Coronado Global Resources Inc. (CRN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coronado half year results presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Gerry Spindler, Chief Executive Officer. Please go ahead.

Thank you, and thank you for your attendance at our 2020 half year conference. I am joined today by Ayten Saridas, our outgoing CFO; and Gerhard Ziems, who is the incoming CFO. And since both of them are in a transition period, it has been left to me to run through the entire presentation, which I will do. I don't know which of us is the least happy about that. Let me begin, as we always do, with the safety performance for the first half of the year and years prior. While our operations remain well below the national averages of the statistics in their relative jurisdictions, the incident rate has increased in Australia, and that -- and a fatality that occurred in January has initiated an increased focus on safety implemented, among other things, with the hiring of additional auditors and a reemphasis on training and the management of the programs employed by our various contractors. The effort is intense and it's resulted in an increase in what is called safety contacts, which are behavioral observations from -- up to a current level of about 5,000 to 6,000 per month. And it will continue, and we will work diligently at this issue until the trend is reversed. The U.S. operations are enjoying continued reductions in their accident frequency rate. My sincere congratulations and deepest thanks to all employees and management involved in that effort. Let me turn to Slide 4 and run through some operating highlights. The reported half year '20 net loss after tax of $123.2 million is down some $337.5 million compared to '19, the first half of '19. Adjusted EBITDA of $34.9 million is down 91.4% compared to the first half year of '19 of $405 million. Group mining costs of $57.30 per tonne are an 11% increase over the prior period in 2019, and group operating costs are 79 -- $78 per tonne, a 2% increase over the first half of 2019. Revenues were $713 million, and that was fully $0.5 billion below the first half of 2019's revenue of $1.234 billion. That's due to lower coal sales volumes and a lower average realized metallurgical coal price. Net debt position of $404.9 million as of June 30 was comprised of $36.1 million of cash and $441 million of debt. The factors which affected performance are well known, including the adverse impact of a temporary suspension of mining operations at Curragh due to the fatality, and the impact of COVID-19 on a global metallurgical coal demand, resulting in temporarily idling U.S. operations in April and May of 2020, and higher expected -- higher-than-expected wet weather in Queensland impacting mine sequencing and impacting the operations at the Curragh mine. As a result, run-of-mine production of 11.9 million tonnes was down nearly 30% compared to the first half of last year. Saleable production of 8 million tonnes was down 23% compared to the first half of last year, and the group realized metallurgical pricing of $97.30 per tonne was down 30% compared to the first half of last year as a result of the soft market conditions and falling index prices. There have been no distributions -- we're now on Slide 5. There have been no distributions for the first half year of '20. And from a corporate standpoint, since the onset of COVID-19 pandemic, we have implemented a range of measures to preserve capital and maintain balance sheet flexibility. These include the suspension of our dividend in line with the distribution policy, reducing fiscal year '20 capital expenditures by 40% and agreeing with lenders to waive compliance of financial covenants until February of 2021. We will continue to assess options. These may include further rightsizing of production at the U.S. operations, depending on market conditions; deferring developmental CapEx; reducing stay-in-business CapEx; and curtailing nonessential operating costs. And we may pursue other initiatives to improve cash flow, such as the potential for noncore asset sales or other funding measures. Slide 6 is a familiar one for those who have listened to the presentation in the past. It simply highlights the fact that we have high-quality, asset-rich operations. Every single operation we have, including the brownfield development sites, has reserves sufficient to last for 20 years of operation, and that is reserves without the requirement of additional capital for infrastructure or unusual development. Group operating performance is -- demonstrates the difference between Australia's operating parameters and the United States. Australia is down in saleable metallurgical production, and the United States has been impacted proportionately more by the COVID-19 market reductions and the damage to the international coal price. So we can see that while we've lost 2 million tonnes in Australia and 2 million tonnes roughly -- and 2.5 million tonnes in the United States of run-of-mine production, the saleable metallurgical production decreased only 9 -- 0.9 million tonnes in Australia and 1 -- and a full 1.5 million tonnes in the U.S. The