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

Thank you for standing by, and welcome to the Coronado Global Resources FY Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Gerry Spindler, Managing Director and CEO. Please go ahead.

Thank you, and thank you for your attendance and interest in the end of the year results presentation. We'll start, as we always do, with safety. And I want to highlight on Slide 2, the safety performance. After a tragic fatality at the beginning of the year at Curragh, finally, in the second to third quarters, improvements began to be made in the safety record. These improvements were a result of a focus on training, audit and enforcement of the safety policies and procedures. We are not at all where we want to be. We're still above the national average, but we continue to focus on this, and results will be coming -- will be forthcoming. For the U.S. operations, we continue to be well below the national average. I would like to highlight a few operations. By no means, all of the operations with exemplary safety performance, but Eagle 1 at Logan, Lower War Eagle and Powellton have done a full year without any lost time accidents. The construction unit has gone 11 years without a lost time accident. And Elklick has gone nearly 10. Again, this is not a complete list of the exemplary safety performance. But this kind of record does not occur without management attention to detail in a professional and disciplined workforce. I want to express my thanks for the achievement of these records. 2020 will forever be remembered as the year of the COVID-19 pandemic. It has impacted everything we've done. It's impacted our markets, our operations and presented us with problems that we had never incurred before and had no way of predicting. The response was aggressive, was fairly comprehensive, included the usual hygiene implementation measures, social distancing, the wearing of masks, training for the employees. And in particular, the contact tracing methodology that we implemented has received complements and kudos from the health departments in the jurisdictions in which we operate. Again, I want to thank Jim Campbell's leadership and the management for the successful implementation of those programs. But still the impact on the U.S. operations was significant. Coronado lost nearly 2,400 man shifts due to positive COVID-19 results, tests, test results or quarantine. And Buchanan and Logan were idled during the second quarter of 2020. Looking forward, the news is very encouraging. In the United States, the incident rate is dropping steadily and uniformly across the board. And on a nationwide basis, over 13% of the population has received at least its first vaccine. Among our workforce, nearly 10% have received their first vaccine. And 400 employees have been registered for the essential work opportunities under the vaccination. The Australian operations have yet to have a single COVID case. And we are looking forward as the pandemic subsides and the impact wanes to an improvement in the markets and a recovery -- an economic recovery across the board, which we see as benefiting our markets and has already shown some benefit to pricing. Going to Slide 5 and looking at the financial performance. Reported FY '20 net loss of $226 million was down $532 million compared to FY '19. The adjusted EBITDA was $53.8 million, down nearly 92% from FY '19, a year of $634 million of EBITDA. Group mining costs were $55.60 per tonne, 7.3% higher than FY '19 as a result of lower production volumes. Revenues dropped from $1.462 billion, down 34% to -- from fiscal year '19 of $2.215 billion and of course, due to realized pricing drops and lower sales volumes. And the net debt position remained almost unchanged as of the -- as of December 31, 2019, to December 31, 2020, of $281.9 million. Operational performance, the run-of-mine production was down to 25.2 million tonnes, down nearly 20%. Salable production was down -- was 17 million tonnes, about 16% lower than FY '19. And the sales volumes of 18.2 million tonnes were 9% lower than FY '19. Realizations, of course, dropped to $90.50 a tonne, down 30%. And the U.S. operations successfully returned to full production through the third quarter and into the fourth quarter. From a corporate standpoint, we successfully executed 2 covenant waiver letters, which moves the covenant testing to the 30th of September 2021. Capital expenditures were controlled to $123 million, nearly $124 million in fiscal year '20, down 32% from fiscal year '19 and 40% below the original FY '20 guidance. But it should be noted that the capital spend did preserve our ability to respond to improved pricing. We did not high grade any of the operations. We raised gross proceeds of $180 million through a placement in institutional and retail entitlement offer issuing CDI on the ASX. The Xcoal overdue receivable was reduced to $85 million by the end of the year, and currently an additional $20.1 million collected has reduced it to $65 million as of February 25. And we executed a sale-leaseback transaction with equipment at Curragh, which raised $23.5 million. The proceeds were used to repay debt and improve liquidity. We have shown before the measures we intended to take as the pandemic progressed. Now at the end of the year, we can say that all of these measures, including the safety protocols, the restart of the U.S. operations and the equity offerings, have been completed We have currently completed the rightsizing of the U.S. operations, and we're in the process of reviewing other capital structure implementations we can make to improve liquidity. Going to Slide 8. The slide -- this slide is here to highlight the unique capability of Coronado Global. Unique to any other coal company listed on the ASX, our U.S. operations can take advantage of the current arbitrage and higher prices available into China off the East Coast of the U.S. Nature abhors a vacuum, and economic abhors an arbitrage, and we don't know how long this will last. But while it does, we've seen the CFR price into China off the East Coast go -- rise 88% from 2020 lows, and the High-Vol A price has gone up 47%, and both are at significant premiums to the current available benchmark in Australia. Looking at the reserves and resources. We have, again, 20 years of life at every active operation. Reserves stand at a total of nearly 1 billion tonnes, and the resource is a little over 2.5 billion tonnes. Looking at Slide 10 and the operational performance. The run-of-mine production was down by about 1.7 million tonnes at Curragh, by about 1.1 million tonnes at Buchanan and by 2.1 million tonnes at Logan as a result of the idling of some of the U.S. operations and the issues at Curragh. Saleable metallurgical production was 0.8 -- was down 800,000 tonnes at Curragh, 1.1 million tonnes at Buchanan and 1.1 million tonnes at Logan. I would like to point out that Curragh in the second half of the year did perform at a record-setting pace 4 of the months where we set records for historical tonnage at Curragh, and we look forward to continuing the trend. The export ratio remained about the same as did the revenue split by tonnage. And I'll turn it over to Gerhard for the fiscal year '20 financial performance. Gerhard?

