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

Thank you for standing by, and welcome to the Coronado Global Resources 2021 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, operator, and thank you, everyone, for joining Coronado's Half Year 2021 Investor Call. This morning, we released our half year results to the ASX and the SEC in which we outlined in detail our safety, production and financial results. Today, Gerhard and I will provide a summary of our results, but also outline our company and market expectations for the second half of the year. The first half of 2021 has presented several challenges. But as a company, we've weathered the storm and are very well positioned to take advantage of significantly improved markets in the second half of 2021. As always, we commence our call with safety. As of 30 June, our total reportable injury frequency rate in Australia was 5.63, and in the U.S., the total reportable incident rate was 2.55. Both reportable rates are below the industry average in their respective operating regions. The Curragh result is extremely encouraging with improvements this year-to-date, reflecting the commitment of management, employees and contractors to drive improved safety leadership and interactions. The rate at Curragh continues to fall. And in the June 30 statistics, [ a TRIFR ] marked a 40% improvement on the rate compared to December 2020. Across all of our mining operations and corporate offices, we remain committed to ensuring a safe working environment. In both the U.S. and Australia, we continue to focus on incident reduction initiatives, including enhanced supervisor training, enhanced hazard recognition and risk assessments. The COVID-19 pandemic is still very much prevalent across the globe as evidenced by recent lockdowns across most of Australia's Eastern seaboard. Our company, led by the Coronado COVID-19 Steering Committee, continues to remain vigilant in monitoring the pandemic and ensuring not only that we maintain safe and sanitized working conditions, but that our company follows the mandated laws of the land. In both segments, screening and preventive procedures continue without impacting our operational performance. We have noted an uptick in vaccinations across our workforce. As mentioned in our call in July, vaccinations have been provided to all U.S. employees who have wished to receive one. In Australia, vaccination rates are increasing in accordance with the federal government's vaccination program. Coronado has also committed to working with the Queensland Resource Council and state government to assist in the rollout of vaccinations to neighboring communities to boost vaccination rates. Turning to the summary of results for the first half of 2021, you can see that Coronado has realized improved run-of-mine and saleable production rates, and also noted higher sales volume compared to the first half of 2020. Coronado's revenue was 12% higher compared to the first half of 2020. However, higher costs, on account of a materially higher average FX rate, were noted during the period, which impacted our EBITDA. During the half year, Coronado has taken significant steps to strengthen its balance sheet, reduce net debt and increase available liquidity. The completion of the $550 million refinancing package eliminated the application of the legacy SFA financial covenants, and has provided the company with increased flexibility, enhanced liquidity and extended tenor on its debt arrangements. At June 30, Coronado has reduced its net debt to $236 million, a reduction of 42% compared to the same time last year, and the company has available liquidity of $213 million. As I alluded to earlier, the headwinds of challenging market conditions at the beginning of this year are behind us for now as we see index pricing in Australia and the U.S. for premium metallurgical coal north of $215 a tonne. Coronado is exceptionally well positioned to take advantage of this higher price environment in the second half of the year. Looking at our operational performance by mine. Production rates across all Coronado mines, except for Greenbrier, which remains idle and held for sale, have increased. Saleable production levels at Curragh were up 4.7%, Buchanan was up 23.3% and Logan was up 35%. The increase in production rates stemmed from a combination of the steel market recovery to pre-pandemic levels and the U.S. operations being temporarily idle for 2 months in the prior year due to COVID. The U.S. operations continue to perform very well as North American and Atlantic Basin steel producers increased production. In addition, higher Chinese demand from the U.S. due to the import restrictions on Australian coal have boosted U.S. pricing. The Buchanan mine is at full production and successfully completed maintenance and upgrade activities at the preparation plant and also completed the longwall move in the half. Despite tight labor supply, the Logan complex has been able to increase production by optimizing the existing workforce as evidenced by a daily processing record during the half. The Australian operations increased production levels but were impacted by seasonal wet weather, a 3-week breakdown of the bucket wheel reclaimer and scheduled dragline maintenance. During the half year, the operations deployed additional fleets for overburden removal to increase coal availability in the second half of the year. Pleasingly, both Coronado's export volume mix and met coal revenue mix percentages have increased compared to the first half of 2020. Turning to Slide 6, I remind our callers that Coronado continues to remain the premier met coal pure play on the ASX, and we retain a sizable metallurgic coal reserve and resource base that underpin an operating life of approximately 20 years. Our motto is steel starts here, and we mean it. We remain committed to being the premier metallurgical coal supplier of choice to our customers. The supply of Coronado met coal and steel production will continue to generate economic growth for countries and improve the standards of living for people across the globe. I now hand over to Gerhard to go into a bit more detail on the company's financial performance and market outlook.