revenue split between export and domestic increased a bit from -- to the domestic end, and this largely is because in the U.S., we focused our operations and sold out of inventory into the domestic market, enjoying higher prices under the U.S. domestic fixed-price contracts for the full year. Going to Slide 9 and focusing on financial performance. I want to highlight 2 particular numbers, group metallurgical realized price of $97 for the first half of the year, down $40.20 per tonne from the first half of last year, and group mining costs of $57.30, which were up $6 a tonne as a result of the lower volumes. All of this was the -- impacted the EBITDA and resulted in the EBITDA drop of $370 million from $405 million to $34.9 million. Going to Slide 10 and, again, focusing on different characteristics existing between U.S. operations and the Australia operations. There's a 14% sales drop in Australia's tonnage and a 40% drop in the United States tonnage, and yet a 40% drop in the revenue from each jurisdiction. The reason is because the -- again, the U.S. reduced its operations, it had the flexibility, and the nature of the operations allowed it to seek efficiency and improve margin by reducing operations, leaving the export market, which was not sufficient to employ the full production of the U.S. operations, and focus on the domestic market, and that enhanced margins and resulted in the nature of the graphs you see here. Again, realized pricing. Metallurgical coal is -- the group sales mix from last year to this year stayed pretty much the same. The graph on the right with the usual admonition that in the -- in Australia, we priced coal on a dollars per metric ton FOB the port, and in the U.S., it's a dollars per metric ton FOB rail, still gives you some idea of the severity of the downturn in pricing that occurred at the beginning -- since the beginning of the year. But still, while Australian prices were down $50 a tonne U.S. prices were down $30 a tonne. Going to Slide 12. This is an EBITDA bridge from last year to this. And you can see the impact of the reductions in both coal pricing and sales volume for the entire year. Some improvement in the cost of coal revenue and, of course, royalties due to the lower price -- lower realized price, and that indicates clearly the circumstances that produced the result -- the resulting drop in EBITDA. Going to segment performance. In Australia, there has been a $265 million drop in EBITDA to $6.3 million, and in the U.S., $110 million drop, and the EBITDA remained at -- EBITDA was at $41.7 million. And again, this illustrates the nature -- the different nature of the 2 types of operations. With a tiered pricing for domestic business and export business in the U.S. and the ability to flex the size of the operations, you could maintain a higher level -- although severely damaged, but a higher level of EBITDA in the U.S. And in Australia, where the cost structure is much more impacted by a reduction in total tonnage, the Australian operations are marked by a high percentage of variable cost as opposed to fixed. And the best way to enjoy cost-efficient operations is to run them flat out, which for a variety of reasons, we were not able to do in the first half of this year. Mining cost analysis on Page 14 supports the fact. Group mining costs in Australia went from $42.60 to $53.90, but in the U.S., they dropped from $65.40 on average to $64.30, a remarkable accomplishment. And again, my congratulations to the ingenuity of the management and employees who managed to achieve that. On Slide 15, you have a cash flow bridge showing cash at the start of the year and ending -- and the end of the first half. And again, you can see the CapEx -- the impact of CapEx, negative operating flow -- operating cash flow supported by net borrowings, and the dividend that we paid at the very beginning of the year based on the second half of last year's performance. Going to Slide 17 and looking at the metallurgical coal markets. They are badly in disarray, and there is -- while they seem to have bottomed out, they have been characterized in the first half of the year by the impact of COVID-19 and the absolute inability to ship to most markets. In this environment, China was the buyer of last resort and supported most of the operations that managed to enjoy a level of export shipping sufficient to support their operations. That -- it seems to be tailing off at about the same time that the economies in other countries, Japan, Korea, and relatedly India, appeared to be showing signs of strengthening as well as some indication that there is some strength in Europe as well. Focusing on Australia. We've done the -- Australia is in our operations that were characterized by significant programs to improve productivity and improve cost, programs which, frankly, were beginning to bear fruit, as evidenced by some fairly gratifying improvements in dragline efficiency that we reported last year. Those were derailed by the various circumstances we've talked about this year, and they are now coming back online. But there are some elements of ongoing programs that have continued to benefit the Australian operations. The