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

Thank you for standing by, and welcome to Coronado Global Resources, Inc. equity raising presentation. [Operator Instructions] As a reminder, any U.S. persons or entity must be a predetermined QIB in order to access and listen into the management conference call. I would now like to hand the conference over to Mr. Gerry Spindler, Chief Executive Officer. Please go ahead.

Good morning, and welcome to the management conference call for Coronado. The purpose of the call is to update you on our current circumstance and give some information about the current equity offering. But first, I'd like to go over the financial performance for the first half of the year. I would like to introduce this by saying that if you're in the commodity business, you are accustomed to price variations and you are accustomed to anticipating these variations. But nobody was prepared for the economic downturn and the price disruption that resulted from COVID-19, and it is overshadowing every element of Coronado's current circumstance. Our first half year '20 net loss after-tax was $123.2 million, down $337 million compared to the first half of '19 or 157%. Adjusted EBITDA was $34.9 million, down 91.4% compared to the first half of last year where EBITDA was $405.4 million. Group mining costs of $57.30 per tonne or an 11.5% increase over the first half of '19, purely as a result of lower production volumes, and that was purely a result of the market and some operating circumstances occurring. Gross operating costs of $665 million were down 18% compared to the first half of '18 -- or of '19, and a revenue of $713.7 million was below the first half of '19's revenue of $1.234 billion due to lower coal sales and lower average realized metallurgical price. So $0.5 billion in the first half of '20 came off the top line as a result of the market, COVID-19 and the circumstances associated with the metallurgical coal marketplace in general. The net debt position of $404.9 million as of 30 June 2020, consisted of $36.1 million of cash, excluding restricted cash and $441 million of debt. Looking at operating performance. Coal production was adversely impacted by the temporary suspension of mining operations of Curragh due to a fatality, a tragic fatality in January 2020 and some follow-on wet weather and operating scheduling issues that impacted the second quarter. The run-of-mine production was 11.9 million tonnes, down 28.7% compared to the first half of '19. Salable production was 8 million tonnes, down 23.2% compared to the first half of '19. Sales volumes of 8.3 million tonnes were down nearly 20% compared to the first half of '19 as a result of lower production. And the group realized metallurgical pricing of $97.30 per tonne was down 30% compared to the first half of '19 as a result of the COVID-19 impact on a market which turned soft and saw the index prices falling. There were no distributions made in the first half of '20. And from a corporate standpoint, in May, the company concluded an agreement with lenders of the syndicated facility agreement to waive the compliance of financial covenants until February 2021 and there will be additional details given on a waiver extension to that. We have taken further steps to safeguard our operations, strengthen the balance sheet, increase liquidity by reducing capital expenditures and managing operating costs and focusing on excess assets and generally conducting the business in a disciplined manner. Going through the first half year financial metrics. Much of this is a repeat of what we've already gone through, but I need to highlight that the metallurgical price dropped from $137.50 a tonne down to $97.30 a tonne on average across the group, a $40 reduction in price. And the group mining costs went up by nearly $6 a tonne as a result of the lower production. Revenue, again, $0.5 billion, $520 million came out of the revenue line purely because of the condition of the market. Looking at segment results. It's worth some discussion in noting that both Australia and the U.S. approached the COVID challenge and the need to safeguard the health and well-being of the workforce in a very aggressive manner, but because of the differences in mining operations, in jurisdictions, the approach was a bit different. In Australia, where the operations are all service operations, the ability to socially distance and maintain hygiene requirements on site is a bit easier, although you do have to take care of the camps and the housing facilities on site. In the U.S., where the operations are largely underground, social distancing is a bit more difficult. And for this reason and generally, the market conditions we saw, the U.S. operations shut down in April and May of this year. Even with that, the U.S. operations produced positive EBITDA of a little over $40 million in the first half of the year. Because of the operating issues in Curragh, the performance improvements that we've seen all through the year in '19 were curtailed or interrupted in the EBITDA of only $6.3 million, a number which we believe will improve in the second half of the year significantly as operating problems are corrected. And over to you, Gerhard.