Thank you to everybody joining this call. Today, I will go into a bit more detail on our financial results for the first half and also elaborate on what we see as a key market fundamentals and outlook for the second half of 2021. Turning to Slide 8, half year financial results. As outlined by Gerry earlier, it is pleasing to see that Coronado realized production increases of 10% and sales volume increases of 7% in the half year. While sales volumes were higher, Curragh was impacted by a derailment on the Blackwater line in June, which saw the mine unable to rail coal for approximately 5 days. As a result, the mine built up its stockpiles at the end of June, which we expect to wash through the system in quarter 3. Revenue for the business of $800 million was up 23% and reported adjusted EBITDA was $25.7 million. The reduction in EBITDA compared to the first half of 2020 is primarily due to the impact of higher costs associated with higher FX rates and lower prices from the Australian segment. Mining costs of $64 per tonne increased due to the U.S. operations returning to pre-COVID production levels, whereas the operations were idled for 2 months during the first half of 2020. At the Australian operations, costs were higher primarily due to the impact of seasonal wet weather and equipment breakdown, additional fleet mobilized to accelerate overburden removal and an unfavorable average foreign exchange rate of $0.77 compared to $0.66 in the first half of 2020. Net debt of $236 million was significantly down compared to this time last year. Coronado has realized a net debt reduction of 42% and expects net debt to further reduce in the coming quarters. CapEx year-to-date was $52 million, down 16% on prior year. Turning to Slide 9, the refinancing slide. We have discussed the refinancing package on previous calls, but it is important to state again that Coronado successfully completed a USD 550 million refinancing package during the half year. This comprised of an asset-based loan, ABL facility of USD 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 legacy SFA cash collateralized and replace bank guarantees, fund working capital and for other general corporate requirements. This was a significant milestone, of course, for the company, and I would like to thank all Coronado employees for their efforts. The new capital structure increases Coronado's financial flexibility by eliminating the application of the SFA financial covenants and introduces debt on more sustainable terms. In addition, the arrangements extend the debt maturity profile significantly, provide diversification of funding sources and maintain liquidity for the business. Turning to Slide 10, cash flow liquidity. You can simply see that our liquidity and net debt positions have improved. Despite lower prices for the majority of the first half and higher FX rates, Coronado generated $57 million in operating cash flows. At 30 June, we had a closing cash balance of USD 113 million, excluding restricted cash and had available liquidity of $213 million comprised of cash and the fully drawn $100 million -- undrawn $100 million under the ABL. Free cash flow generation and further net debt reductions are expected in the second half of the year given where we are with the pricing. Looking at Slide 11, we are showing segmental performance for revenue price and costs, higher benchmark prices from May 2020 resulted in average realized metallurgical coal prices of $99.8 per tonne, which is a mixture of FOR and FOB terms. The U.S. segment realized an average met coal price of $100 per tonne FOR, which is up 15.5% compared to the first half of 2020. And this price is a combination of domestic and export prices. As a reminder to the market, the majority of our U.S. business is solid on FOR terms. We estimate that on an FOB-equivalent basis, the U.S. operations would realize a price that is approximately USD 35 per tonne higher taking into account rail and port costs. The U.S. realized an average $87 per tonne FOR on domestic annual contracts in 2021 and domestic sales make up approximately 30% of total U.S. volumes. The Australian segment realized