preparation plants have received a great deal of attention and not only has efficiency, availability and recovery improved at both of the preparation plants at Curragh, but the costs have dropped, and we anticipate a continuation of these kind of improvements because the programs initiated are beginning to bear fruit and show real promise. The export sales coal -- or coal sales mix. In times like these, when the price drops, the very bottom of the market surges for the highest realization, and sometimes, that can be thermal. In the first half of this year, operations at Curragh were characterized by taking available coals and washing them as hard as we could and selling what we could into the -- to the HCC, hard coking coal, market and minimizing PCI, and that increased marginally the thermal coal sales. This is a routine characteristic, and very often, you will see that the crossover coals at the bottom of the range do see a better market while you begin to impact your recovery by washing the higher quality coals as hard as you can. From the U.S. operations, on Slide 19, you can see that, again, the metallurgical production mix changed a bit. Certainly, you can see domestic increased significantly as a percentage of the total mix, and that will continue for the rest of this year until the export markets improve. All of the operations in the U.S. were impacted by COVID-19. The decision to ship out of inventory and operate in -- during April and May with limited crews to maintain the operations is responsible for much of the fall in produced tonnage, but it did allow us to reduce inventories. And operating in the limited markets available would certainly have increased inventories over the time. Going to Slide 21 and focusing on the overall outlook. Coronado, having come through the first half of the year, still maintains its slot as the fourth largest international shipper of metallurgical coal production with very -- with a very high-quality suite of top-tier assets. And I think the ability to flexibly produce from these assets during the first half of the year is testimony to that. It's a diverse suite of assets, various operating characteristics, and it covers all of the broad range of coal qualities that are required by modern steelmaking, making it a core feedstock supplier for leading steel producers across the world. It has flexible, low-cost operations, again, as has been demonstrated by the first half of this year. And it's got a track record of producing profitable tonnes through the cycle. There is, going to Slide 22, a confirmed view that we're at about the bottom of the market. Most people predict a positive metallurgical coal outlook, and we can argue about whether it will be a V-shaped recovery or whether it will be a U-shaped recovery. This illustrates a V-shaped recovery and focuses on Indian steel production. And steel prices so far this week have begun to go up, and India has begun to export even into China. The Indian steel production should increase throughout the rest of this year and throughout next year, and they are our largest single customer. The coal quality we sell them is widely recognized and highly valued by those customers that rely on it. And there is significant EBITDA generation when coal prices recover. It's a significant play on the metallurgical coal price. And as noted by the graph, once prices begin to recover, they do so fairly rapidly. There is a tremendous leverage to this business. Every $10 a tonne price increase in HCC price, high coking coal price, results in a $100 million improvement in EBITDA. So there is indeed tremendous leverage. And we can see the benefit of that kind of leverage in estimates of EBITDA at higher prices. Finally, the operating and financial levers available in a sustained downturn have been demonstrated in this first half of the year. At Curragh, we reduced the operating cost base, curtailed overheads and cut capital, and we can continue to do that. In the U.S., you can see the flexibility achieved in rightsizing the production for the -- in response to the various coal price environments and a high degree of embedded operating and cost flexibility and the potential to manage production for the highest and most remunerative markets. Buchanan and Logan are still currently operating at reduced levels to meet predominantly the domestic market and those export contracts we can rely on. And the lower production will significantly manage to reduce development costs and eliminate the least profitable continuous miner units, which we can curtail. And the ability to approach production economics in a granular manner are largely responsible for the flexibility that you enjoy in the U.S. Coronado retains a number of additional initiatives, which we mentioned, which can be implemented to support liquidity, if required, including the divestment of noncore assets, the sale and leaseback of major mining equipment, coal reserves, or infrastructure or other financing initiatives and the Xcoal payment plan has reduced -- has resulted in reducing the outstanding balance during the first half of the year by about $60 million. And I'll open it up for questions with that.

