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

Thank you for standing by, and welcome to the Coronado Global Resources Q2 Quarterly Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Gerry Spindler, Chief Executive Officer. Please go ahead.

Thank you, operator, and thank you to all participants for joining the second quarter investor call for Coronado. This morning, we released our second quarter report to the ASX and the SEC in which we outlined our production and sales volumes for the quarter as well as other key information related to our safety and financial performance. A more detailed outline of our financial position and results will be released to the market on August 10, and we will commence another call then to outline in more depth our financial outcomes from the first half of the year ended June 30. As always, we commence our call with safety. In the U.S., the total reportable incident rate was 2.55. And in Australia, the total reportable injury frequency rate was 5.63. The Australian rate continues to fall, and the June 30 rate marks a 40% improvement in safety results compared to December 2020. Indeed, Curragh is currently experiencing the longest period without lost time accidents that they've had since 2008, being a record. Both the U.S. and Australian operations safety rates are below their national averages. The improvement in safety at our Australian operations is testament to the great work from management, employees and contractors in driving improved safety leadership and interactions. Improvements from the ongoing rollout of the Critical Control Management Projects are seeing tangible results. This year, both the U.S. and Australian operations have implemented incident reduction initiatives, including enhanced supervisor training, enhanced hazard recognition and risk assessments, which are also having a positive effect. In the U.S., a number of our operations received the West Virginia Joseph A. Holmes Safety Association award for their 2020 performance. The Lower War Eagle and Elk Lick Tipple operations were also notified that they will receive the Mountaineer Guardian awards for their 2020 safety performance. These awards are exceptional achievements, and I congratulate all of our employees for their effort and dedication to safety. But the real story is behind the numbers because it is in the accidents which did not happen, the injuries that didn't occur and the suffering that nobody has to endure. I want to thank everyone for the particular effort here. It is truly the best we can do in making our world, and arguably the whole world, a better place. As the COVID-19 pandemic continues, Coronado's COVID-19 Steering Committee continued [ monitoring ] the effect of the pandemic across our operations. In the U.S., vaccinations have been provided to all employees who have wished to receive one. In Australia, the workforce is seeing increased vaccination rates in accordance with the federal government's vaccination program. Additionally, Coronado is working with the Queensland Resources Council to assist in the rollout of vaccinations to neighboring communities. In both segments, screening and preventative procedures continue without any material impact to our operational performance. Turning to production. Run-of-mine coal mined for the quarter was 6.9 million tonnes, in line with the prior quarter. Saleable production was 4.2 million tonnes, down 7% on the prior quarter, driven by a planned dragline shutdown at Curragh, which impacted the timing of run-of-mine coal delivered to the preparation plants, and additionally, some prep plant repairs that were required at the Buchanan mine. On a year-to-date basis, saleable production was 8.8 million tonnes, up 10% on the prior year. Sales volumes for the quarter were 4.5 million tonnes. The U.S. operations realized a 14% improvement in volumes compared to last quarter, driven by improved rail service and stronger met coal demand. The Australian operations were impacted by a rail outage on the Blackwater system during the quarter due to the train derailment. The cumulative impact of the outage to Curragh saw the mine lose 5 days of railings, which is expected to be recovered in the September quarter. Year-to-date, sales volumes were 8.9 tonnes for the group, up 7% compared to the prior year. During the quarter, the Buchanan mine successfully and safely completed the Longwall move. The Logan complex achieved a daily record raw coal processing record, and our marketing team secured a record U.S. East Coast shipment of Logan High Vol A coal in a single vessel. The vessel was loaded with 136,000 metric tons of High Vol A coal bound for China, a tremendous effort by all involved. With regard to the balance sheet, Coronado successfully completed a $550 million refinancing package during the quarter, which comprised of an asset-based loan facility of $100 million, a notes offering of $350 million and an equity entitlement offer of $100 million. The proceeds from these transactions were used to repay and terminate all the outstanding obligations under the syndicated facility agreement, cash collateralize and replace bank guarantees under the syndicated agreement and fund working capital for other general corporate requirements. The new capital structure increases Coronado's financial flexibility by eliminating the application of the SFA financial covenants and introducing debt on a more sustainable term. In addition, the arrangements extended their maturity profile significantly, provide a diversification of funding sources and maintain liquidity for the business. I'll now hand over to Gerhard to talk to our financial position and market outlook.