an average net coal price of $99.6 per tonne FOB, down 5% and from the first half of 2020. Australian cargoes will continue to price the majority of its met coal products on a lag rolling 3-month index-linked basis. That's just a rule of thumb. With regards to cost increase year-to-date, it's overwhelmingly down to the higher realized FX rate during the period. Compared to the first half of 2020, the average FX rate has increased $0.11. Now all other factors being equal, we estimate that a $0.01 movement in FX equates to about $0.75 per tonne impact to group cost per annum. And turning to Slide 12, Gerry has already covered off on our production stats, but I will just reiterate that our group sales volumes of 8.9 million tonnes were up nearly 7% compared to the first half of 2020. And that's despite Queensland wet weather and icy conditions in the U.S. impacting the logistics chain, plus the impact of the derailment in Queensland. We expect sales volume in the second half of the year to be higher based on current plans. At this stage, Coronado makes no changes to production, cost or CapEx guidance at this time, but we will continue to review and provide you further updates at the end of quarter 3 as appropriate. Now shifting gear, I will now outlook on the met coal and steel markets, Slide 14. Coronado is well positioned to take advantage of higher prices in the second half of 2021. A combination of both strong global steel demand and tight supply has driven prices higher with the premium met coal FOB index price in Australia and the U.S., both above $200 per tonne in July and into August. Now just $220 for the Australian FOB and 10% higher for the U.S. Coronado is poised to realize the benefits of these higher prices in quarter 3 and quarter 4 due to an average 3-month pricing lag. The company's geographical diversification is a bonus here, and we're seeing our U.S. operations exporting tonnages into China, while the import restrictions on Australian coal continue. While pricing is currently north of $200 per tonne, we expect over time the price to moderate back to an average 14-year average, which sits at about $160 per tonne. But this year, we are quite optimistic that it stays above that level. Slide 15, looking at supply and demand. Our latest data set from Wood Mackenzie show significant growth in seaborne supply and demand through to 2050, underpinned by India. Seaborne met coal demand is forecast to grow by 52% between now and 2050, and Indian demand is forecast to grow 195%, close to 200% from 63 million tonnes today to nearly 190 million tonnes by 2050, utilizing blast furnace steel production technology. Seaborne met coal supply is expected to remain relatively stable from the U.S. over the forward estimates. But overwhelmingly growth in supply to meet the burgeoning Indian demand will come from Australia. Seaborne coal supply growth from Australia is expected to grow close to 60% between now and 2050. That's simply because we have got extremely good quality here. Coronado envisages the import restrictions on Australian coal to continue for the remainder of 2021. Coronado's Australian operations have traditionally not had term contracts with Chinese customers and have only sold into this market sporadically. The company expects the continued import restrictions will not materially impact our Australian operations, but will continue to benefit our U.S. operations for the remainder of the year and going even into 2022. And then on Slide 16, steel prices in recent times have hit record highs. These highs are due to government stimulus packages focused on infrastructure spend in order to boost employment rates as most major economies exit the recessions brought on by the pandemic. India is forecasting GDP growth rates of 9% this year and 5% in 2022, underpinning steel demand and met coal forecast. Indian crude steel production is forecast to grow 248% between today and 2050 to 392 million tonnes based on the latest Wood Mackenzie forecast. Coronado sells approximately 26% of its seaborne met coal to India, making the country Coronado's largest customer. And now, Gerry, back to you.