Thanks, Gerry, and good day, everybody, on the line. Over to the financials on Page 12. So look, it's a little bit of a sea of red here. The only positive is that we don't pay a lot of tax in 2020. So yes, 2020 was our annus horribilis. We had the perfect storm with 2 black swan events. One was COVID and the other one is the China import restrictions. COVID caused us to suspend our U.S. operations for 2 months. Australia was also impacted in quarter 1 2020, and therefore, production year-on-year is down 16%. And when we look at the details, actually, Australia performed at 2018 level, supported by a record half 2 performance, as Gerry highlighted. Price had the biggest impact in 2020, 30% less realized price than 2019. First, we have the COVID and then associated downturn in the steel industry with cascading effects on met coal producers like us and others. And just as the market starts to recover in, I think it was in August, September, and with that the met coal price that was towards the end of September '20, when I think the met coal price went up to $139 per tonne, the premium Low Vol Australia FOB price, as the news came out that China implemented the ban on Australian coal. So yes, with that, prices -- these prices the -- that was actually the biggest drag on our EBITDA in 2020 market and therefore, prices. We still delivered an EBITDA of $54 million despite this perfect storm that I mentioned in the -- particularly first half 2020. We just have to see through 2020, and I personally look forward to 2021 here. Going on Page 13, revenue performance. Look, the following pages for a bit in the details and same year on revenue performance. That was 34% down compared to 2019. Again, volume had a big impact, but suspending or after suspending Curragh and idling our U.S. operations for 2 months, market, and with that prices was by far the biggest contributor, and you will see that on one of the slides here. Page 14, realized pricing, again, more detail on this page on our product mix and realized pricing. So look, I think we are a pure met coal producer. The U.S. is nearly 100% met coal. Australia has some thermal coal that we are contractually obliged to sell to the Queensland government's Stanwell Power Station. Stanwell provides about 30% of Queensland's base power. On pricing, that's where this, 30% drop in realized met coal pricing across the U.S. And Australia. Australian coal is more impacted than our U.S. coal due to the situation with China and some other impacts. And here on the following page, it really shows that in times like this, you need to manage for liquidity and not for profit. Our profit or EBITDA was almost entirely consumed by market prices. You can see here, first, the COVID, as I said before and then in the fourth quarter, the China embargo. Last year's EBITDA of more than $600 million stood against the margin impact of price downturn in 2020 that cost almost $600 million alone. And then we had the volume losses due to the suspension of our operations earlier in 2020. The good thing is -- the good things we have done here, almost now is we have actually saved $106 million in our U.S. operations that were then partially offset by recovery activities in our Australian ops. And we also cut overhead by nearly 20% or $6 million. And the rest like royalties is an impact from lower volume and prices. So still a positive EBITDA of $54 million for the year. In terms of segment performance on Page 16 and in terms of where we have earned EBITDA, the U.S. is a clear winner here. It shows the strength of our U.S. operations. Despite idling for 2 months, in 2020, they generated a decent profit. The flexibility of these operations is clearly second to none. You can turn them off and back on without much delay and much costs. That's something we don't have in Australia. But here, we have scale. So when prices are at a normal level, we produced some serious profit and cash from our Australian operations. Over to Page 17, mining costs. Something I mentioned just now, the U.S. ops are very flexible and can be turned off and turned on almost in instant. Idling Australian mines on the other hand, means higher unit costs as costs are quite sticky. We also see some minor FX impacts here. So exchange rate had a minor impact. In general, our cost base across the board is quite low, and we will benefit from the U.S. flexibility on Australian scale when prices normalize. Page 18, cash flows and balance sheet. So when you look at our cash flows, you will see the relatively healthy liquidity of just under $270 million at the end of 2020. The equity raise helped us funding CapEx and improving our capital structure. And if you compare 2019 with 2020, you can see that our liquidity position improved from $247 million to $268 million, so just under $270 million. Net debt came down from $303 million to $282 million. Over to you, Gerry, for operational update.

