Organic And Inorganic Opportunities For Coronado

This story features CORONADO GLOBAL RESOURCES INC, and other companies. For more info SHARE ANALYSIS: CRN

Analysts applaud second quarter production and sales figures for Coronado Global Resources and incrementally raise 12-month target prices.

-Strong June quarter production for Coronado Global Resources
-Record volumes at Curragh and expansion approved
-Potential share price catalyst from acquiring BHP Group assets
-Cost guidance retained but may be difficult to achieve

By Mark Woodruff

After hitting a 52-week low of $1.29 at the beginning of June, shares of Coronado Global Resources ((CRN)) have rallied by over 30% to be currently trading around $1.69.

A strong second quarter performance at the Curragh open-cut coal mine in Central Queensland and a better-than-expected performance at the Buchanan underground mine complex in southwestern Virginia are contributing to further share market gains, as brokers incrementally raise 12-month target prices.

Production improved materially on the prior quarter which suffered from unfavourable weather and constraints around logistics.

The company produces and exports metallurgical and thermal coal from the US states of Virginia and West Virginia, and from its Bowen basin mining complex in Queensland, and supplies to steelmaking customers located in the Americas, Europe and Asia.

Production is split 60%:40% between Australia and the US, with around 80% and 20% from met and thermal coal, respectively. Over 80% of volume and earnings derive from Curragh and Buchanan.

Volumes at Curragh were the strongest since September 2020 in the second quarter, as record prime waste movement has unlocked operational efficiencies at site, explains Macquarie.

The board also approved the Curragh North underground project for first coal in late 2024, which, according to UBS forecasts, supports Curragh sales growth to around 13.5Mtpa by 2025, up from 9.9Mtpa in 2022. The project is expected to cost around US$100m over the next 18 months.

Run-of-mine (ROM) coal production of 7.2Mt and sales of 4.5Mt increased strongly quarter-on-quarter, while FY23 guidance for 16.8-17.2mt of saleable coal, US$84-87/t in costs and capital expenditure of US$260-290m was maintained.

Revenue of US$728m was a 4% beat against Macquarie’s expectations, as a beat in sales volumes offset group realised prices of US$219.5/t, which decreased by -8% quarter-on-quarter.

UBS believes met coal prices will find a floor near $US220/t over the next twelve months and in the longer term expects prices around US$180/t (real) as supply normalises from 2025/26. Long-term risks to the upside is expected amid persistent underinvestment and cost escalation.

Goldman Sachs anticipates a benchmark price of US$293/t for 2023 (US$265/t in the second half) and remains constructive on met coal in 2023 due to: ongoing risks around supply; the EU ban on Russian coal; ongoing mine supply issues in Australia and Canada due to wet weather; and now, China is restarting purchases of high-quality Australian met coal, including from Curragh.

First half results are due on August 8, and UBS expects a first half dividend of US4.48cps at a payout ratio of 25%.

This broker is not anticipating a large special dividend due to lower coal prices and given management has flagged the recently depressed dividend was to shore up the balance sheet as M&A opportunities are reviewed.

Macquarie expects an update on M&A regarding BHP Group’s ((BHP)) Blackwater mine in the second half of the year will act as a positive share price catalyst.

Blackwater is currently valued at US$1.5bn (100% basis) within the analyst’s BHP valuation.

UBS agrees and sees significant operational synergies should Coronado be successful in acquiring Blackwater.

Cost guidance potentially a stretch

2023 mining cost guidance of US$84-87/t implies unit costs fall to below US$80/t in the second half, which Bell Potter suggests may be ambitious, given this level hasn’t been achieved since early 2022 and mining cost inflation has persisted.

Macquarie agrees and also sees risk to cost guidance given elevated costs in the first half.

On the other hand, Goldman Sachs expects unit costs will fall to US$81/t in the second half from US$95/t in the first half on higher volumes, though concedes management expects waste movements at Curragh to stay elevated.

Outlook

While Hold-rated Ord Minnett highlights Coronado continues to offer investors leveraged exposure to met coal given its organic growth outlook, experienced management team and strong balance sheet, an onerous contract with Queensland power generator (Stanwell Power Station) weighs on the overall profit margin.

Given the recent share price rally, this broker suggests the current valuation is fair.

On the other hand, UBS points out leverage to higher met coal prices remains attractive, with a 10% rise in the long-term price of met coal lifting its valuation by around 35%. The company’s 2024/25 dividend yield is also considered attractive.

FNArena’s daily monitoring of Coronado Global Resources consists of five brokers with four Buy (or equivalent) ratings and one Hold. Morgans is the only broker yet to update research for the second quarter results.

The average target price of the five brokers rises to $2.06 from $2.04, suggesting around 25% upside to the latest share price.

Goldman Sachs is not monitored daily. This broker retained its Buy rating and $2.15 target price.

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