Coronado Global Resources Drifting toward further stress
The 1Q disappointed our expectations on price realisations and costs, and we infer a 1Q cash burn of +$50m (ex-asset sales & receivables unwind). Our base case forecasts now infer that CRN will require debt covenant waivers to be extended beyond Sep-30.
We apply a 10% discount to our revised DCF valuation to derive our target, reflecting the risk of balance sheet strain/ remediation if weak coal prices persist. We think holders should tread cautiously and we continue to advocate trimming overweight positions. 1Q disappoints Group 1Q EBITDA of only $7m was well below our bottom-of-the market forecasts ($22m). Sales of 4.4Mt were only a touch below our forecasts, but met price realisations in both Australia (74% vs 3-year average 78%) and particularly the US materially disappointed (74%) given the +US40/t premiums over QLD HCC (FOB basis) seen in current US east coast ULV spot prices.
We back calculate that CRN is not receiving a material premium on Buchanan spot sales to China. We also see risks to unchanged CY21 cost guidance after 1Q costs ($62.20/t) came in 7% above guidance. The lack of a better explanation/ market conference call on a very tough 1Q is a concern. Balance sheet back in sharp focus We infer that CRN burned roughly $55m in the 1Q (including financing and capex) despite the help of +US$150/t QLD HCC pricing in January and ongoing US price premiums.
Net debt climbed only $8m in 1Q (to $290m, cash $34m, debt $324m, 26% ND/ND+E) helped by the fleet sale ($23m), reduction in Xcoal receivable ($24m) and apparent capex deferral (~$14m). We forecast further Xcoal repayment (estimate $29m) in the 2Q but otherwise we do expect net debt to climb more quickly unless coal prices appreciate. “Initiatives to generate liquidity” We forecast that CRN will be in breach/ require extension of its debt covenant waivers beyond Sep-30 on minimal forecast 1H EBITDA of $17m (ND/EBITDA covenant
Coronado produces and exports high quality metallurgical coals from a portfolio of 4 coal complexes (incorporating 8 operating mines) in Queensland (Australia) and in Virginia and West Virginia (USA). In 2017, CRN was the fifth largest met coal producer globally by exports and the largest US met coal producer by production.
Our valuation adjusts for: 1) lower short term coal price assumptions; 2) lower forecast price realisations; 3) slightly higher production forecasts; 4) a higher WACC (risk) assumption; and 4) higher cost assumptions. We now apply a 10% discount to our DCF valuation to derive our target, to reflect potential balance sheet strain in a weak coal price scenario.
Recently weaker QLD PLV coal prices are frustrating in the context of recovering steel demand, material supply disruption (Anglo, QLD weather) and broader commodities reflation. Abnormal trade flows see price dynamics remain inverted (US LV to China @ +US$140/t FOB) meaning Chinese PLV buyers, Aussie producers (BMA, CRN, privateers) and QLD royalties remain the most notable losers from Chinese restrictions. BHP/BMA’s actions are key, with stated intentions targeting unit costs implying BHP volumes will risk suppressing QLD PLV prices near term.
Current price: A$0.77 Target price: A$0.90 Previous target: A$0.99 Up/downside: 16.9% Reuters: CRN.AX Bloomberg: CRN AU Market cap: US$831m A$1,066m Average daily turnover: US$2.4m A$3.0m Current shares o/s 1,384m Free float: 20.0%
Key Industry Drivers Global growth + Steel production Asian, European and Indian demand for higher quality metallugical coal Chinese domestic coal policy, influencing marginal demand and price Industry supply discipline and growth constraints Supply side disruption due to weather, labour and infrastructure Key risks COVID driven demand risk Commodity price and FX fluctuations Production versus budget Management of capital and operating costs Disruption due to internal or external factors Concentration of ownership / lower liquidity
Market cap (A$m): 1,066 Rating: HOLD Shares outstanding (m): 1,384 Price (A$): 0.77 Free float (%): 20.0 Target price (A$): 0.902 Website: www.coronado.com.au Upside/downside to target price (%): 16.9
-CIMB Bank Research