[Operator Instructions] Your first question comes from Paul Young from Goldman Sachs.

Gerry, the first question is on Curragh. It was free cash flow negative in the half. It had some challenges with the fatality. I understand that. But waste movements at Curragh are your largest costs within the group. Do you have any flexibility on deferring stripping, high-grading Curragh for a period of time during low prices? Or is that just not feasible based on the mine plan and actually the mining contract?

We have some flexibility to do that, but it doesn't result because we capitalize our box cuts, that's the first area to look at. We'll eliminate and minimize stripping by eliminating the box cuts, and that will result in a drop in capital. We can, of course, adjust the number of units of the truck/shovel fleets in -- that the contractors employ, both in the North and the South, and we can do that. Right now, we are operating to rebuild our inventory -- our coal inventories, raw coal inventories and be able to respond much better than we did in the first half to what we see in the market in the second half. So the cost -- again, Curragh is the kind of mine that enjoys the best cost -- the best cash cost per tonne at the highest tonnage levels. And we can improve our operating costs and improve our production. And where the quickest fix in the operating cost will be is in the improvements that have been made in the plan. And if things continue to stay bad, those adjustments will be made in box-cut capital.

So in other words, you're investing for the future, building up inventories. You have no plans on reducing the strip ratio. In fact, it sounds like it's increasing in the second half.

The -- as far as building for the future, it's the immediate future. We could have sold all the coal that we could mine in the first half of the year. It was an operating restriction that impeded that. So we'll sell everything we're mining in the second half of the year. We will enjoy lower costs, should enjoy higher revenue, will depend -- we'll see how the market responds to that. And the building the future is built on the box cuts. So we're simply releasing coal in the second half of the year. And all of the activity is just that, it releases immediate coal.

Okay. Great. Then talking around the grounds and switching to the U.S. At current coal prices, is Logan free cash flow positive?

Yes, at the current prices it's selling to. Now they're renegotiating the prices in the U.S. right now, and it is a very competitive environment. They have started early. They see opportunities because of the export market. So we'll wait and see how the meeting season kind of goes forward with that.

Okay. And just to help us out, I know you've compressed your disclosures. You don't report the U.S. operations separately, the accounts. Under the reduced operating rate at Buchanan and the reduced cost structure, what are the operating costs roughly at Buchanan, if you have that number available?

I don't think we report individual mine operating costs. So...

Okay. No problem. Okay, last one, Gerry, just on the balance sheet. A couple of questions here. The first one is just to confirm, facility B under the SFA, which is AUD 130 million bank guarantee facility, is that not available to you to draw down?

Ayten, I'll let you speak to that.

Yes. Look, that's a bank guarantee facility, so we have used it. We've got some bank guarantees out there. So it is available to use, but it's not available to draw down in cash. I hope that explains that, Paul.

Right. So this is attached to rehabilitation or take-or-pay or other obligations?

Take-or-pay exactly. So we could -- rehab is no longer included in that. We participate in the Queensland Financial Provisioning Scheme now. But there are other guarantees that we have to provide. But the main one, the largest one at the moment is the WICET one.

Yes. Okay. Right. And then, Ayten, while I have you, on the covenants, I know we spoke briefly about this last result call about the -- what the covenant measure was, and I think we spoke about an EBITDA to net interest sort of covenant. Can you maybe talk about that threshold, if you can, but also the backward-looking time period on the covenant test? Is it a 3-month trailing? 6-month trailing? 12-month trailing? Can you help us out with that?

Yes. It's 12-month trailing. And the -- look, it's all public information. It was put out there with the SEC. So I guess, I'll have to disclose all of this to you, but -- so it's a net debt-to-EBITDA covenant of 2.5x. There's an interest covenant ratio as well as the tangible net worth. But the key one is the net debt to EBITDA, and that's a 12-month historical look back.

