Coronado Global Resources: A global met coal player of scale

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
30 November 2018, 1:43 PM
Sectors Covered:
Resources, Metals

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:

  1. Long life assets support super profitability at cycle highs and resilience to cycle lows;
  2. limited growth capex enables strong free cash generation available for returns;
  3. the balance sheet (no debt) offers protection and optionality;
  4. seasoned management bring fresh ideas to extract production upside at Curragh;
  5. met coal markets remain tight/fragile supporting ongoing upside risk to pricing; and
  6. 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.

More information

Morgans clients can login to view our detailed report and share price target for Coronado Global Resources (CRN). Alternatively, please contact your nearest Morgans office for access.

Disclaimer(s): Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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