Thank you, Gerhard. Addressing sustainability, and we do every year in our sustainability report, which will contain details we won't go through here. We're very proud of the sustainability record. We run a very nearly spotless record of environmental compliance. We have improved performance in our reclamation operations across the board, and we prove on a regular basis that we're good neighbors in the communities we operate by assisting in a variety of ways through weather-related and economy-related turbulence that occurs in the areas where we operate, where we are able to help and do. And again, additional details will be available in the sustainability report when it comes out. As far as the Australian operational review, again, metallurgical coal production was down by 800,000 tonnes. But again, I want to highlight the improved performance in the second half of the year to near-record levels. The percentage of hard coking coal produced in '20 improved as a result of a focus on washing and recovery. And the metallurgical and thermal balance remain pretty much the same with a little more thermal coal being produced as Stanwell did take its full complement. For the U.S. operational review, a very strong cost focus resulted in the EBITDA generation in spite of the fact that Buchanan was down by 1.1 million tonnes. Logan was down by 1.1 million tonnes as well. And there was a -- as we've mentioned, an idling of all operations in the second quarter. Again, reduced costs throughout the period and a positive EBITDA do not happen. So a very strict attention details of costs into the performance of the operations, and I want to thank the operating managers for all that they did throughout last year. Gerhard, over to you.