Thank you, Gerry. Good morning, everybody. Just a quick reminder that a call replay will be on our website after the session in case some investors cannot join us today. So Coronado will release its detailed financial results for the half year on August 10, but there are a few points we can make today. Firstly, the successful completion of the refinancing package was a significant initiative. It has provided us with sufficient liquidity, increased financial flexibility, longer-term debt maturity and the removal of periodic financial maintenance covenants. I would like to thank here also everybody at Coronado for the good and hard work in completing this significant initiative. On the quarterly results, June quarter revenues were $424 million, up 14% from the prior quarter as we saw steel demand and met coal pricing start to increase from late May. Coronado's net debt position of $236 million has reduced by $54 million or 20% since the end of March. And year-to-date, capital expenditure of $52 million was down 15% compared to the prior year. Just to preempt the question, this is on the back of increased capital discipline, not at the expense of maintenance. In relation to our costs, our mining costs per tonne were $64 per tonne, up from $57 per tonne in the same period last year. Mining cost per tonne has increased primarily due to the impact of higher FX. Just as an example, for the first 6 months ended 30 June '21, the average FX related to the U.S. dollar was $0.77 compared to the 6 months ended June 2020, $0.66. So $0.11 higher. Coronado is impacted by this movement in FX. Of course, the majority of our cost here in Australia are denominated in Australian dollars, but we report our results in U.S. dollars. On average, we calculated that a $0.01 movement in FX equates to about $0.75 per tonne impact to group mining cost per tonne on an annualized basis. In recent weeks, we are starting to see the FX rate come down, which will benefit us in the second half. During the quarter and into the second half of the year, the Curragh mine is continuing its initiatives by reviewing operational efficiencies and opportunities to reduce costs, improve productivities, and that includes also procurement review. The mine is also continuing with initiatives on noncore infrastructure asset sales, which will further enhance our liquidity. Turning our attention to coal markets and steel markets. During the quarter, we saw a profound shift in pricing uplifts. Metallurgical coal pricing substantially increased in the back half of the quarter with a premium low vol FOB Australian index reaching $194 per tonne, sitting today at $212 per tonne and the low vol FOB U.S. East Cost index reaching $217 per tonne at 30 June. The benefits of these price increases will be realized at Coronado in quarter 3 and quarter 4, and that's because of roughly 3 months pricing lag between contracting and delivery. We expect to see a strong cash generation for the business at current pricing levels in the second half. On the China ban, the China ban on Australian imports -- coal imports continues. And for most of the quarter, we continue to see the pricing distortion between the Australian and U.S. price indices. By the end of June, that distortion has largely resolved itself. And we now generally see index parity between the regions, which is basically on the back of more normal trade balances. On the forward look, lower steel demand for the balance of 2021 is forecast to remain very strong, underpinned by the ongoing global economic recovery driven by low interest rates, growing consumer confidence as vaccination rates increase and higher government spending resulting in continued sustained global demand for metallurgical coal. Global hot rolled coil prices have stabilized at historical highs as steel demand continues to rise faster than supply growth, driven by ongoing robust industrial output. International trade flows of met coal have realigned to accommodate the displacement of Australian coal from China with Chinese Steel Mills continuing to pay a premium for the replacement tonnes. The June spot prices for the CFR China premium low vol index have exceeded USD 300 per tonne. So you can see the arbitrage there. In quarter 3, we expect prices to moderate from the recent highs given the lower seasonal steel production period in China and lower spot demand from India during their monsoon season. But pricing will remain supported by continued supply tightness from Australia, United States and Canada. Negotiations for U.S. domestic coal sales in 2022, which are on annual term contracts, will commence towards the end of the third quarter. We expect that prices from those discussions will be higher and therefore have a positive impact in the following years. I'll now hand back over to the operator to take questions.