Thank you, Gerhard. I would now like to talk a little about Coronado's ESG efforts. As we think about ESG, it is important to consider all of the components of what that means. While the focus of most people and markets is specifically on carbon emissions, ESG covers all aspects of environmental, social and corporate governance responsibilities that a company such as Coronado is committed to complying with to ensure a sustainable business. One of our focus areas is on mine rehabilitation efforts. As evidenced by the pictures on this slide, we have made tremendous headway in our Greenbrier and Logan operations in recent times. Year-to-date, we have completed 52 acres of rehabilitation works at our idled Greenbrier mine. And in addition to that, Coronado has planted more than 277,000 trees to rehabilitate the land and offset emissions. Due to varying climate characteristics in which our U.S. and Australian operations are located, rehabilitation techniques in the Central Appalachian region are very different to the Bowen Basin. At Curragh, we continue our rehabilitation efforts to focus on top soil stability and the planting of native trees and shrubs as appropriate rehabilitation measures. Our goal as a responsible miner is to have 0 significant incidence of an environmental or cultural heritage nature across our operations. And I am pleased to confirm that this year-to-date, we have had no such incidents at any of our operations. Coronado's sustainability report, which can be found on our website, details the company's ESG commitments and sustainability principles in respect of safety, health, people, community, environmental and climate change -- climate risk and opportunities increasingly form a part of our strategic thinking in investment decisions. We monitor our emissions, and we are investing in research and development to ensure we are well positioned for a transition to a low-carbon economy. The use of metals production is integral to achieving a low-carbon future. Renewable infrastructure and technologies such as wind and solar farms rely heavily on metal production, including steel and aluminum. Coronado's met coal reserves and resources, from the U.S. and Australia are of an extremely high quality, and remain essential in the steelmaking process to ensure lower emissions. Lower quality met coal source from Asia for use in steelmaking ultimately results in higher emissions in a time when the world is looking to reduce them. At present, there is no viable replacement to metallurgical coal in the steelmaking process. We view the concept of producing green steel from hydrogen not to be technologically or financially viable in the near to medium term. As we look ahead, there are 5 key elements that drive improved returns for Coronado in the second half of the year. One is higher prices. Index prices for Australian and U.S. premium met products are currently north of $215 per tonne. We expect a higher priced environment, which commenced in late May, to be realized by Coronado in the second half due to an average 3-month lag in price realization. Furthermore, annual U.S. domestic price negotiations kick off at the end of quarter 3 with expectations of the significant uplift on current prices that were agreed to in 2020. Lower costs. Average higher FX rates of $0.77 experienced in the first half of the year are expected to be lower in the second half. And currently, they sit at around $0.73. The reduction in Stanwell rebate is expected to be materially lower than the $103 million expense incurred in 2020. Given the 12-month look back and how the rebate is calculated, we expect an approximate 40% reduction in rebate costs in full year 2021. We expect higher sales volumes in the second half of the year given stockpile builds at 30 June 2021 and additional higher production rates. The Curragh transformation project. The core focus of this project is to improve operational efficiencies and reduce costs at the mine. Initiatives include a review of procurement and contracts, and a review of all key operational activities in the mining process. Much has been accomplished under Jim Campbell's leadership and Doug Thompson will bring his considerable talent to this process in the second half. CapEx reductions. Our stated capital guidance for 2021 is between $135 million and $155 million. And we retain that guidance at this time. However, Coronado was able to flex CapEx spend down to USD 120 million or lower in 2021, if required, to further improve liquidity. Noncore asset sales. We continue to progress the sales process for the Greenbrier and Amonate assets. And we are also continuing to progress our arrangements with regard to the Curragh housing and camps. Managing houses and camps is not part of our core business, and we expect arrangements to complete in the second half of 2021. Coronado has 3 core focus areas for the remainder of 2021 to ensure that we are positioned for growth and to capitalize on current market conditions. These are safety, production and financial management. Coronado remains focused on increasing liquidity, and reducing net debt in the second half of the year by reducing costs, prudently managing capital expenditure, increasing production and executing certain noncore asset sales. The U.S. mines are focused on production rates to take advantage of the higher price environment. The Curragh mine is focused on implementing its transformation project to improve operational efficiencies and reduce costs. Coronado is the largest independent producer of steelmaking coal globally. Our primary strategic direction can be described in 3 buckets: asset optimization, strategic growth and capital management. And we will continue to pursue these strategic initiatives for the remainder of 2021 and into the future. I would also like to particularly thank Jim Campbell and Rick Rose currently retiring. Jim Campbell was a founding partner of Coronado, and has contributed immeasurably to the growth over the years. And Rick has led us to an IPO and several contract negotiations that were very complex. I'll now hand it back over to the operator to take any questions.

