Resources

Coronado Global Resources: On the rise despite short-term weakness

With Coronado Global Resources’ 12-month price targets set lower after second-quarter results, strong coal fundamentals and pricing keep brokers on the buy side.

-Coronado Global Resources Reveals Q2 Production Weaker Than Expected
-Management Lowers FY22 Production Guidance, Expects Higher Costs
-The Curragh mine suffers from climatic impacts
– Revenues increase by 5% thanks to higher realized coal prices
-Brokers are bullish on the outlook

By Mark Woodruff

Brokers typically lower 12-month target prices for Coronado Global Resources ((CRN)) after second-quarter results showed lower-than-expected production and higher costs, although realized prices rose.

Production and marketable sales were -30% and -15% lower than consensus expectations, which Bell Potter attributes to weather impacts at the Curragh mine in Australia and geological conditions in the United States resulting in lower coal yields in Buchanan, Virginia.

The Company produces and exports metallurgical (metallurgical) and thermal coal from the US states of Virginia and West Virginia, as well as from its Bowen Basin mining complex in Queensland.

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

Coal sales were 3.9 million tonnes (2.3 million Australian deals and 1.6 million US deals) for the quarter, -11% below Macquarie forecast and -9% QoQ.

The broker points out The operational strength of the United States was offset by weak coal production at the Curragh mine in Australia. The Group’s production of raw coal (ROM) (containing impurities) and marketable coal of 5.5 mt and 3.3 mt was -19% and -29% lower than forecast, and -20% lower than forecast. quarter to quarter.

ROM coal production at Curragh of 2.3 million tonnes was -45% lower than Macquarie’s expectations and -34% lower than the previous quarter, due to unfavorable weather conditions and planned maintenance activities.

While Macquarie previously flagged risk of higher costs across the group, weather impacts and inflationary pressure exceeded expectations. Mining cost forecasts were raised to USD 79-81/t from USD 69-71/t.

Management now expects marketable production guidance at the lower end of the 18-19 million tonne range, following the weak start at Curragh. However, Outperform-rated Credit Suisse points out that a 40% half-on-half improvement would be needed at Curragh to achieve this guidance, and forecasts 17.5m tonnes. The broker’s target drops to $2.60 instead of $3.00.

Despite low sales, revenues increased 5% quarter-on-quarter as coal prices faced by the group rose 21% to $321.2/twhile unit costs were US$91/t.

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

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

As the target price slides -10% to $2.50, the broker’s outperformance rating remains with sustained coal prices set to lead higher.

Outlook

Following the recent collapse in the price of coal encountered in an easing macroeconomic environment, Credit Suisse is lowering its forecast for the price of coal encountered by -40% and -2% for the second half of 2022 and 2023, respectively.

These downward price revisions are offset by an increase in Coronado price realization in the second half to 80% versus 60%, given the lagged prices. In addition, the European Union embargo on Russian coal comes into force on August 10.

Buy-listed Goldman Sachs also suggests the bans should support a more balanced global marine coal market in the second half. The broker, which is not one of the seven brokers updated daily in the FNArena database, lowers its target from $2.50 to $2.15.

While Bell Potter, also not one of the seven, predicts that the global economic backdrop could lead to near-term weakness in coal markets, longer-term supply and demand fundamentals remain very strong.

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

Credit Suisse also points out that Coronado’s share price has fallen significantly from its May high, suggesting that some decline in earnings is priced in, and the broker expects coal prices to meet could bottom 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 (or equivalent) listed brokers in the FNArena database suggests an 80% upside from the last stock price, although Morgans has not yet updated its research to Coronado’s second quarter results.

While production started 2022 weaker than expected, Macquarie expects an acceleration over the rest of the year, with production weighted to the second half.

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