Thanks, Gerry, and everybody on Page 24, metallurgical coal market. So look, what a year in terms of market. As I said before, we had 2 black swan events, first came COVID and then the China import ban. And in between, we fixed our capital structure. Anyway, the key market points for today in the short terms are, number one, global steel producers have recovered. In fact, in Europe, there's not enough steel to produce the demand for cars and steel prices have therefore exploded. But more importantly, we see a strong recovery in Asia. China had a bumper year with a record steel production of 1.05 billion tonnes. India, Japan, South Korea, Taiwan have all recovered from COVID. Also, Brazil is going strong and has become a bigger customer of Australian coal. And therefore, it is really interesting to analyze the December '20 statistics. So just December. Brazil was buying actually 100% more Australian met coal in December '20 on an annualized basis. That was 7 million tonnes per annum on an annualized basis, whereas previously that was -- in 2019, that was 3.5 million tonnes. India saw an increase to 68 million tonnes per annum in December annualized, coming from 46 million tonnes in 2019. That is nearly 50% increase at a very high volume. And India is clearly the highest Australian met coal buyer now. But also Japan, Korea and Taiwan combined increased to 77 million tonnes per annum in December on an annualized basis from 63 million tonnes in 2019 or 22% more on annualized basis. So really, you can see the market is rebalancing here. And that makes sense. There's only one global pool of seaborne export met coal. And if one party stops buying from Australia, like China did and does, then others will step in like the U.S. and Canada have. However, they ship less into the other markets. And so like the Atlantic and Asia and so Australia goes into these markets. So it's really a zero sum game here. One thing that positively separates Coronado from other met coal producers is that, yes, our Australian coal doesn't go into China. Actually, never really did. But our U.S. Buchanan product is one of the most popular products in China. So here, we can see the benefits of our geographical diversity. I think the whole story here is reflected in prices. First, we saw prices coming down because of COVID. Then when steel markets recovered in the second half, August prices came back up again. And during our equity raise in August, I predicted that prices will hit $140 per tonne in quarter 4, and it was heading that way. Actually a little bit earlier towards end of September, they were $139 per tonne. Then early October, the message came through that China may have stopped buying Australian coal. And after it declined more, obviously, China stopped importing Australian met coal. We have seen prices going down again to $102 per tonne in December and then in January. Then doing the met coal rebalancing act that I explained before, we have seen prices recovering from mid-January on shooting up to $160 before Chinese New Year. And during Chinese New Year, the markets are usually quite, but analysts are expecting more movements from March on. So I expect that we expect -- market expects some more activities from next week on. Overall, 2021, we'll see more demand for met coal going up from 280 million tonnes in 2020 to 300 million tonnes or more in 2021, a 7% increase. If you go to Page 25, the long-term outlook for met coal. This page really excites me, should excite us all as we look into the long-term outlook for met coal. This is not my data, it's Wood Mac's. It shows how popular met coal is going to be. Overall, we will see a global demand increase of 13% between 2021 and 2030 -- from 2020, actually, to 2030. That would be 21% increase. About 60% of met coal usually comes from Australia. And so the Australia is the biggest exporter. The U.S. comes second or third. On the demand side, we see something really interesting here. The traditional markets like Japan, China, Korea and Taiwan are stagnating. But we see India's demand for met coal shooting up by more than 50% between now and 2030. India is a met coal market going forward. And by the way, it's Coronado's biggest customer. Let me give you one interesting statistic that is a real eye opener here. Why that is? And that is a steel consumption per capita. You know what that is in China? It's about 633 kilograms per capita per annum. And now let's guess what that is in India. It's about 74 kilograms per capita per annum. So China right now consumes 9x more steel than India. We saw a huge growth potential for India. Also, India is to build another 24 million housing units in the next 15 years. They have only 25 cars per 1,000 people in India, 25 cars per 1,000 people. That number is 8x higher in China at 200 cars per 1,000 people, And then when you look at the U.S. Australia, they're closing in on 900 cars per 1,000 people. But the growth is not only coming from India. In Southeast Asia, the steel consumption is 120 kilograms per capita per annum, which means all of Southeast Asia will have to grow profoundly to catch up with the rest. Let's move to Page 26, a little bit of our marketing -- insight into our marketing. Our Australian products are largely on contracted index with a bit of spot. Our U.S. products are a mix of fixed and indexed with more than 50% for the spot market. Buchanan is a very popular product in China, and we expect about 2 million tonnes going into China in 2021. About 25% of our U.S. products go into the domestic market. And with our U.S. and Australian products, we can say that almost every car on the planet has some Coronado in it. So I hand back to Gerry. Gerry?

Gerhard, thank you. Look, in summary, fiscal year '21 tested us all. And from such an experience, we learned some lessons. We realized some strengths and spotlighted those. We also realized some deficiencies, and those were highlighted as well. And those represented areas we can now concentrate on. As far as safety goes, we'll continue with a higher level of investigation into all of the recordable injuries and continue the increased inspections and enforcement of safety policies across the board at all operations. From a production standpoint, again, we found ways to improve the Australian operations productivity, and we're reviewing the expansion plan at the Curragh mine in line with the market recovery. And we're stabilizing production at Buchanan and Logan. From a financial perspective, there'll be a continued focus on cost and capital spend. We'll continue to examine noncore assets for the capability to generate additional liquidity. And we are examining Curragh main mining services agreement, which will go up for renegotiation. And there'll be a detailed capital structure review. We have guidance for fiscal year '21. This is full year guidance. Saleable production will be between 18 million and 19 million tonnes. Mining cost per tonne will be between $57 and $59 per tonne, and there is some expectation of an increase in FX in that number. In CapEx, we expect at $135 million to $155 million, in line with last year's spending level. And that concludes the presentation. We're now open for questions.

[Operator Instructions] Your first question comes from Sam Webb from Crédit Suisse.

A couple for me, please. Gerhard, perhaps first to you a few post reporting data inflows of cash. So I'm just wondering if you can give us a number of where your net debt sits currently. And the second question is on the Xcoal payments. Sorry to be blunt here, but what's taking so long to get these in the door? And how confident are you that the remaining $65 million will arrive by the end of September? And then finally, sorry, I just missed your comment there on the review of the company's capital structure. Excuse my ignorance, but what does that review actually entail? And what's the goal there with that review that you're undertaking?