Okay. And confirm, you're trying to look to -- you're looking to extend beyond February '21. How are those negotiations going with your lenders?

I might just hand that over to Gerhard because he's been running that over the last few years. He's been very busy with that. Gerhard?

Yes. Look, all I can say at this stage is that we are close with these negotiations, but that's probably all I can disclose at this point of time.

Your next question comes from Sam Webb from Crédit Suisse.

I might just follow-up on Young's questions just around the balance sheet, if I can. To the extent that you're not able to get further extensions to those waivers, what other funding options are you considering if you need them?

All options are on the table. And we've highlighted a few, but anything is under consideration.

And so in terms of those noncore asset sales -- sales and leasebacks, what sort of quantum are we talking about that you think you could realize from those things that you're considering?

I think we've made no prediction on what the quantum could be, simply that it's significant. It's enough to matter.

Okay. And then just quickly, you just quickly noted on pricing dynamics now that it's meeting season in the U.S. Can you talk to demand around volumes from your customers and what they're -- you're looking to feel for '21?

Look, the meeting season has begun, and it's begun early because they smell blood in the water, obviously. The demand, as represented, is quite down, but utilization is beginning to go back up. And it will be an artful negotiation, it always is, based on what other producers in the U.S. see as their alternatives as to whether you capture the market at a low price or enough people will hold out that the prices can be maintained. Right now, you're looking at domestic prices, which are significantly higher on a fee-on-rail basis than export opportunities, so I imagine there'll be pressure to reduce the domestic prices.

Okay. And I'll let just lob one more in just to your other markets, India and then comments around Japan and South Korea. You've always been pretty blunt, Gerry, with your commentary around how realistic a recovery may or may not be. Are you actually seeing increased activity in these markets? The commentary noted that Japan and South Korea mills had considered restocking activities this quarter. Have you actually seen that starting yet?

Yes, we have. In Australia -- or in India, it is sort of company by company. Some companies appeared to be improving more quickly than others, but there are some that are improving significantly over the last several weeks. Japan is being bolstered by -- their steel demand is being bolstered by Toyota, who is -- has announced that they are going to increase automobile production fairly significantly. And the -- I'm not quite sure what the recent projections for Korea are. But generally, the Europe and Brazil are looking for improvements in utilization and increases in steel consumption as well.

Your next question comes from Glyn Lawcock from UBS.

Just on the covenant waiver, first question, you've got it until the February 28, '21. So does that actually cover the next test for the 12 months ending 2020? So basically, you're looking to get a waiver to the next one? Just trying to make sure I understand the waiver you're looking for.

Ayten, do you want to take that?

Sure. Look, what we're trying to do, Glyn, is -- I mean we're not the only ones in the market who has been getting these waivers. Everyone's been getting them. I think it's more than anything to just buy some time to see how the impact of COVID-19 affects individual businesses. Most companies will have a 12-month look back. What we agreed at the time was let's just kick this out till February. And then close to the date we would go back to them and rethink where the market is, how things are shaping up and what other things we need to do, whether that might be calculating them on a different basis, on a forward-looking basis, but all those discussions are underway at the moment. So where it lands, I think you'll have to wait and see for that. But all options are on the table at the moment on how we play that. And the banks don't have an answer any more than we do in terms of what those calculations will be. But the important thing is that it is a calculation. The priority is to get that kicked down the road because as it currently stands, of course, not only Coronado but most companies would probably struggle with a 12-month backward-looking EBITDA test.

Yes. Okay. Ayten, I understand that. So I guess I'm just unclear. So at the end of calendar '20, there would be a test done, and it would be done something soon after the end of the year. So does the current waiver mean that you won't test again until the end of the 12-month, the June '21?

February. So we -- no, so we won't test this until the end of February. So it will be February test. We'll have to test it at that point in time. And look, to be quite frank, we won't...

For the 12 months...

Yes. We won't be leaving this outstanding until December or the new year, you will hear more about this closer than you might think. But we won't be leaving this until December to February.

