Australia | Jan 28 2020
Some constraints on coal sales to China which weighed on Coronado Global in the December quarter appear to have been alleviated with the initial US/China trade deal.
-Expanding export supply of metallurgical coal dampens prices
-End markets, besides China, remain weak
-Can the company sustain its dividend in the current environment?
By Eva Brocklehurst
As metallurgical (coking) coal prices start to improve so will the appeal of Coronado Global Resources ((CRN)), brokers believe. Several issues resulted in a disappointing production outcome in the December quarter, while the outlook for 2020 remains clouded by difficult export markets.
Uncertainty surrounding restrictions on Australian exports to China have weighed on demand, UBS points out, and expanding export supply in the metallurgical coal market has dampened prices.
Moreover, outside of China, many steel producers have been affected by a slowdown in demand for steel. UBS still envisages upside in 2020 amid the signing of the initial US/China trade deal, which should alleviate selling constraints on the company's US operations.
Chinese restrictions on Australian exports are also expected to be relaxed. Chinese steel demand is robust, with the government announcing a stimulus package focused on infrastructure. India has also initiated strategies to increase construction activity.
Production was lower in the quarter because of a maintenance over-run at Curragh (Queensland) and extended shutdowns in the US. This required the company to manage inventory and resulted from weak demand. Metallurgical coal made up 76% of the sales mix.
Unaudited 2019 revenue was US$2.22m and mining costs in 2019 were in line with guidance. Saleable production was 4.6mt, down -6%. Higher than anticipated capital expenditure was mostly the result of development costs associated with the Stanwell reserve area. Operations at Curragh resumed on January 17 following a fatality.
High inventory and lower exports to China from the US resulted in a decline in sales from Buchanan, while lower demand in the Atlantic sphere affected the Logan mine. While exports from Buchanan will be able to resume following the initial US/China trade negotiations other end markets appear flat or soft to Morgans, and this points to a higher proportion of lower-margin US domestic sales in 2020.
Credit Suisse suspects the commentary around export tonnage from Buchanan may be optimistic. The broker also notes the outlook for China is reasonable while other end markets are almost universally weak, so the risk to volumes and prices continues.
Moreover, Wilsons suspects more coal shipments will be directed to domestic consumption (US) from Buchanan. Production was affected as the mine was suspended in November and inventory was run down. This was a result of China stopping its purchases of the specific Buchanan product in response to the trade war. Since then, two shipments have been delivered to China.
While a weak coal price theme is no surprise, Bell Potter believes the company's assets can withstand this situation as it is favourably positioned on the global metallurgical cost curve.
There are also organic growth prospects and capacity on the balance sheet for opportunistic acquisitions. Morgans agrees a strong balance sheet means the company can consolidate should opportunities arrive, albeit sector stress elsewhere may weigh on the equity.
The company has been open about its strategy to acquire operating assets in preference to exploration & development. Morgans suggests this particularly applies to over-geared US assets where curtailments have already begun.
While acknowledging the approach and noting the acquisition of Curragh advanced the business considerably, the inference around anticipated cyclical weakness is considered a deterrent for marginal equity investors. Thus Morgans considers value is leveraged to catalysts such as improving coal prices and an increased free float.
Bell Potter's forecasts assume coal prices prices rise above current levels but remain lower than recent multi-year highs. The broker notes any final dividend at the upcoming results will rely on drawing down debt and should provide an indication of the company's preference with regards to leverage levels on its balance sheet for the medium term.
Wilsons suggests the suspension of mining at Buchanan and the longer-that-expected maintenance period at Curragh will weigh on the pay-out ratio, and is starting to query the company's ability to sustain its dividend in the current environment. The broker, which has placed the stock on review, also believes a free float below 15% is an issue for institutional investors.
Credit Suisse expects the results, on February 25, will provide a number of markers for the 2020 outlook including guidance and, notably, the dividend. The catalysts, the broker agrees, are whether softer markets provide a greater opportunity for Coronado Global be an active consolidator and whether the liquidity issue will be addressed.
Credit Suisse assesses the multiples are undemanding and remains relatively confident a valuation gap can be bridged in time. Nevertheless, a lack of near-term catalysts is likely to keep investors on the sidelines for now.
Morgans believes the stock is cheap but emphasises the 2020 earnings risk linked to export splits and achieving pricing levels for US production. The broker considers the stock a leveraged play on metallurgical coal pricing, which continues to look tricky.
Bell Potter, not one of the stockbrokers monitored daily on the FNArena database, has a Buy rating and $3.50 target. The database has two Buy ratings and one Hold (UBS). The consensus target is $2.78, suggesting 35.1% upside to the last share price. Targets range from $2.05 (UBS) to $3.50 (Credit Suisse).
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