Thanks, Gerry. I'm on Page 11. So look, here, broadly, the things we have done, do and going to do to manage the current situation. First, we do ensure our workforce is safe as we care for our colleagues and contractors. We believe that safe operations are well-run operations and in the end, productive operations. And I'm currently actually at Curragh, our Australian operation this week, and I will focus on a lot on safety when I engage with my colleagues and contractors here today and tomorrow. Second, having added -- after having added our U.S. operations, we have successfully restarted them in June. Then we have also reduced our CapEx by about 40% compared to our guidance of USD 190 million to USD 200 million (sic) [ USD 210 million ]. We have received an extension to our existing waiver until October next year. And we do this equity raise here at very attractive terms for you as our investors. And we still have other levers to pull depending on how markets develop and we'll come back to that in a second. Over to Slide 12. So here, the point I want to make here are the key impacts of equity raising. We have actually concurrently worked up the plans with our lenders and got all the flexibility and liquidity through this arrangement. We will more than double our liquidity to $325 million and reduce our net debt by nearly 50%. With that, we have cleaned up our balance sheet by and large. And there are reasonable and even, I have to say, unreasonable downside scenarios we have [ won ]. We have ample liquidity to work our way through even more than 12 months, maybe on 12 months of distressed met coal process, which I call unreasonable scenario and I'll come back to that in a second when I talk about market. But even then, we have plenty of liquidity and time. Now that gives us also time to implement all the other initiatives that we are going to highlight and talk about. Gearing/leverage is now at a more sensible level. And the other issue we wanted to fix is that we have now the stock liquidity in the share market and the free float that will allow us to be indexed. And that means index funds can buy us as a result of this exercise we are just going for. On Slide 13, waiver, this really shows a good relationship we have with the lender group, who have been very supportive for this period of COVID-19. We have worked with the lender group to get, first, the initial waiver through to February 21 and then shortly after that, have given us further covenant waiver that gives us the flexibility to walk through the facility. It [ pays ] this equity raise to improve our liquidity and give us more than -- way more than the 12 months that I just talked about. In more detail, the waiver is effectively extended until October 31 next year, where -- and we were handed back the last $50 million drawdown facility that was locked up. And in return, we reduced the facility limit in three $25 million tranches in February, March and August next year. The banks also have released security of a bunch of assets that we are now able to sell to generate further liquidity for us. We go to Slide 14. Gerry, I hand back to you on Slide 14.

All right. Let me speak a little bit about some of the initiatives at Curragh, particularly in this tough time. We have deferred the expansion at Curragh, which would have required initiating box cuts this year. They will be postponed. And we are postponing other box cuts, which would have opened up pits that we could attack in 2022 and 2023. We will resume these box cuts and think we can catch up but it will delay the full value of the expansion. We are reducing the stay-in-business capital expenditures to the bare minimum. And we are initiating certain productivity improvements, including continuation of the dragline efficiency programs that we had started, a refocus on the efficiencies of the drill and blast operations and particularly efficiencies in the preparation plant, which will improve the operating hours and improve the recovery of the coal in the preparation plant with minimal capital requirements. Most of these changes are in operating procedures and some improved maintenance. In the U.S. operations, we have a unique ability to access a tiered market system where we have a pricing arrangement for domestic buyers, which is fixed for the duration of the year. These are commonly negotiated in October -- September, October of the year and are -- provide a fixed price and a reliable rate of delivery for the full succeeding year. Negotiations have not completed this year. They've started a little early, but it gave us the opportunity to serve that market, which was about $10 a tonne over a competitive export market for the first half of this year. And the ability to do that, rightsize the operations in order to attack the highest price market was largely responsible for the ability to generate EBITDA in the first half of the year, even with mines that were idled in the absorption of those out of costs for a 2-month period. Those mines will operate in our plan to operate on a full-time basis although at a reduced staffing and capacity for the second half of the year. And we anticipate that they will be able to meet the markets that we can see, even in the export market, to the extent that we choose to participate. Other initiatives are the divestment of noncore assets and the sale and leaseback of some mining equipment and coal reserves into royalty trusts or other financing arrangements, which can produce cash this year and enhance liquidity. And there are programs in place to manage the Xcoal receivable payment plan, which has been reduced since the first quarter of the year by about $60 million. All of these programs are ongoing and producing improved liquidity across the board even in this terrible market. Gerhard, back to you.

