Coronado Global Resources Inc.

Company Overview: Coronado Global Resources Inc. (ASX: CRN) is a global producer, marketer and exporter of a full range of metallurgical coal products. The company owns a portfolio of operating mines and development projects in Queensland, Australia and in Virginia, West Virginia and Pennsylvania in the United States. CRN’s coal supports the manufacturing of everyday steel-based products that enrich lives around the world. In terms of export volume, CRN is one of the largest metallurgical coal producers globally. The company was listed on the ASX on 23 October 2018.

CRN Details

Improving Top-line and Bottom-line: Coronado Global Resources Inc. (ASX: CRN) is a leading international producer of high-quality metallurgical coal with a portfolio of operating mines and development projects in Australia and the United States of America. As on 11 November 2020, the company’s market capitalisation stood at ~A$1.34 billion. CRN is focused on driving efficiencies and achieving incremental growth through its mining operations. The company has a track record of making value accretive acquisitions, driving production growth and increased sales from its unique portfolio of assets. From 2015 to 2019, the company’s revenue grew at a CAGR of 76.62%. Over the same period, the company also witnessed significant improvement in its bottom-line, rising from a net loss of US$55.2 million to a net profit of US$305.5 million.

Revenue and Net Income Trend (Source: Refinitiv, Thomson Reuters)

Looking ahead, the company is focused on improving its productivity, reducing its costs and minimising the overall cash burn. The company continues to manage its inventory level to maintain a balance between stockpiling costs and meeting customers’ demand. Based on its future outlook, which is subject to changes in demand from its customers, volatility in coal prices and COVID-19 uncertainties, the company is of the view that expected cash generation from operations, available borrowing facilities and other strategic and financial initiatives will be sufficient to fulfil the needs of its existing operations and service its debt obligations.

H1FY20 Highlights: For H1FY20, the company reported total production of 8.0Mt, down by 2.4Mt on the previous corresponding period (pcp), impacted by temporary suspension in January 2020 at the Australian operations and idling of US Operations as a result of the COVID-19 induced reduction in global demand for metallurgical coal. For the period, the company reported a total sales volume of 8.3Mt and earned a total revenue of US$713.7 million. The company’s gross operating cost for H1FY20 stood at US$665.1 million, down by 18% on pcp.

H1FY20 Results (Source: Company Reports)

Key Metrics: For September 2020 quarter, the company reported a gross margin of 24.1%, higher than the industry median of 9.6%. For the same period, the company’s current ratio stood at 1.2x, higher than the industry median of 0.88x, demonstrating that the company is well equipped to pay its short-term obligations. The company's debt to equity ratio for September 2020 quarter stood at 0.4x, lower than 0.66x in June 2020 quarter.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 71.51%.  Coronado Group LLC and AustralianSuper hold the maximum interest in the company at 55.86% and 8.00%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Completed Equity Raising of US$180 Million: On 19 August 2020, the company announced that it has completed the A$145 million Placement to institutional investors and the institutional component of its fully underwritten 2 for 11 pro-rata accelerated non-renounceable entitlement offer. Notably, the Placement received strong support from the company’s existing institutional securityholders and new institutional investors. From the Placement and Institutional Entitlement Offer, the company raised combined gross proceeds of around A$239 million.  This has significantly strengthened the company’s balance sheet and improved its liquidity and flexibility.

September 2020 Quarter Highlights: For the September 2020 quarter, the company reported total saleable production of 4.6Mt, up 31.2% on the previous quarter, driven by the restart of US mining operations at Buchanan and Logan and strong Australian (Curragh) performance. From its Curragh mine, the company reported record quarterly saleable production of 3.6 Mt, up 24.5% on the previous quarter. During the quarter, the company’s US operations continued to ramp up production in line with the gradual recovery in steel and metallurgical coal markets.

Due to higher production and improved market conditions, the company’s total coal sales grew to 4.9Mt, up 27% on the previous quarter. For the quarter, the company reported total sales of US$376 million, up 23.7% on the previous quarter, driven by higher sales volume.

Over the quarter, the company successfully raised US$180 million of new equity and paid down debt, providing additional liquidity and improving credit metrics. During the period, the company also negotiated an extension to its financial covenant waiver to 30 September 2021. As at 30 September 2020, the company’s net debt stood at US$273 million, reduced significantly from US$405 million at 30 June 2020.

Q3FY20 Operations Results (Source: Company Reports)

Key Risks: The company is exposed to the risks associated with the COVID-19 pandemic as it remains an ongoing issue for steel production and metallurgical coal demand across the globe. The company is also exposed to the risk related to uncertainty and weaknesses in global economic conditions, including the extent, duration and impact on prices caused by reduced demand. CRN is exposed to the risks unique to international mining and trading operations, including tariffs and other barriers to trade.

Outlook: For the remainder of FY20, the company expects steel demand to remain strong, underpinned by the investment in infrastructure. As per Wood Mackenzie, the long-term metallurgical coal demand is expected to grow 1.1% p.a. to 2040 and is largely anchored by India’s steel production growth.

With decent liquidity levels, the company seems well placed to manage its operations efficiently and to improve its productivity, reduce costs and minimise overall cash burn. Further, the company is well-positioned to take advantage of a recovery in steel demand and metallurgical coal prices post COVID-19. For the full year 2020, the company expects its total production to be in the range of 16.5 to 17.0 million tonnes.

The company’s US mines are set to further increase production quickly as the market gradually recovers to the pre-COVID-19 demand level. The company continues to actively review plans for reducing operating, corporate and capital expenditure to ensure sufficient available liquidity during the current period of uncertainty and volatility.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Month

Stock Recommendation: Over the last three months, the stock of CRN has provided a return of 72.8% and is currently trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation. On the technical analysis, the stock has a support level of ~A$0.718 and resistance of ~A$1.733. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). For the purpose, we have taken peers like BlueScope Steel Ltd (ASX: BSL), Stanmore Coal Ltd (ASX: SMR), Whitehaven Coal Ltd (ASX: WHC). Considering the company’s decent operational performance in Q3FY20, positive metallurgical coal outlook, healthy balance sheet, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of A$1.08, up by 11.340% on 25 November 2020.

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

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