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

Great quarter and recovery. Just a question on the production in the second half. Just looking at your guidance in '18 to '19, looking at the midpoint, that effectively implies production of around sort of 9.7 million tonnes saleable, which is sort of what you did last year. Just wanted to dig into a little detail about the performance of Buchanan and Curragh. What do you expect in the second half now with the Buchanan back at full capacity? Can we see Buchanan producing at the 2.3 million to 2.4 million tonne mark on saleable? And with Curragh, do you think the outlook for the second half is -- should be better than the second half of last year on saleable production?

Without predicting the exact numbers, we clearly expect Buchanan to continue the increased production level with the Longwall move. And the -- and Curragh, where we have taken significant steps to improve operations and improve performance, is exhibiting promising signs that lead us to believe there will be an increased level of production in the second half. And again, without putting numbers on it, we expect that to happen.

Okay. Next question is on inventory build and also realized prices. There's a fair bit of info as always in moving parts on the Australian and U.S. business. But what inventory build did you see in the quarter? I know Curragh didn't produce as much as maybe you would have liked it to produce. And then also, on the realized price versus benchmark in both the U.S. and Australia, it actually held pretty steady. In fact, it actually went up, I should say, quarter-on-quarter, which we're not really seeing in that case, and correct me if I'm wrong, the lags in your business on pricing that maybe some other coal companies are seeing. Or are we -- should we -- what is the lag, I should say, on price realizations taking into account your order book and also shipping?

Let me address some of that. The -- we haven't seen, other than for rail, with rail impact, any real lag on shipping. We are clearing our inventories and don't see any particular reason to believe that there will be a supply chain disruption, shortfall or change in the future 6 months. And Gerhard, do you want to add any comments?

Yes. Just on inventory build, I mean, the biggest one is really Curragh derailment that caused, of course, inventory build substantially for us. That's probably all we can say here at this stage. On your question on pricing and the time -- the lag it takes us to benefit -- really benefit from it. When I look at the pricing that really just came up in May, the prices you have seen on 1st May, actually, met coal -- sorry, premium low vol Australian index sitting at $106 per tonne, 1st May, and it started coming up in the second half of May. So if you apply a 3 months' time lag, you see that you really start benefiting from this in July, August, from the higher prices. So not much yet seen in the second quarter, probably a glimpse of it maybe in June.

Okay. Last one for me. And one for you, Gerhard, just on some of the numbers at the back of the report, looking at freight expenses and other non-mining costs. There was an increase in freight year-on-year. Is that the additional -- just additional volumes in the U.S.? Or is it higher rail and port rates in the U.S.? And can you also explain that other non-mining costs increase? What is that?

I think on the non-other mining cost increase, we can probably provide more detail after the 10-Q in a few weeks' time. On the freight cost, I think I mentioned that before -- last quarter that we see more FOB sales in the U.S. And at the same time, in the U.S., it's not uncommon that railing costs are proportionate -- in proportion with the U.S. East Coast index. So if that goes up, which it has, then the railing costs go up as well. So there is probably not an abnormality in the freight cost. It's more higher U.S. East Coast price, more FOB shipments and a little bit of demurrage as well.

Okay. All right. I thought it was that rail-linked -- price-linked contracts.

Your next question comes from Matthew Hope of Crédit Suisse.

I'm just trying to understand the U.S. prices you're receiving a little better. So you reported $105 for FOR prices. We've seen Buchanan cargoes going into China at about $220 across the quarter. Now obviously, there's $50 to $60 going on freight. So I'm just trying to understand the breakup of where the rest of that money goes. Is it actually going to traders? And do you have a chance of capturing any of those higher benefits? Because most of these benefits of the higher China prices don't seem to be going to Coronado.