Thanks, Gerry. I'll move to Slide 16, equity raising terms. In terms of offer size and structure, we have got a fully underwritten placement of about USD 104 million and a fully underwritten entitlement of USD 76 million, so in total, USD 180 million. The use of these proceeds will go against our syndicated facility agreement to basically repay drawn debt. The offer price is AUD 0.60, which is a 27.3% discount to the last closing price of $0.825 on Monday, 17th of August. And in terms of major shareholder, EMG, they have been quite supportive of this deal. They're supporting the increased liquidity and the indexing of our securities. Coronado's free float is expected to increase from 20% -- about 20%, to 44% after this equity raise. Let me -- there's a timetable on Page 17 but let me move on to Slide 19. Let's just talk about how well positioned we are for the recovery of the market. We are one of the leading met coal producers. Globally, we are also diversified across products and geographies. We sell our products to major steel mills in Brazil, Europe, Korea, Japan but also particularly India. We have a track record of profitability. And we have a management team that has experience in the U.S., in Australia and to be quite frank, globally. Let me get back to this in a second. Let's move to Slide 20. Look, Slide 20. Here, let's just pause here and focus on the chart in the top right-hand corner. In a normal market, we are a pure cash machine that produces more than USD 600 million of EBITDA and more than USD 400 million cash per annum and that is in U.S. dollars. So we are able to produce that at relatively low cost and with a lot of CapEx flexibility as we outlined before. Over to Slide 21. [ I guess ] one of our core markets and the second largest steel-producing market globally, India, will see a V-shape recovery and we are already seeing green shoots in India and in other markets. India overtook Japan, by the way, as second largest steel producer recently, last year, I think it was. India is a great growth market for met coal. Currently, 20% of the global met coal demand comes from India and that will grow to 35%. And just take this statistic that I like, the per capita steel consumption in China is nearly 700 kilograms per annum. In India, that is 70 kilograms per annum. Both countries have the same population, so India's growth potential is purely phenomenal. The other important message is that the met coal demand goes up from 300 million tonnes per annum to 400 million tonnes per annum, a 25% increase that is met coal seaborne export. You can actually replace India with major steel producers here, particularly the Asian ones. And in the Q&A, I'm happy to talk more about markets. Over to Slide 22, 2 key messages here. Just a $10 higher price gives us about $100 million more EBITDA. Today's price, in the world's most severe downturn over the last 100 years, is about $110. It's slightly under, let's call it $110. The average price over the last 13 years is $163 per tonne. As I said, we can see green shoots in Brazil, Europe, particularly India, Korea and Japan, where everywhere, furnaces start up again. The market consensus is that in quarter 4 this year, we will see higher prices edging to about $130 per tonne. That's not my number. That is based on market consensus, Wood Mackenzie and Platts Forward Curve. What is driving this is the recovery in these markets but also very, very strong China market. The domestic China prices in U.S. dollars is USD 50 per tonne lower -- sorry, higher than the seaborne export price, so there is an enormous pressure within China to [ get the quarters ] then some market analysts predict that this will happen in quarter 4. And the [ last end ] of quarter's prices based on market analysis, prices would be profoundly higher than where it is now, and not that quarters are relaxing based on market analysis, quarter 4 this year and then particularly quarter 1 next year. What I'm saying here is really that Coronado is a super cheap stock that is at the bottom of the cycle and it's totally correlated to the upswing of met coal prices. And that is the general view of all analyses you've read over the last 72 hours. Gerry, I'll leave it here and over back to you.

And I think we're ready for questions.

[Operator Instructions] Your first question comes from Glyn Lawcock from UBS.

Trust you're well. Apologies, I've just joined following the BHP call. But I was just wondering, Gerry, if you could talk a little bit to the U.S. business. Obviously, it has the benefit of being very flexible when it comes to its workforce. Just wondering -- it's profitable today. Cash, making cash because you're running off 2019's contracted prices that you said will bend for this year. I think last week at the results call, you talked about -- buyers wanted to start negotiating for next year, clearly not the best time. If you had to settle at today's spot prices, could the U.S. business still make cash? And if that -- and if not the case, what are the options? How flexible can it run? I mean in the past, you have closed the U.S. business in low periods. Just wondering if it's still that flexible.

