A global met coal player of scale
Coronado Global Resources (CRN) produces and exports high quality metallurgical coals from a portfolio of four coal complexes (incorporating eight mines) in Queensland (Australia) and in Virginia and West Virginia (USA). In 2017, CRN was the fifth largest met coal producer globally by exports and the largest US met coal producer by production.
Bull points and risks
Key bull points are as follows:
- Long life assets support super profitability at cycle highs and resilience to cycle lows;
- limited growth capex enables strong free cash generation available for returns;
- the balance sheet (no debt) offers protection and optionality;
- seasoned management bring fresh ideas to extract production upside at Curragh;
- met coal markets remain tight/fragile supporting ongoing upside risk to pricing; and
- scarce pure met coal exposures of scale should attract premium market attention into price strength.
Key risks relate to realised coal prices, production/cost and capital management.
How we look at Coronado
CRN's cash margins are materially lower than met coal leaders BHP and Teck. We view CRN as a price leverage story much more than a play on production growth or cost-out given the mature asset base. Understanding the dynamics driving seaborne demand and price is therefore key to timing your entry and exit.
We forecast CY19 free cash flow of US$439m, supporting approximately 20% yield at the current share price. We do think that met coal prices are moving through another interim spike, but equally that CRN is mispriced at current levels.
Upside to fundamentals
We think that liquidity, the high ownership concentration (80% EMG) and broader macro concerns have hindered CRN's post-IPO performance. The Jan-19 quarterly and Feb-19 result are opportunities for CRN to deliver on pro-forma production and costs, and to build the market's trust that all surplus cash will indeed flow to shareholders.
Ultimately we see solid upside to a pure DCF based valuation, supported by a compelling dividend yield. As met coal prices continue to outperform expectations (remember US$300/t?) we believe investors will recognise the weight of CRN's cash generation. We initiate coverage with an Add recommendation.
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Disclaimer(s): Analyst owns shares.
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