Let me -- Gerry, let me take this one. Look, I looked at this in detail just last week, preempting this question. It's really timing. Timing is everything here. If we saw the cargo that we see now being sold at whatever the prices are now, CFR China, you need to go back to before May and pick the price at that point, not the price that you see today in the market. So there is a massive timing delay. So when we see prices going up as steep as it did over the last 8 weeks, you will always have this kind of situation where you actually don't see the benefit or the big price gap -- price realization gap between today's price and then for what you hear, depending on what's sold in the market. So it's really a 3 month -- go back 3 months ago, sometimes even 4 months, pick the price and see the difference. You need to take off the railing cost as well because when the price was [ in need ] a few months back and prices have gone up, again, what I said just now, railing cost are actually in -- correlated to the indices in the U.S. to a large extent. And you take off some quality adjustments and you take off the -- if it goes to China, 3% China tariff goes off. Then you come to pretty much a more reasonable -- much more reasonable difference, if at all difference.

But just, I mean, talking about those prices. So today, basically, the price for Buchanan going into China is $248. Back at 7th of May, it was $216. We've still got this huge gap. Now I'm just trying to understand that gap. Taking out the rail, taking out the freight, there's a gap there. And is this -- I understand Xcoal is sending most of these cargoes into China. Are they capturing the benefit? Is there any chance that you can start to capture the benefit by, say, taking it away from the traders and doing the shipping yourself?

Let me just go back to your analysis because I have done that as well. If you go back to May, you will see actually that the CFR index was about $60 below what you see today, $60, $70 below what it was today. And then you have spread from Tier 1 to Tier 2 in there. You have the higher railing costs in there. Railing, you can't apply it in the railing cost where it was in May. You need to apply the railing cost, what it was when it was actually railed. So again, I've done the calculation in detail and the difference is marginal. So that's on this. What you are saying this is like take the middleman out. What I can say is with Xcoal, Xcoal is not only shipping for Coronado. Xcoal is shipping for a number of reputable coal companies in the U.S. As you know, Xcoal is also exporting to a large extent. Our coal has done a good job there over the years. Yes, the receivable has built up, but the receivable has also dramatically reduced between last year in March and last year December. And now I think we disclosed it's down to $37 million now. So we continue that good relationship and see benefits for us coming from it.

[Operator Instructions] Your next question comes from Sam McGovern of Crédit Suisse.

Can you update us on the China ban on Australian imports? And any sign of resolution coming on the horizon or no movement yet there?

Yes, it's...

Sorry. Yes, go ahead, Gerhard.

I'll take this one as a market question. Look, the thing is that realistically, if you would have asked me 6 months ago, I would have said this will disappear, the China ban, simply because China needs Australian coal, particularly the low vol. It's very clear now that China has dug their heels in, and this situation has continued to stay here. China will probably for at least another year, if not for a couple of years, dig their heels in and avoid buying Australian coal, thermal and met coal. We are not too concerned about thermal. But also what I said in previous quarters is at some stage, these arbitrages don't last long and the markets will stabilize. And that's exactly what you see right now in the markets where China is like a magnet for all North American coal, including ours. So all of the North American producers are now diverting their products from the Atlantic market into China, and then the Atlantic market is short of coal and become a magnet for Australian coal. And India, India is dramatically increasing steel production anyway. So they are taking a lot more Australian coal as well. So you can see this dramatic price increase. The price basically doubled between 1st May and today. The premium low vol Australian FOB price doubled, exactly doubled between 1st May and today. You can see that increase coming from this situation. No doubt, $212 per tonne is above the long-term average. But most market analysts forecast prices to stabilize at the long-term average.

Got it. That's very helpful. And then with regard to your comments about the free cash flow generation in the second half, how do you prioritize the use of that cash? Do you guys expect to pay a dividend? Or where else might you sort of focus that cash flow?

So that's for, of course, for the Board to decide. But at this stage, I think our focus as an organization, as a company is really to keep reducing net debt. And that's exactly what we have done. We reduced net debt by $34 million down to $236 million. And I think it's a good number compared to where we were 2 months ago. We have a positive outlook.

[Operator Instructions] Your next question comes from Alex Ren of Crédit Suisse.