We still have that flexibility. I can't get -- well I could, but it would be useless to guess what the reduction in price for the U.S. domestic contracts will be. The negotiations are done. I think I can probably say with certainty that they will be lower than they are now. And you're looking at a $10 range as $10 lower is not an unreasonable estimate. When that happens, then you become -- you reexamine your operations and make sure that you are getting the best you can out of those markets and using what incremental tonnes are available for an export market, which right now would probably be about at parity or maybe even a little worse than the domestic market but will, in the forward curve, show some signs of improving. Nobody settles a domestic price based on current spot. You pay attention to the curve, the steel producers do, the coal producers do. And we'll settle at better than current spot but not as good as current contract domestically or that would be my guess. And that will still allow room for restructured operations and generation of cash.

So Gerry, just so I'm clear -- and that's good color. So essentially, whatever price you are, you do accept? So obviously, you probably would accept some price at domestic. But whatever price you accept, it would be a price that you could run the U.S. business, given your flexibility, at least minimum free cash flow positive and then take advantage of any recovery in the export market? Is that the strategy? Or can you actually get a price that would make the domestic business free cash flow positive as well?

Well we're going to -- I mean I think we can -- it remains to be seen. But look, Buchanan is the lowest-cost metallurgical mine in the U.S., we believe. Certainly, it's the lowest-cost, low-vol metallurgical mine in the U.S. We think we can make cash on domestic business for that. That gives you the opportunity to play the incremental production -- to play on incremental production and put some incremental tonnes into the export market. And it's -- I would be guessing if I knew how much of the base market we'd get and how much we'd have the ability to put on the export market with incremental tonnes. But Buchanan -- if anybody can make money in any market, Buchanan can. And the real advantage is that because we are not weak on development and because the longwall can perform very, very well, the conditions are very consistent. This is a mine that if the market gets better, can go from 0 to 60 in 3 seconds. Logan County is a little bit more complicated in that you simply are looking at continuous miner sections. And you focus on the best conditions. The conditions change from section to section. You focus on the highest clean tonnes per foot. You focus on the best recoveries you can get and the lowest cost that determines where your operating level is.

Okay. So really, the U.S. business, you can flex it enough so that you could probably make it free cash flow positive, so cover your CapEx as well as you did in the last 6 months? I think your free cash flow was probably breakeven in the last 6 months for the U.S. when I look at the numbers from last week.

You're guessing at the market, but I think so. Yes. We have done that in the past. That's what we have.

Okay. And then if I look at Curragh -- just my second question, apologies. If we look at the first half for Curragh, obviously was impacted by a number of issues, which you've flagged. I mean it was cash flow breakeven when I look at the business. Second half, better volume, lower cost, but you're going to be dragging a lower price through. At the current pricing that you're going to drag through into the September quarter on the lag, can you get a free cash flow business out of Curragh as well at the moment with the price you're dragging through?

We think we can. It depends a lot on the qualities that you produce. During the first half of the year and into the second half of the year, we will produce more hard coking coal, less than the soft, and a little more thermal coal than we normally do. That's a function not only of the market but a function of the operations and the way they're currently working. We just had a call this evening and frankly, the news on recovery was good. We are going to get operating improvements. We're confident that we can get continued operating improvements throughout the second half of the year and have every expectation that if not cash positive, it will be nearly so, even in the worst market.

Okay. And then just quickly, just a follow-up to what you were just saying. The additional thermal you'll produce at Curragh in the next 6 months, will Stanwell take that? Or will you get the opportunity to at least sell it into a better price in the international market?

You'll sell it -- you'll sell some of it into the international market. It will be more than Stanwell can use.

Okay. So I thought you'll make a bit of margin off that better than you would selling at the Stanwell, I assume.

Yes, yes.

[Operator Instructions] There are no further questions at this time. I will now hand back to Mr. Spindler for closing remarks.

Well we appreciate your attention and the time you've taken to this presentation. But this is a great opportunity, as Gerhard says. This is -- certainly, yes, we think very high-quality assets at a very attractive price. And with that, I think we're through.