An apparent inability to take advantage of coal pricing combined with higher costs has clouded the outlook for Coronado Global Resources ((CRN)), raising concerns about debt covenants.
Brokers were disappointed with the miner’s price realisation and costs in the March quarter, which imply a first quarter cash burn of more than -$50m. Furthermore, Morgans envisages risks to unchanged cost guidance for 2021 after first quarter costs were 7% above guidance, citing the lack of a clear explanation as to why this occurred.
Credit Suisse was also disappointed with the higher costs and the rise in net debt to US$290m. This comes despite the company collecting US$27m in outstanding receivables from XCoal and another US$24m from the sale and leaseback of mining equipment.
The broker accounts for half the cash burn in terms of inventory build-up and capital expenditure but agrees there must be other impacts that are unclear. Saleable production was in line with expectations at 4.6mt, although sales were a little lower than expected at 4.4mt, resulting in 200,000t in extra inventory.
At the same time mining costs were elevated. Credit Suisse adjusts working capital estimates to account for the elevated cash burn and reduces the estimated premium coal price index to US$120/t for the June quarter.
Coal sales were below Goldman Sachs’ estimates, attributed to maintenance issues at Curragh and rail delays in the US yet the broker expects the benchmark metallurgical coal price will improve over 2021 because of stronger steel production and supply-side challenges in Australia.
Issues
Australian production and sales were affected by seasonal conditions and equipment problems while US operations (Buchanan & Logan) fared somewhat better, benefiting from export sales to China, where prices are significantly higher compared with US domestic sales.
Nevertheless, Morgans now suspects the company was not receiving a material premium on Buchanan spot sales to China and, critically, the longer it takes to obtain higher prices the longer the balance sheet is at risk.
The tendency for the current market to rapidly re-price risk indicates the share price may well drop below fundamentals, Morgans asserts, as occurred in late 2020.
The company has reiterated 2021 production guidance of 18-19mt with US$57-59/t in unit costs and $135-155m in capital expenditure. Given guidance is unchanged, Goldman Sachs anticipates coal production should trend higher and costs edge lower over 2021.
Macquarie, too, is positive on the outlook for metallurgical coal because of steel demand and as seaborne prices edge closer to Chinese import prices. Still the broker acknowledges a risk to earnings and the balance sheet at spot prices.
Debt Covenants
Morgans suspects an extension of debt covenant waivers will be required, pointing out the company stated there would be initiatives to generate further liquidity but provided no specifics, which is likely to weigh on the shares.
Bell Potter expects the banking syndicate will remain supportive, given the long-life and low-cost metallurgical coal assets. Still, the broker acknowledges that profitability at an operating earnings (EBITDA) level in the first half of the covenant review period was only around US$8m.
Bell Potter concludes 2021 will be a recovery year, enabling the company to de-leverage and contemplate a return to dividend payments. Goldman Sachs points out Coronado Global has previously spoken about the possibility of selling the housing/accommodation at Curragh and the next test of the debt covenants is September 30.
Both Goldman and Bell Potter anticipate a substantial uplift in metallurgical coal prices will underpin profitability in the next two quarters and help reduce net debt. Moreover, Goldman Sachs ascertains free cash flow is compelling on the assumption metallurgical coal will rebound.
Credit Suisse now expects a slower unwinding of net debt, which may still exceed US$200m in 12 months time. The Outperform rating is solely driven by the broker’s long-term metallurgical coal price assumptions of US$160/t, materially ahead of the spot price. Morgans is less sure and believes shareholders should treat the stock with caution, advocating the trimming of overweight positions.
Goldman Sachs and Bell Potter, not stockbrokers monitored daily on the FNArena database, rate the stock a Buy with the former holding a $1.30 target and the latter at $1.27. The database has three Buy ratings and one Hold (Morgans). The consensus target is $1.25, suggesting 68.9% upside to the last share price.
