Stanmore Resources: Transformational met coal leverage
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 19 May 2022, 9:00 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- The acquisition of BMC (80%) transforms Stanmore Resources’ (ASX:SMR) operating scale, improves its risk profile and significantly improves its equity appeal.
- Fortunate timing into unprecedented coal price strength supports a ~12-month payback, rapid de-leveraging and dividend upside potential.
- Smooth BMC integration would also assist SMR to position for other coal sector divestments, delivering further potential value accretion.
- We initiate coverage with an Add rating and a (login to view) target price, noting materially higher capital upside versus peers.
Transformation into a globally significant met coal player
BMC acquisition: BMC lifts SMR’s metallurgical coal production to ~10.7Mtpa (#7 globally), with second-quartile costs driving significant cashflow leverage to good volumes over long mine lives.
Larger established assets bring embedded revenue and cost opportunities and lower portfolio risk. SMR also emerges with a more investible register.
Rapid de-leveraging: We estimate SMR held ~US$680m in net debt on the May 2 handover assuming near fully drawn acquisition facilities (~US$825m gross debt, ~US$145m cash).
Our base case price forecasts support a CY22 EBITDA of ~US$1.4bn at ~60% margins, a 12-month BMC payback (EBITDA basis) and a net cash position in early 2023 including full debt service/ sweeps but pre dividends.
Dividend upside: SMR’s CY22 dividend paying potential does sit behind its peers but improves rapidly post de-gearing. Assuming no M&A and pre dividends, we forecast accumulation of ~US$525m/A$0.82ps of net cash by end CY23 (Bull case: ~US$744m/ A$1.16ps) available for capital management and/or M&A.
Unique growth platform: SMR looks well positioned for further coal divestments via: 1) a strengthening balance sheet; 2) aligned major shareholders (assertive, liquid); and 3) northern Bowen Basin synergies.
Mitsui’s 20% BMC stake and BHP’s 50% stake in Daunia (~4Mtpa met neighbouring Poitrel) are obvious targets offering potential accretion. We note smooth BMC integration would assist in acquiring similar large assets.
SMR is too important to mis-handle: Market unfamiliarity with GEAR (64% of SMR) is a potential impediment. On page 9 we explain our comfort in the alignment of interests between minority shareholders and GEAR, but we do note SMR suits assertive, growth-oriented investors with a higher risk appetite.
Forecast and valuation
Our SMR modelling methodology (from page 5) is consistent with our approach to CRN/ WHC/NHC and we test key comps/sensitivities via four coal price scenarios.
We are increasingly of the view that stronger-than-expected met coal pricing will persist through CY22 on solid demand ex-China, coupled with very tight supply and exacerbated by disruption to Russian exports.
The BMC acquisition has timed perfectly against this and provides a strong financial and strategic platform from which to grow, or failing that, release significant dividends.
SMR offers 48-102% upside to our base/bullish NPV scenarios, respectively (Coronado: 25-57%). Our (login to view) target price is set at an 80/20 blend of our base/bullish NPV scenarios to reflect upside risk to our coal price forecasts.
We’re attracted to:
- SMR’s compelling NPV discount;
- Superior upside leverage to higher coal prices;
- Scope for better-than-expected BMC cost-out initiatives;
- Further M&A optionality;
- Dividend upside;
- Ability to fully frank dividends.
- Rapid familiarisation, de-gearing and recognition of capital/dividend upside.
- Sector asset divestments (possibly 2HCY22).
- BMC integration, influencing achieved sales and costs.
- Macro-economic sensitivity (global GDP, steel) and ESG forces.
- Register turnover (majority of ~30% free float @ A$1.10ps).
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