as 0.2Mt of thermal coal, in 2021.
• Greenbrier Mine Complex (Greenbrier): production idled complex since April 2020.
Key Fundamental Drivers
Production Targets Are Achievable
The Company has outlined group production guidance for FY22 and a medium-term production target for the Curragh mine (which is a key value driver for the Company).
In terms of the FY22 production guidance, this is highly weighted towards the second half of the financial year (2H22). Production in 1H22 was impacted by wet weather, geological issues, and scheduled planned downtime for key maintenance activities. Excluding an external risk to production from further adverse weather, the full-year production guidance of 18.0 – 19.0Mt is considered achievable, given incremental tonnes from highwall mining, additional fleet, and improved utilisation/productivity on conversion of four fleets to CRN operatorship.
Over the medium term, CRN is on target to achieve its production target for Curragh of 13.5Mt by FY25 (11.1Mt as at FY21). This is expected to be supported by increased productivity through mine planning (+0.4Mtpa), and two new drag lines and other productivity improvements including the conversion of four fleets to contractor operator model (+0.7Mtpa).
Pricing Expected to Recover
Over 90% of CRN’s revenue is derived from metallurgical coal. Movements in metallurgical coal prices present the most significant upside and downside risk to CRN’s earnings forecasts and valuation.
Metallurgical coal prices for shipments from both the Australian and US operations reached record levels in 2Q22. More recently, metallurgical coal prices for the 4th quarter of calendar year 2022 have recently been revised downwards to reflect the rapid deterioration in steel demand (excluding China). To this end, it is worth noting that CRN’s Australian coal sales receive a lagged priced. As such, any softening in coal prices in the 4th quarter of calendar year 2022 is likely to impact CRN’s Australian coal sales in the following quarter (1st quarter of calendar year 2023).
CRN can take advantage of higher metallurgical coal prices by diverting metallurgical tonnes into higher-priced thermal coal markets in order to achieve higher realisations. Further, the Company has previously benefitted from the Chinese ban on Australian coal and has been able to divert cargo from its US assets into China at a healthy premium. The unwinding of this could be positive for Curragh operations and prices.
The medium-term outlook for metallurgical coal prices is bullish. It is underpinned by supply underinvestment and India’s import dependency leading to a supply gap in the market in the medium term. The Company traditionally sells approximately one-quarter of its seaborne metallurgical coal to India, making India CRN’s largest single market. India is forecasting GDP growth rates in 2022 and 2023 of 7.0% and 5.9%, respectively, which is ahead of the growth rates for most other key markets.
Strong Balance Sheet Enables Dividend Payments at Attractive Yields
The balance sheet has moved from a net debt position of US$236.6m as at 30 June 2021 to a net cash position of US$171.2m as at 30 June 2022. The strong net cash position has enabled CRN to pay dividends (including a US7.5 cents per share interim dividend and a special dividend of US12.0 cents per share) at an attractive yield. Importantly, CRN has stated that it expects to remain in a net cash position following the current capital management initiatives
The cash balance is expected to expand further by 31 December 2022, based on stronger volumes from Curragh, contract pricing lags, unwinding of working capital and some switching of US metallurgical coal into the higher-priced thermal market.
Fundamental View
We highlight three factors that underpin the potential for further upside in the shares:
i. Investors are increasingly willing to look beyond the expected decline in metallurgical coal prices by the end of the calendar and year, and instead focus on the potential upside in pricing from 2023 onwards (as the market typically looks ~12 months ahead).
ii. The Company is well positioned to achieve its production targets by FY25 (US 6.9Mtpa, Curragh 13.5Mt), although consistently stronger production performance at Curragh is required before these targets are fully factored in by the market. In addition, further detail on a potential 15Mtpa expansion (due before the end of the calendar year) is also likely to be well received.
iii. Prudent management of the balance sheet (which is in a net cash position) enables dividend payments at attractive yields (1-year forward yield of ~28%) and provides a buffer against moderating metallurgical coal prices in the near term.
Charting View
The decline across May – July appears to be over with CRN nicely pushing higher in August and then holding in well these past several weeks to consolidate that early-August rally. This consolidation appears to be ending and CRN is starting to get back into an uptrend here. It looks like CRN is now trying to break above resistance (blue line). A close above this blue line would be the buy signal.
Michael Gable is managing director of Fairmont Equities.
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