Coronado Global Resources: Upside Despite Near-Term Weakness

Australia | Jul 25 2022

While 12-month target prices for Coronado Global Resources are set lower following second quarter results, buoyant met coal fundamentals and prices keep brokers Buy-rated.

-Coronado Global Resources reveals weaker-than-expected 2Q production
-Management lowers FY22 production guidance and expects higher costs
-Curragh mine suffers from weather impacts
-Revenue rises by 5% on stronger realised met coal prices
-Brokers buoyant on the outlook

By Mark Woodruff

Brokers generally lower 12-month target prices for Coronado Global Resources ((CRN)) after second quarter results reveal weaker-than-expected production and higher costs, though realised prices increased.

Saleable production and sales were -30% and -15% below consensus expectations, which Bell Potter attributes to weather impacts at the Curragh mine in Australia, and geological conditions in the US resulting in lower coal yields at Buchanan in Virginia.

The company produces and exports metallurgical (met) and thermal coal from the US states of Virginia and West Virginia, and from its Bowen basin mining complex in Queensland.

The company supplies to steelmaking customers located in the Americas, Europe and Asia and met coal accounted for 79% sales in the second quarter.

Coal sales were 3.9mt (2.3mt Australian Operations and 1.6mt US operations) for the quarter, which was -11% below Macquarie’s forecast and -9% down quarter-on-quarter.

The broker points out US operational strength was offset by weakness in coal production at the Curragh mine in Australia. Group run-of-mine (ROM) coal (containing impurities) and saleable coal production of 5.5mt and 3.3mt were -19% and -29% lower than expected, and down -20% quarter-on-quarter.

ROM coal production at Curragh of 2.3mt was -45% below Macquarie’s expectation and -34% lower than the prior quarter, due to adverse weather and planned maintenance activity.

While Macquarie had previously flagged a risk of higher costs across the group, weather impacts and inflationary pressure exceeded expectations. Mining cost guidance was lifted to US$79-81/t from US$69-71/t.

Management now expects saleable production guidance at the lower end of the guidance range of 18-19mt, after the weak start at Curragh. However, Outperform-rated Credit Suisse points out that a 40% half-on-half improvement would be required at Curragh for this guidance to be achieved, and forecasts 17.5mt. The broker’s target falls to $2.60 from $3.00.

Despite soft sales, revenue increased by 5% quarter-on-quarter as group realised met coal prices rose 21% to US$321.2/t, while unit costs were US$91/t.

Thermal and metallurgical coal prices have rallied since mid-2021, after a weak pricing period since the onset of covid-19. Thermal coal prices averaged US$77/t in FY21 and have increased 200% to a US$235/t average in FY22.

Macquarie expects strong cash flows will continue to strengthen Coronado’s balance sheet and support the company’s commitment to additional shareholder returns. The net cash position at the end of the quarter was US$171m, down by -US$86m, as free cash flow of US$265m was offset by -US$351m in dividends.

While the target price slips by -10% to $2.50, the broker’s Outperform rating remains with buoyant met coal prices expected to drive upside.

Outlook

Following the recent met coal price collapse amidst a softening macro backdrop, Credit Suisse lowers its met coal price forecasts by -40% and -2% for the second half of 2022 and 2023, respectively.

These pricing downgrades are offset by an increase in Coronado’s second half price realisation to 80% from 60%, given lagged pricing. In addition, the European Union embargo on Russian met coal comes into effect on August 10.

Buy-rated Goldman Sachs also suggests these bans should support a more balanced global seaborne met coal market in the second half. The broker, not one of the seven brokers updated daily in the FNArena database, reduces its target to $2.15 from $2.50.

While Bell Potter, also not one of the seven, anticipates the global economic backdrop may result in short term weakness in met coal markets, longer term supply-demand fundamentals remain very strong.

The broker forecasts strong free cash flow generation based on its met coal price outlook and retains its Buy rating, while lowering its target to $1.95 from $2.15.

Credit Suisse also points out Coronado’s share price has retreated significantly from its May peak, which suggests some earnings downside is factored in, and the broker anticipates met coal prices may be bottoming out in three to six months.

The share price was around $2.40 in May and is currently trading around -42% lower at $1.40 at the time of writing. The average target price set by three Buy-rated (or equivalent) brokers in the FNArena database suggests 80% upside to the latest share price, though Morgans is yet to update its research for Coronado’s second quarter results.

While production has started 2022 weaker than anticipated, Macquarie expects a ramp-up over the remainder of the year, as production is weighted to the second half.

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