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

A few questions and start with the met coal market and on capturing these higher prices. Can I just ask about the U.S. operations. I know the Australian operations get that 2- to 3-month lag, is that the same for the U.S. exports? Is it average a 3-month lag or a little longer than that?

It's average 3 months as well, but it could be longer as well, yes. We have just recently sold the cargo -- or shipped the cargo that we have sold in November. So it really depends on -- but the rule of thumb is 3 months. But remember that 30% of our U.S. production is sold domestically. And we previously disclosed the price of -- average price of $87 per tonne for domestic contracts for this year.

Next question is on costs. Clearly, unit cost C1 costs for the half a lot higher than the full year guidance, currency and sales volumes that will benefit you in the second half. I'm just curious around the -- I guess, the elusive Curragh cost out that has sort of been spoken about for a number of years or since the IPO. Costs in dollar million terms, it actually sort of steadily increase. So I'm just wondering if you could just step through. I know you're targeted procurement, et cetera, but what is the potential price here at Curragh? And is there any [ change ] -- any cost out that's built into the unit cost guidance for the full year?

We continue with the guidance. There is some upside because inventory movements and additional production in the fourth quarter are projected to improve the costs. But -- and in the projects that we have in hand, all of which are focused on the pre-strip and freeing up the dragline movement continue at pace. The key, as it always has been, is to increase the availability and utilization of the draglines to the cheapest way we move dirt. And we are accomplishing this more slowly than we thought, but we are accomplishing this, and that will reduce the cost.

Is there any target there that you can share with respect to dollar per tonne or dollar million that potentially you could be looking at?

I don't want to share a target. It is within the guidance range. And frankly, I'd like to see how some of these programs, ambitious in their scope, work out before we fix on a number.

Okay. No problem. Last question's on the dividend policy and really, I should say, capital allocation. I mean, clearly, a pretty tough last 12 months from a company and market perspective with the recapitalization, met coal drifting down to $100 a tonne and now back up again. I know that your dividend policy of paying out 60% to 100% of free cash flow is unchanged. But does the last 12 months make you think differently about how you manage the balance sheet on a go-forward basis with respect to being more conservative, prepare potentially for ongoing volatility in met coal, I know it's at $200 now, but it won't be forever. And then also looking at opportunities, both organically, I know you haven't spoken a lot about the expansion at Curragh for some time now. but also inorganic, lots of M&A opportunities out there at the moment. But to execute on those and grow this business further, you really need to come from a sizable position of strength on the balance sheet. So I guess what I'm saying is and what I'm asking is that are we going to be looking at the lower end of the guidance range for dividend payout on a go-forward basis, just to be super conservative to take advantage of opportunities.

I'll probably pick the first part of your question, then give the strategic growth to Gerry. Look, at the moment, fair to say, I think you answered it already. Fair to say we are very much focused right now to reduce our net debt on the balance sheet. So at this stage, balance sheet improvement rather than distributions.

And the follow-on, strategic issues. The strategic opportunities will accrue to those companies that can demonstrate financial capabilities. And given the current our ESG requirements in the debt market, that limits a lot of participants. We would expect that, while we look at all possibilities, we're particularly -- we're particularly encouraged by the possibility that large companies with high-quality assets will, as a matter of strategy, exit the coal business, the met coal business. And these will provide assets, which we'd like to get and are in a position to be able to acquire. When that happens is subject of much speculation, but we look forward to the opportunities when and if they arise.

Your next question comes from Jack Gabb from Bank of America.

Just following up on some of Paul's questions. So just on the dividend, can I just check that there are no covenants or restrictions around reinstating the dividend at the end of this year?

There are restrictions under the DON, description of notes, that allows us to pay dividends under 4 baskets. I don't want to go into the details. They're explained in our disclosures. But we can pay dividends. And we could -- this year, we could pay dividends. At this stage, as I said before, we are very much focused on reducing net debt.

Perfect. And then can you comment on the -- or are you considering restarting, I guess, the Curragh expansion once you're -- if you're sufficiently deleveraged next year?

We are going into a reevaluation of that for 2 reasons. One, because some of the potential of the expansion has been realized through some incremental capital investments that were made over the last couple of years. And secondly, because in the face of the market and the changing appearance of opportunities, we're looking to see when it is the expansion can best affect our earnings and best impact our profitability. But the ongoing examination of that opportunity is still occurring.

And I guess if you don't proceed with the expansion, does that delay slightly the time line for when the standalone rebate disappears in the late 2020s?

Not materially because the Stanwell rebate disappears when the thermal contracts go away not when the total tonnage increases. So it's only that percentage of the total tonnage that goes to Stanwell that impacts the duration of the [ exa ] or the Stanwell rebate.