Coronado Global Counts On Better Times Ahead

This story features CORONADO GLOBAL RESOURCES INC. For more info SHARE ANALYSIS: CRN

Following Coronado Global Resources’ fourth quarter update, analysts focus on operational improvements and upside from the Mammoth underground deposit.

-Operational improvements in Q4 for Coronado Global Resources
-Ramp-up at Mammoth underground key for costs, highlights Macquarie
-Balance sheet risks weighing on the share price
-Brokers largely Buy-rated, despite some balance sheet concerns

By Mark Woodruff

Following the December quarter operational update by coal miner Coronado Global Resources ((CRN)), broker Morgans sets aside the company’s vulnerability to short-term, cyclically driven pricing pressures.

Instead, the broker focuses on Coronado’s strength as a volume-leveraged proxy to compelling, structurally driven pricing tailwinds for hard coking coal (HCC) over the medium-term.

A 2025 rebound in steel market fundamentals is key to Morgans’ investment thesis for Coronado, along with sound execution by management at the company.

Management anticipates stable near-term Chinese demand fundamentals, contingent on potential stimulus measures, and a substantial boost in US steel demand on an improved economic outlook and potential re-shoring policies.

Coronado is largely a metallurgical coal miner with operations in the Bowen Basin of Australia (Curragh mine) and the Buchanan, Logan and Greenbrier mines in the Appalachian region of the US.

Supplying coal to steel making customers located in the Americas, Europe and Asia, Coronado sells several grades of metallurgical and thermal coal.

Weighing a forecast for minimal free cash flow in 2025 against the deep value at which shares of Coronado are currently trading, Ord Minnett decides the organic growth outlook remains compelling, pointing to an anticipated 23% production lift by FY28.

The 2027 expiry of Coronado’s long-term contractual obligation to supply thermal coal to Stanwell Corp should also result in higher realised prices, notes this broker.

Stanwell Corp is a Queensland government-owned entity that operates the Stanwell Power Station. At present, the company pays Stanwell a tiered rebate for coal access.

Coronado is currently ranked outside the top 300 for market capitalisation on the ASX, after experiencing a share price fall to circa 65c from around $2.45 in May, 2022.

December quarter results

Over the December quarter, the company made gains on production and executed on cost improvements, but a metallurgical coal sales mix decline weighed on realised prices, resulting in an expanded net loss for the December half, observes UBS.

Operational progress was evident at the Mammoth deposit at Curragh with the delivery of first coal in December, while the Buchanan expansion performed better-than-expected by UBS, despite a longwall move completed during November.

Costs of US$97/t were -9% lower than the consensus expectation, a fall of -17% quarter-on-quarter, reflecting productivity improvements and a cost reduction program at Curragh. UBS observes inventory builds also had a positive impact on costs.

The Mammoth underground ramp-up is a key near-term catalyst to lower costs, highlights Macquarie.

Run-of-mine (ROM) coal production (i.e. prior to processing) of 6.8mt in the fourth quarter beat the consensus forecast by 4%, but saleable production of 4.0mt and sales of 4.1mt missed by -4% and -6%, respectively.

Goldman Sachs attributes the lower-than-expected saleable production mainly to lower production from the Buchanan mine due to poor geotechnical conditions and a 10-day outage during December.

Curragh production was in line with the analysts’ forecast despite the impacts of heavy rainfall throughout the Bowen Basin.

The sales miss and lower proportion of met coal sales at 77% resulted in revenue of US$558m, missing the consensus estimate by -12%.

The lower met coal mix translated to met coal realised price for the group of US$163.2/t, an 81% realisation to the quarterly average HCC index, highlights Bell Botter.

This broker believes quarterly group earnings (EBITDA) were -US$2m, in line with its own forecast, taking estimated earnings to US$108m for 2024.

Balance sheet concerns

At quarter’s end, Coronado held net debt of US$85m, 11% higher than the consensus forecast, and available cash liquidity of US$468m.

Rightly, suggests Morgans, the market is placing a sharp focus on liquidity and balance sheet buffers due to cash leakage.

This broker estimates free cash outflows of circa -US$65m in the fourth quarter, prior to tax and working capital adjustments, which has effectively been funded from the September quarter debt re-financing.

A US$400m senior secured notes issue was completed in early-October 2024.

Coranado can weather another three quarters or so, believes Morgans, before total available liquidity tests management’s notional comfort level of US$250m.

Upside from underground operations at Mammoth

Bell Potter believes Coronado’s production profile has de-risked with the commencement of ramp-up to 1.5-2.0mtpa incremental saleable production from the lower cost and less weather-affected Mammoth underground operation.

One continuous miner is operating, with an additional two scheduled to be added in the first and second quarter of 2025.

Following a troubled 12 months at Mammoth due to weather, inventory movement and unplanned outages, management expects unit costs will normalise.

Outlook for earnings and coal pricing

Ord Minnett anticipates improved earnings in 2025, forecasting a 155% improvement in EBITDA to US$304m, thanks to production growth and the annualised benefits of recent cost savings.

2025 production and cost guidance is expected at the full year financial result release on February 20.

A new $1.35 price target set by Buy-rated UBS assumes a long-term real US$200/t met coal price.

This broker forecasts premium low-volatile (PLV) coking coal, the high-quality grade of metallurgical coal used primarily in steelmaking, will recover to US$250/t by the end of 2025 versus the current US$190/t spot price.

Of the five brokers updated daily covering Coronado Global Resources in the FNArena database, three have Buy ratings, while Morgans has a Speculative Buy rating and Ord Minnett is on Hold.

The average target price of $1.17, down from $1.29 prior to the December quarter operational update, suggests around 83% upside to the current share price of 64c.

Outside of daily coverage, Goldman Sachs is rated Buy and Barrenjoey is Neutral with respective targets of $1.05 and 90c.

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