Okay. And it would be for the 12 months ending the February 28, the testing?

That's right. That's exactly right.

Okay. So instead of being on a calendar year, you've just moved it out by 2 months, the 12 months trailing for the 28th of February?

Yes. It's an old-time test, but it's based on statutory accounts. In this case, we've agreed that we would do it on the basis of management accounts at the end of February.

At the end of February, okay. Gerry, the next question is just in the release today, you say you've got all the rail and port conditions now for the Curragh expansion. Just when does that commitment kick in because I assume it's a take-or-pay? So how long can you push the Curragh expansion out for before you start maybe running into additional costs for your rail and port commitments?

There are costs associated with moving the Curragh expansion out too far that go beyond where the ports are, but we are comfortable that we can manage and utilize all the capacity that we've got for the next year.

Okay. So that's for 2021. What about in 2022? Do you have to push the button then on the expansion next year to ensure you don't run -- we run a long position in infrastructure in '22?

In fact, if we did run long, it wouldn't be that much. It will depend upon pricing. But given the promising economics of the expansions, which we went through, you'd be seeing a very severe continued market downturn before you wouldn't be initiating that piece of capital investment. It's too valuable not to.

Yes. Sure. And then just the final question. I note receivables have increased from Xcoal. Given the current conditions in the market, should I have any concern about the counterparty risk with Xcoal and getting your money?

We have a program, but the receivables from Xcoal since the beginning of the year have decreased significantly, and that program is therefore working. So we're confident.

Your next question comes from Mark Levin from The Benchmark Company.

I wanted to ask a couple of questions. One, Gerry, on the domestic contracting front. I realize you guys are right in the heart of negotiation season. But I'm just curious, in terms of your thought process for mix, if, in fact, the domestic annual price were to get hit pretty hard, is there a thought about shifting more tonnes to the export market than you might ordinarily? Or should we still anticipate a similar mix even if prices came down considerably?

We will take what we can in the domestic market. The nice thing about export is you can get into that market very quickly. I mean you have operations like Buchanan and operations like Logan, which just scale very quickly and can deliver tonnages into a market as it improves, while it improves. But currently, the best options we've got, the best options anybody has got, is to try and make as much as you can of the reliable shipments and the transportation ease that you get when you deal domestically as well as the confidence in a long -- in a year-long consistent price and delivery schedule. So the answer to this -- go ahead.

Yes. That makes sense. I'm sorry. No, no, no, that's great. And then I wanted to kind of just sort of shift to some of the cash flow issues. In terms of thinking about CapEx, second half versus the first half, without trying to get into guidance, is it reasonable to assume that your second half CapEx would be lower than your first half? And then as it relates to SG&A, sort of a similar question. What does the kind of tenor of SG&A look like as we think about the second half versus the first half in this kind of market?

It is reasonable to assume that everything, capital and SG&A, gets a lot of attention. And there are programs that are already in place to continue reductions, and they will continue. And we'll see where they wind up at the end of the year. This is not a business. There's a certain cleansing effect that takes place in a market like this. And one of the things you need to do is retain the cost advantages that you can get in overhead and operating structure and not lose them when the market goes back up.

No, that makes sense. And then the final question just relates to some of the comments that were made about potential noncore asset sales. Is that -- from a timing perspective, is that something that you're just thinking about ways off in the future? Or are those processes ongoing, and we might anticipate asset sales between now and year-end?

Those processes are ongoing. And the best or the worst thing you can say about those processes is that they're opportunistic. Nothing wrong with that, but that's about all you can say. You press them as hard as you can, but they are opportunistic. But there will be -- we're confident, some results before the end of the year.

There are no further questions at this time. I'll now hand back to Mr. Spindler for closing remarks.

Well thank you for attending the presentation. I want to take just a moment to thank Ayten, wish her well and ask you to welcome Gerhard. He's cometh, the old Chinese curse, in an interesting time, and we'll -- we're glad to see him here. Having said that, thank you.

Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.