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Poor Production Won’t Rain On Coronado’s Parade

Small Caps | Nov 02 2022


Despite a weaker production result in its third quarter, Coronado Resources has benefitted from strong price realisation. 

-Third quarter production from Coronado Resources missed expectations
-Production at Curragh was slowed by rainfall volumes three times the norm
-Weaker volumes were offset by high price realisation

By Danielle Austin

Weather continues to plague coal producer Coronado Resources ((CRN)), with the company’s third quarter production and sales disappointing analysts. Managing the impact of adverse weather at its Curragh project remains a key issue for the company, with three times the usual rainfall slowing production capabilities in the quarter. 

Quarterly coal production missed consensus forecasts by -16%, and sales by -19%, leading the company to downgrade full year coal production to 16.9-17.1m tonnes. Mining cost guidance was also lifted to US$81.00-83.00 per tonne, from US$79.00-81.00 per tonne, attributed to both adverse weather and inflationary impacts. 

More positively lagged first quarter prices were realised in the quarter, benefitting Coronado. The company looks to generate strong free cash flow on the favourable met coal price outlook. Coronado Resources announced a special dividend of US13.4 cents per share, or US$225m, alongside an offer to repurchase up to US$200m in Senior Unsecured Notes. 

Hopes for wet weather to ease by the March quarter

Macquarie, Credit Suisse and UBS were all disappointed by the September quarter production update. Between them, these brokers have an average target price of $2.50 ranging from $1.70 to $3.30.

Strong realised pricing saw revenue beat Macquarie’s assumptions by 27%, while costs year to date are 12% higher than anticipated. While this broker (Outperform, target price $3.30) had anticipated a guidance downgrade, it was surprised by the extent of the decrease.

Higher realisations drive a 15% increase to Macquarie’s earnings per share guidance for 2022. Looking ahead, Macquarie has lowered its production guidance -5% from 2023 onwards, and lifted cost assumptions.

Credit Suisse (Outperform, target price $2.50) highlighted Coronado Resources’ production guidance downgrade was already largely reflected in consensus forecasts. Following the special dividend announcement, Credit Suisse anticipates the dividend announcement in February will yield 10%.

The broker was pleased by the completion of US domestic price negotiations, noting contract pricing looks to cover around 90% of US operational costs in the coming year. The company estimates 40% of FY23 output will be contracted at US$201 per tonne. 

UBS (Neutral, target price $1.70) was encouraged by December quarter cost guidance of US$68.00-70.00 per tonne, which it believes may suggest peaking costs. This broker also sees potential for weather risks to ease by the March quarter.

Outside of core coverage, Bell Potter (Buy, target price $2.10) and Goldman Sachs (Buy, target price $2.20) both highlighted strong performance from Coronado’s US operations, despite disappointment from the domestic operations.

Bell Potter notes downgraded production guidance still suggests a strong final quarter, and continuing wet weather impacts could pose risk to this. Goldman Sachs remains positive the met coal market will prove supportive in the coming year, and sees upside risk to forecasts on benchmark price assumptions.

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