Let me address net debt, capital structure, then lastly, export before I hand back then to Gerry. On net debt, our net debt at the end of 2019 was $303 million. At the end of 2020, it was $282 million, so an improvement of the $21 million. And equally, the availability -- the available liquidity improved equally from $247 million to $268 million. On capital structure, what we do is we do a detailed review of our capital structure and look at -- which is the right one for a business like this. Core focus is further improving liquidity, of course, but also the flexibility. We're also looking at the pricing. And we need to ensure that we have appropriate liquidity for continued growth as well so that's in terms of the capital structure. In terms of Xcoal, look, what we have done is since the outstanding is really $65 million as of February coming down from $150 million that was, I believe, in March last year. The Board and management believe that we can collect the entire outstanding $65 million. What I've done on the balance sheet is really I have taken -- I've discounted the receivables by $9 million applying an appropriate interest rate conservatively. And that's not a write-off, it's discounting as we have seen late payments in the past. But the entire Board of Management believes this amount is collectible. Gerry, any further comments?

No. I would point out that, again, as you have the Xcoal receivable has declined markedly over one of the worst years that the business has seen, we fully expect continued rapid decrease in that.

Can I just follow up on a couple of things there? So the review of the capital structure, is this looking to get more liquidity? How are you thinking about that? And is this -- do you feel like you need more liquidity to, say, fund expansion of Curragh or above and beyond what you've got at the moment? And sorry to circle back to net debt, but just wondering if you could -- if you're happy to give us where net debt actually sits today a backward-looking number at December 31, one account for what we've seen is a pretty strong increase in price. I'm just wondering if you'd be willing to give us where net actually -- net debt actually sits today?

I can't really disclose where it sits today, but you can see that we have sold our treatment for USD 23 million in January, equipment sale and leaseback. So that certainly is a positive contributor. In terms of capital structure, we -- I mean, we are going through this review. So it's not a solution yet. That's a detailed review I'm doing with the team right now. But of course, you can imagine, I look at liquidity, more liquidity and flexibility as well. Flexibility is very important to me at this stage. And then again, also more liquidity, we should ensure that we have a profit liquidity for continued growth, whatever that is. So I'd say at this stage, it's probably all we can say.

Your next question comes from Paul Young from Goldman Sachs.

A couple of questions on -- I'll start with the guidance. And first of all, on the production guidance of 18 to 19 million tonnes, that production rate is still below 2019. I understand Greenbrier is on care and maintenance. But can you step through the production increases that you're targeting from each of the operations, Curragh, Buchanan and Logan, please?

We haven't -- we have not identified specific increases across the board, and I wouldn't want to give projections on a by mine basis. We've designed the guidance to be a full year guidance, recognizing that there's still aways to go in the business improvement, and we'll capitalize on that market improvement where we can. But obviously, the biggest focus is going to be Curragh.

Okay. Can I further ask, Gerry, just on Logan? Are you assuming that Logan -- it does produce the full run rate for 2021?

We are adding some capacity at Logan. And yes, there is the assumption that there will be some improvement in Logan.

Okay. Maybe turning to unit cost guidance. Can you -- maybe this is question for Gerhard, what FX have you seen, Gerhard, on what are the dollar have you saved?

Yes. Look, I mean, it's -- what you see here the entire increase between 2020 and '21, all I can say is that's really FX. It's probably even more. It's not a cost increase per se, it's FX.

Right. Okay. So since Curragh's costs are pretty flat year-on-year, that's the target?

That's right. That's the target, yes.

Okay. Okay. Good to know. Can we talk about the U.S. operations, obviously, benefiting from the strength in the seaborne market, particularly exporting to China with the arbitrage there. Can you maybe talk around a couple of things there? One is actually the rail charge that the U.S. operations are wearing at the moment. Is that still just a rule of thumb around 25% of the coal price? Or has there been any movement in that, I guess, you call it price participation on the rail? And then secondly, with the strength in U.S. steel volumes, can you provide an update on expectations for U.S. coal price fixed contracts to 2021?

Looking at the issue for rail, rail is not a percentage of the price. Fortunately, it's usually by fixed rate. And the rate hasn't appreciably changed. It varies by source. It varies by customer, but it hasn't appreciably changed over the last year. And as far as predicting price, the meeting season for U.S. coal won't begin until August to September. And we'll have to wait until then to see what the market -- what the benchmark and what the competitive pressures are. But as Gerhard has pointed out and as public information confirms, the price for steel in the U.S. has gone up quite a bit. So there's room for improvement.

Okay. And Gerry, what was the last sort of broad range of pricing that you achieved and are achieving at the moment?