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’s operations are located in the Bowen Basin in Queensland, Australia, and the Central Appalachian region of the US. CRN’s coal supports the manufacturing of everyday steel-based products that enrich lives around the world. The company’s management team has a proven track record of operating and optimizing coal operations in Australia, U.S., and globally.

CRN Details

Growth Supported by the Recovery in Metallurgical Coal Markets: 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 United States of America. As on 14 April 2021, the company’s market capitalisation stood at ~A$1.20 billion. In response to the COVID-19 pandemic, the company had implemented several strategic initiatives to strengthen its balance sheet, preserve capital and increase its liquidity. CRN reduced its FY20 capital expenditure by 32% on FY19, deferred the expansion capital for Curragh, and has continued its disciplined approach to cost management across the business. Although CRN’s full-year performance in FY20 was impacted due to the ongoing COVID-19 pandemic, the company had performed decently in the last two quarters as it ramped up to full production of the US operations. From 2016 to 2020, the company’s revenue grew at a CAGR of 35.23%.

Revenue Trend (Source: Refinitiv, Thomson Reuters)

Looking ahead, the company intends to maintain its focus on cost and capital spending. Further, it is planning to progress non-core asset sales such as the Housing and Accommodation sales at Curragh mine. The company is currently well placed to benefit from the arbitrage opportunity in the seaborne metallurgical coal market. Further, the company’s operations are positioned to capitalize on the recovery in metallurgical coal markets. In 2021, the demand from China for Buchanan is expected to remain strong and CRN is expecting to send ~2Mt into this market.

Decent Operational Performance in December 2020 Quarter: For December 2020 quarter, the company reported total ROM production of 6.8 Mt, up 3.3% on the September 2020 quarter. Total Saleable production for the quarter was 4.5 Mt, down 3.2% on the previous quarter. This took the total FY20 saleable production to 17.0 Mt, which is at the top end of revised market guidance (16.5 Mt – 17.0 Mt). CRN’s proportion of metallurgical coal sales volume in the December 2020 quarter was 81.0% of the total sales mix. Export sales as a percentage of total sales for the December quarter were 77.0%, up 2.0% over the previous quarter.

FY20 Result Highlights: For the year ended 31 December 2020, the company reported ROM production of 25.2 Mt, down by 18.1% on FY19. Sales volumes for FY20 stood at 18.2 Mt, 9.0% lower than FY19 as a result of lower saleable production. As a result of soft market conditions, CRN realized metallurgical coal pricing of US$90.5 per tonne, down by 29.7% compared to FY19. Due to lower sales volumes and a reduction in the average realized metallurgical coal price, CRN reported revenue of US$1,462 million in FY20, down by 34% on FY19.  During the year, the company successfully executed two covenant waiver letters in May and August 2020, which waived the covenants testing under the Syndicated Facility Agreement (SFA) until 30 September 2021. The company reduced its capital expenditure to US$123.9 million in FY20, down by 32% on FY19 and 40% below the original FY20 guidance. This helped the company in preserving capital during a period of uncertain economic conditions while maintaining the ability of operations to respond to improved pricing.  Over the year, the company raised gross proceeds of ~US$180.0 million through a Placement and Institutional and Retail Entitlement Offer. These proceeds were used to repay debt and improve CRN’s liquidity position. The reported net loss for FY20 stood at US$226.5 million, down by US$532.0 million (174.2%) compared to FY19. As at 31 December 2020, the company had cash of US$45.7 million and drawn debt of US$327.6 million.

FY20 Sales Volume and Revenue (Source: Company Reports)

Key Metrics: Gross margin for FY20 stood at 24.8%, down from 45.6% in FY19. EBITDA margin for FY20 stood at 3.4%, down from 28.6% in FY19. Current ratio for FY20 stood at 1.37x in FY20, up from 1.09x in FY20, mainly due to gross proceeds of ~US$180.0 million raised through a Placement and Institutional and Retail Entitlement Offer.

Past 5-year Financial Performance for Year Ending 31 December; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 72.81% of the total shareholding, while the top four constitutes the maximum holding. Coronado Group LLC and AustralianSuper are holding a maximum stake in the company at 55.86% and 8.0%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Risks: The company is exposed to the risks unique to international mining and trading operations, including tariffs and other barriers to trade. 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. CRN 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.

Improved Market Outlook: Lately, the spot pricing in the metallurgical coal market has improved as global steel producers continue to ramp up production, underpinned by the automotive and construction sector. The demand for metallurgical coal is expected to improve further in 2021, supported by increased investment in infrastructure, which is driving the consumption of steel products. The growth of India’s blast furnace production over the next decade is expected to improve the long-term outlook for metallurgical coal.

Decent Company Outlook: In FY21, the company is mainly focused on improving the contractor performance at Australian operations to limit mine sequencing issues. Further, it is focused on stabilising production at Buchanan and Logan.  CRN is actively managing its inventory levels to achieve a balance between stockpiling costs and meeting customers’ demand, as well as positioning for a recovery in met coal prices. 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. CRN expects a marginal increase in export sales in FY21 from its US Operations. For FY21, the company expects its total saleable production to be in the range of 18.0Mt – 19.0Mt. Total capital expenditure for FY21 is expected to be in the range of US$135 million – US$155 million.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1 USD = ~1.31 AUD

Stock Recommendation: The stock is currently trading lower than the average 52-week price level band of A$0.580 - A$1.374, offering a decent opportunity for accumulation.  On the technical analysis front, the stock has a support level of ~A$0.708 and a resistance of ~A$1.289. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer median EV/EBITDA (NTM trading multiple), considering the improved metallurgical coal outlook and recently implemented strategic initiatives to strengthen the balance sheet. We have taken peers like Whitehaven Coal Ltd (ASX: WHC), New Hope Corporation Ltd (ASX: NHC), and Yancoal Australia Ltd (ASX: YAL), etc. Considering the company’s decent operational performance in Q4FY20, improved market outlook, modest company outlook, healthy balance sheet, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of A$0.865, down by 0.575% on 14 April 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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