Congrats on the quarter. I've got a couple of questions on operations. First one is on the China logistics. So this quarter, I noted repairs of the preparation plant and last quarter was poor rail services. But overall, there's probably net positive considering the rising prices. I'm just trying to understand, could you give us a bit more color on the -- should we be expecting sales to normalize or potentially higher than production in the September quarter onwards? And on costs, during quarter, I think June has averaged $64 a tonne. Your full year is still at midpoint at $58. Does that still stand? Or should we be expecting cost to be a bit higher than guidance considering the inflation rate environment these days?

We are -- regarding -- I mean, the circumstance of Buchanan that was most disruptive was a thickener with the cement. Having fixed that, it's not expected to recur. And we'll sell all we produce, and we expect enhanced production, I'll put it that way, for the rest of the year from both Buchanan and Curragh. Curragh in particular should enjoy the benefits of programs already starting to improve productivity. And the one thing I will say is that the issues with Curragh in productivity are singularly limited and easy to identify. So we are targeting those without going into any more detail on that. But we do expect and hold the guidance here with cost and production.

Yes. Got it. And also, I have a follow-up question on CapEx. So $52 million for the half. Meanwhile, the previous guidance was $145 million. And I think in the refinancing package, you mentioned it could be squeezed down to $120 million. So far, it's annualizing below that. So can we sort of use the first half as the yardstick for the next half, i.e. $100 million for the year? And how much CapEx is actually deferred into future years?

We would -- go ahead, Gerhard.

Let me refer to the comment I made. So I think the 54 -- sorry, $52 million CapEx for the first half is really on the back of a very high capital discipline that we introduced and not on the back of maintenance regime. I think what you don't need to expect is all of a sudden in the second half CapEx costs are exploding and we're going to hit $155 million. I think our guidance was $135 million to $155 million. So it's definitely the lower end. And you can probably see the first half might be yardstick. I wouldn't just -- at this stage, I would say look, we are probably aiming for the lower end. But at the same time, I'm not sitting here saying I want to spend $135 million if we don't have to. But again, this is very important for everybody to note. We are not in a position where we have to -- not in a position at all where we have to sacrifice the maintenance. So whatever has to be done will be done. It's just a better capital discipline in place.

[Operator Instructions] Your next question is a follow-up from Paul Young of Goldman Sachs.

Gerhard, a follow-up on the U.S. business and pricing. Just to confirm that your domestic sales are actually included in the achieved pricing for the U.S. And can you remind us, that was 2.2 million tonnes, I think, at $87 a tonne. And in the half, what percentage of U.S. sales were domestic versus export?

Yes. So the prices are included in the U.S. realized met coal prices. Domestic prices are included. Gerry, the domestic sales is about 20% in the U.S.?

Over the year. I do not have a number for the first 2 quarters.

Yes. I think over the year, it's about 20%. So it's probably in the quarter as well. I don't have that number here handy either.

Yes, got it. That's fine. Second question, just a question on the housing sale at Curragh, which has been ongoing now for some time. What's the level of urgency like? I know you're gearing up to get this done. Has your position -- negotiating position improved somewhat with the met coal price increase on that sale? And if you can just maybe just overall just give us an update on where you're up with that.

Yes. Look, I mean, first of all, we want to proceed with the housing sale, number one. That's very important. I think the urgency in terms of liquidity, generating liquidity, still keen to do it but -- whereas probably the urgency was extremely high 3 months ago. Today, I would say our position has probably improved, our negotiation position here. We are not forced to do it at unfavorable commercial terms. However, we don't see that really. Well, what is really causing us to -- what caused this to be a little bit late is government approvals. We need essentially government approvals for each one of those leases. We have more than 90 leases, and we are trying to fast track this. But it is -- it requires some exceptional permissions from the Queensland government, which we are working on. So that's basically it. Otherwise, we could have done it.

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

I want to thank you for your attendance at the half year call. Again, we will have follow-up, more detailed descriptions of the performance in the August 10-Q filing. But once again, thank you.

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