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Soft Coal Prices To Weigh On Coronado

Australia | Aug 06 2019

While Coronado Resources has flagged significant productivity improvements and returned cash to shareholders in FY19, brokers suspect softer near-term coal prices and poor sentiment will weigh on the stock.

-Plan to lift saleable coal production to 15mtpa at Curragh
-A further surprising payout beyond policy limits considered unlikely
-Early release of 11% of register from voluntary escrow


By Eva Brocklehurst

In just over 18 months Coronado Resources ((CRN)) has acquired and upgraded the Curragh metallurgical coal mine in Queensland, finishing FY19 with a significant return to shareholders.

The company has outperformed more modest expectations regarding the upgraded Curragh mine plan, envisaging little risk in achieving its new mine plan at Curragh and lifting saleable coal production to 15mtpa from 2023. Coronado Resources has also returned around US$700m to shareholders.

Nevertheless, the coal price is the main driver for marginal investors and, in this regard, Morgans is concerned about the drop in Queensland hard coking coal to US$160/t. The broker eases back 2019-20 forecasts because of softer coal prices, although the expansion at Curragh offsets the impact on valuation. Morgans is positive about the long-term but believes there is risk in the coal market from Chinese restrictions and pricing in the short term.

Credit Suisse agrees that despite the positive aspects of the new mine plan, the coal price and macro sentiment are running ahead of company specific factors. Strong cash generation and distributions, and the potential to be included in the S&P/ASX index are all up against a background of softer metallurgical coal prices.

Distributions totalled US$0.41, including a US$0.112 dividend and a US$0.298 capital return. Gearing has now been re-set at a level that Morgans expects will continue and, therefore, the scope for further surprising pay-out beyond the 60-100% policy appears limited. Bell Potter assesses the distribution paid in excess of free cash flow in the first half is, in part, a pre-payment of the company's commitment to pay out 100% of free cash flow.

Coronado Resources will draw upon its syndicated finance facility to pay the distribution and expects to have gearing of 0.3-0.5x operating earnings (EBITDA) by the end of 2019. The terms of the facility have also been increased by 12 months to February 2023. Additional debt capacity remains in place to enable a company to act on potential acquisition opportunities.

Costs Reduced

First half operating earnings were US$405m and net profit was US$214m. The company has realised significant improvements in productivity at Curragh and mining costs were reduced by -24% in the first half. Moreover, cost reductions are not reliant upon further efficiency gains, Bell Potter notes, rather reduced costs are principally the result of volume leverage on the Stanwell royalty payments.

The broker assesses the long-life and steady-state assets in the company's portfolio as well as the long-term outlook for metallurgical coal underpin a Buy rating with a a target of $4.55.

Morgans considers it too early to know if notional import controls in China will affect pricing and product mix in other jurisdictions. The broker calculates 2019 operating earnings guidance of US$737-807m implies a price assumption for hard coking coal ranging from US$176-193/t and maintains an Add rating and $3.94 target.

Controlling Interest

There is also the potential for a sell-down of -11% by the controlling shareholder that may weigh on the share price. Morgans asserts that the surprising early release (by six months) of 11% of the register from voluntary escrow, with effect from August 19, creates a situation where fundamental buying may be absent in anticipation of a discounted block trade.

The company anticipates the release will facilitate an increase in its free float to 31% of issued capital. This would enable Coronado Resources to satisfy the minimum liquidity requirement for future inclusion in the S&P/ASX index. The Energy & Minerals Group (EMG) currently holds 80% of the listed entity and so carefully managing a selling down of -11% appears to be in its interests.

Credit Suisse highlights that selling down is an option, not a commitment as yet, and a signal that the major shareholder is keen to alleviate the liquidity headwinds that have put a lid on the share price. The week macro picture is likely to remain in the spotlight, although the broker considers the returns are compelling, maintaining an Outperform rating and $4.60 target.

There are three Buy ratings on FNArena's database. The consensus target is $4.18, signalling 34.0% upside to the last share price. The dividend yield, on present FX values, for 2019 is 24.5% and for 2020 it is 13.7%.

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