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Stanmore Versus Coronado: Higher Margins Rule

Commodities | Mar 22 2023

This story features STANMORE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SMR

In newly released research, two brokers express a preference for Stanmore Resources over Coronado Global Resources

-Is investors' preference for Coronado Global Resources on the ASX the right choice?
-Research by Petra Capital suggests Stanmore Resources is the better operator
-Morgans recently suggested all coal stocks on the ASX are a 'buy'
-BHP Group is selling its Daunia and Blackwater met coal mines in the Bowen Basin

By Mark Woodruff

All producers under Morgans' coverage of the Australian coal sector have an Add rating, though individual company traits are suited to varying investor types or strategies.

The broker recently noted medium-term realised coal pricing for both metallurgical and thermal coal companies is asymmetrically skewed to the upside due to an increasingly tight supply-demand outlook.

New and existing supplies are being dis-incentivised due to several factors including regulatory risk and an increasing cost of doing business, explained the analyst.

In such a favourable supply-demand climate, investors may need some help in selecting the most appropriate ASX exposure.

This morning, both Ord Minnett and Petra Capital released research attempting to narrow that choice by comparing the relative merits of pure-play metallurgical coal producers Stanmore Resources ((SMR)) and Coronado Global Resources ((CRN)).

Coronado is the fourth largest coking coal producer in the world and owns three mines, Curragh in Australia, as well as Buchanan and Logan in the US. Stanmore owns and operates three mines in Queensland’s Bowen Basin having acquired the South Walker Creek and Poitrel operations from BHP Group ((BHP)) in May 2022. The previously owned mine was Isaac Plains.

While Coronado is widely considered the “go to” coking coal producer on the ASX, Petra Capital points to a -50% lower earnings (EBITDA) margin compared to Buy-rated Stanmore. Petra also notes Coronado (not covered) has a far higher percentage of thermal coal sales.

In the 2022 calendar year, Stanmore achieved an operating earnings margin of 54%. While Coronado’s US operations delivered a 49% margin, the margin in Australia was only 26%, courtesy of domestic thermal coal sales, which dragged the group margin down to 34%.

Coronado delivers most of its thermal coal production from the Curragh operations at a loss under a restrictive coal supply agreement (CSA) with the Stanwell power station. In addition to receiving a low price for thermal sales, the company pays the power station a rebate on revenue received for export met coal sold from the Stanwell Reserved Area (SRA).

The CSA is expected to expire in 2027, at which point it will be replaced by a new CSA (already agreed) which excludes rebates.

Ord Minnett also highlights Coronado’s low margin, which hinders leverage to the met coal price. This broker initiates coverage with a Hold rating, while assigning a Buy recommendation to inaugural research on Stanmore Resources.

Higher costs and a lower-value product mix are also responsible for Coronado’s margins, highlights the broker, which are half that of its peer group. Note: No individual comparison is made to Stanmore.

More positively, Ord Minnett analysts forecast higher margins will emerge over the next three years, especially at Curragh. Long mine lives are also expected to underpin the company’s growth plans.

Regarding Stanmore Resources, Ord Minnett forecasts substantial annual dividends over the next three years and envisages a total shareholder return of 55% over the next 12 months.

This broker envisages synergies from and optimisation of the recently acquired BHP mines resulting in a US$224m net cash balance by June this year.

Ord Minnett prefers Stanmore Resources in the met coal space due to high margins and operating leverage.

Candidates for additional BHP Group assets

As BHP Group is selling its Daunia and Blackwater met coal mines in the Bowen Basin, Stanmore has been formally invited to participate.

Petra Capital suggested in its recent research note Stanmore will need to remain fiscally disciplined given it has no boundary coal. 

The broker doesn’t expect management will be interested in Blackwater, which shows zero apparent synergies with existing Stanmore operations.

On the other hand, Goldman Sachs feels Coronado can extract synergies from Blackwater given the open cut operations are just south of Curragh.

There are five brokers that cover Coronado Global Resources in the FNArena database, of which two have a Buy (or equivalent) rating and three are on Hold. The average target price is $2.15, which suggests 27.2% upside to the latest share price.

Outside of the database, both Bell Potter and Goldman Sachs are Buy-rated with a target price of $2.20 and $2.25, respectively.

For Stanmore Resources, the database includes Buy ratings from Ord Minnett and Morgans and an average target price of $4.78 suggesting 41.7% upside to the latest share price. This average target compares to the $5.41 set by Petra Capital.

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