A stock generating $8 million in cash flow. Every. Single. Day.
With the metallurgical coal spot price currently trading at more than US$400 a tonne, Australia's second-largest producer will generate around AU$240 million in pre-tax cash flow per month, or around $8 million every single day ($5.5m per day after-tax).
That's according to Katana Asset Management's Romano Sala Tenna, who on the back of Coronado Global Resources (ASX: CRN) 1H22 result on Wednesday said the team has now doubled down on their position in the met coal producer and would be looking to add more at the end of the quarter.
"Every day that the coal price is above US$400 a tonne is a very good day for Coronado," he said.
But high prices are far from the only thing driving Coronado in both the short term, with long-term underinvestment in the sector, and now, a war in Ukraine, likely to drive prices higher, Sala Tenna said. Over the long term, and perhaps surprisingly for some readers (including this writer), the move to renewables (and the demand for coking coal in steel production) will continue to drive earnings at Coronado for many years to come.
In this wire, Sala Tenna breaks down Coronado's latest earnings result and shares why the short and long term thematics of this stock has him and his team buying more.
Coronado Global Resources 1H22 key results
- Revenues up 46.9% to US$2.1 billion
- Net income up 183.6% to US$189.4 million
- Adjusted EBITDA up 803.5% to US$486.1 million
- Net cash up 143.6% to US$122.9 million
- Capital expenditure down 26.5% to US$91.1 million
- Realised met coal price up 52.5% to US$138 per tonne
- Available liquidity of US$537.9 million (US$437.9 million in cash and US$100 million in undrawn funds under an Asset Based Loan facility)
Note: This interview took place on Thursday 24th February 2022.
What were the key takeaways from the result?
I think firstly, EBITDA was up nearly 804% to US$486 million. That was an absolute standout. I think the repair of the balance sheet is front and center for us.
It went from a near-death experience just 12 months ago, with debt up close to US$300 million, and ended the year with US$123 million net cash. So it's an extraordinary turnaround based on the met coal price.
The met coal price averaged US$316 a tonne on our numbers in the second half of CY21. Compare that to the preceding year when they were selling met coal at close to US$100 a tonne. So some very substantial increases in the pricing of the underlying main commodity being met coal and of course they also have some modest exposure to thermal coal.
It also announced the second-largest dividend on record, being nine cents US, so just over 12.5 cents in AUD. I think March 2020 was the last dividend they paid, so that was an important milestone.
Production was steady, we saw some escalation in costs, as we'd expect. But the standout was Coronado's leverage to met coal prices, which was quite extraordinary.
What was the market’s reaction? Do you think this was an overreaction, underreaction, or appropriate?
On fundamentals, it was an underreaction, in our view. There was a bit of heat built into the share price leading into the results. But then the day before the result was released, we had a leading broker come out and say that it wouldn't pay a dividend, so I think it did catch the market a little bit by surprise. There was a bit of indecision on the results in the morning and then we saw the share price close up around six cents, so around 4% on the day.
But I think moving forward, every day we see the coal price anywhere near the current spot is a very, very good day for Coronado. I think that's the key. We're watching the spot pricing very closely. Spot at the moment is over US$400 a tonne. At that price, Coronado would be generating around AU$240 million free cash flow per month, which is extraordinary.
That's more than the entire dividend they paid in the last 12 months. So we think people are being overly pessimistic on the outlook for the met coal price. There are some very good drivers for met coal moving forward. But the price dropped to its lowest price in a dozen years approximately 15 months ago. And I think people have normalised expectations for met coal being near the low US$100s. But if you look throughout history, closer to US$200 is a better long-term average price.
Were there any major surprises in the result that you think investors should be aware of?
There was a bit of cost escalation, it was modest in our view. But cost escalation is probably the number one thematic we've seen across the mining sector throughout reporting season. So whether it's BHP, Rio Tinto, Mineral Resources, FMG, or whoever, everyone's talking about cost escalation.
I think we're going to see another leg of that here in WA because we're only just about to open the borders. So while we should see good inflows of labour, I think we're going to see some serious impacts on the availability of staff because of COVID, which is going to impact productivity in the short term.
Otherwise, I really don't think there were a lot of surprises in the result. It was a very strong result. Perhaps, the big surprise is just how much cash they're generating per month. And most analysts are looking through that and trying to get a long term picture of where coking coal prices are headed because they have been caught out in the past. But I think this cycle is stronger. There's been underinvestment in the sector, and I think demand is increasing.
Would you buy, hold, or sell CRN following this result?
We already have a position in Coronado, and we added to our position yesterday on the back of its result. We are just thinking, with the dynamics behind it, and a 12.5 cent dividend coming up, that it is probably one that we should be adding some more.
However, we have been around long enough to know that commodity prices are inherently volatile. And so you can try and pick your timing a little bit. And if we saw met coal prices decidedly rolling over, then we would take our profits and head for the door. But as I've said, every day that the coal price is above US$400 a tonne is a very good day for Coronado.
And if we get to the back end of this quarter, and we still see met coal prices here, I think we will likely add further because we know that it's going to print a very strong quarterly.
What are your expectations and outlook for CRN and the coal sector?
As tragic as it is, and we sincerely hope that things settle down in Ukraine, in the short term, Russia is one of the major exporters of coking coal in Europe. And we've already got a very tight market. We have a tight supply market from recent underinvestment in coking coal. And after a few weather events in Australia and COVID events in Mongolia, we've seen the market become very tight in the short term.
This latest move with Russia and Ukraine has thrown the spot price higher again, and if things do escalate in that region, then we're going to see the coking coal price have another leg up.
While short term drivers are important, really what we're trying to focus on is the longer-term picture. And there are a couple of metrics that drive the long term coking coal price. Number one is the move to electric vehicles and renewables. For example, the average wind turbine needs around a quarter of a million tonnes of coking coal for its construction.
We've got this major long-term driver that flows into the requirement for blast furnace steel for renewables. And that's not going to peak until probably 2050, by which stage, Australia will control over 60% of the seaborne market.
We're going to see some ups and downs, and I'm sure we are going to see the met coal price down to under US$150 again at some stage. But I think the long term thematic looks good.
We do make a distinction between met coal and thermal coal. We do see that there is going to be some very clear ESG impediments for valuations reflected in thermal coal stocks. I think met coal has been caught up a little bit in that as well, but over time, we're going to see a bit more discernment there. When people understand the thematic behind met coal in steel and the importance of steel to this transition, I think that will probably see some of that de-rating removed.
It's also worth pointing out that management also provided positive guidance on FY22 sales volumes. They produced 17.8 million tonnes in FY21 and they think there could be up to a 7% lift to 19 million tonnes.
And they have mapped out a pathway to organically grow production to well over 20 million tonnes per annum in the coming years.
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Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...