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

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

Thank you, operator, and thank you to all participants for joining Coronado's Third Quarter Investor Call. This morning, we released our third quarter report to the ASX and 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. Today, we will also provide updates to our previously announced market guidance and outline our expectations for the remainder of the year. We will also provide an update on negotiations with regard to our U.S. domestic contracts for 2022. The health and safety of our workforce remains our #1 priority. And as always, we commence our call with the discussion of safety. In Australia, the 12-month rolling average total reportable injury frequency rate at 30 September was 4, reflecting a 29% improvement over the rate as of 30 June. Similarly, our U.S. operations achieved a 12-month rolling average total reportable incident rate of 2.28, reflecting a 15% improvement. I caution that the reportable rates are not based on the same criteria and a direct comparison between the two is not possible. Both the Australian and U.S. reportable rates continue to be below relevant industry benchmarks. It is pleasing to see continued improvements in safety at our Australian operations, the combined focus from management, employees and contractors in driving an improved safety culture and increasing safety interactions, including a number of safety resets is paying dividends. The Curragh mine achieved 155 days without a lost time incident during the quarter. This represents the most consecutive days without a lost time incident since March 2017 and the best results for the mine under Coronado ownership. In the U.S., our safety development groups have focused on identified risk areas, specifically miners with less than 2 years experience and refolding machine operators, which has contributed to improved incident rates. To enhance the health and well-being of our employees at our U.S. operations, Coronado implemented a COVID-19 vaccine incentive program during the quarter that pays an employee USD 1,000 to get vaccinated. Since the program commenced, vaccination rates have materially increased and absenteeism rates are beginning to fall. In Australia, vaccination rates continue to increase in accordance with the federal government's vaccination program. Coronado continues to encourage all workers to be vaccinated and provides access to educational materials on vaccine safety and efficacy. Additionally, Coronado continues to work closely with the Queensland Resources Council to escalate the supply and rates of vaccination into regional towns such as Blackwater. Turning to production. The U.S. operations continued to perform very well during the September quarter, with both front of mine and salable production up against the prior quarter despite production not reaching its full potential due to heightened absenteeism levels from COVID-19 at the Logan operations. In Australia, Curragh's third quarter saleable production levels were 5.6% higher than the prior quarter. During the quarter, management has undertaken a review of the mine plan to focus on the prioritization of draglines for waste removal works to ensure enhanced coal availability in the December quarter. On a group basis, saleable production was 4.5 million tonnes, up nearly 7% on the prior quarter, primarily due to the [ Buchanan ] mine returning to normalized wash rates following preparation planned downtime in the prior quarter. On a year-to-date basis front of mine coal production of 20 million tonnes, is up 8.5% on prior year, and saleable production of 13.3 million tonnes, is up nearly 6%. Sales volumes for the quarter were 4.6 million tonnes. Year-to-date sales volumes were 13.5 million tonnes, up 1.8% on the prior year. The fourth quarter focus for U.S. operations is to continue to optimize production levels to meet the robust market demand, particularly from China for [ Buchanan ] coal. While the pricing remains elevated, Coronado continues to have a competitive advantage compared to other met producers given its geographical diversification and ability to access the Chinese market while the import restrictions on Australian sourced coal producers continues. In Australia, under the leadership of Australia's new Chief Operating Officer, Doug Thompson, the Curragh mine is focused on enhanced coal production levels in the December quarter. Under the One Curragh Plan, all contracting parties and employees are committed to the mine plan and increasing operational efficiencies to ensure adequate coal availability to meet the current higher price environment. I'll now hand over to Gerhard to talk about our financial position and market outlook. Gerhard?

Thank you, Gerry, and greetings here from Beckley, West Virginia. So let me start by advising all participants here on the call that Coronado will release its detailed financial results for September quarter on the 9th of November. But today's release, there are a few points we can talk about today. And that is September quarter revenues were $573 million, up 35% from the prior quarter as we saw pricing increased dramatically on the back of strong steel demand and tight market supply. The average realized met coal price for the quarter was $144 per tonne, up 37% compared to the June quarter. The average realized price reflects a mixture as always of all FOR, FOB and domestic sales in the quarter and across all grades of our met coal sold. Coronado's net debt position further reduced during the quarter to $154 million at the end of September. This reflects a reduction of $82 million or 35% since the end of June. And based on current and forward metallurgical coal price estimates, we expect to be net debt neutral or in a net cash position by year-end. Our year-to-date capital expenditure was $70 million. CapEx is down 18% compared to the prior year due to our focus on preserving liquidity and prudent capital management plan. We continued, as I said in the last quarter, with a maintenance plan as planned before. Additionally, during the quarter, we announced that Xcoal had fully repaid the remaining outstanding overdue trade receivable balances by end of September. All associated accounting provisions for discontinuing and credit losses were subsequently reversed. And in relation to our costs, our year-to-date mining cost per tonne or FOR costs were $64.7 per tonne, up from $56 per tonne in the same period last year. Mining costs per tonne are higher primarily due to the impact of higher FX and lower Australian sales volume for the 9 months ended 30th September '21, the average U.S. dollar-Aussie dollar exchange rate was $0.76 compared to the 9 months ended this last year, this period of $0.68. So $0.76 this year, last year $0.68. So that makes the majority of the difference. We estimate that for every $0.01 movement in FX equates to about $0.65 per tonne group cost variation. Curragh is impacted by the movements in FX as the majority of its costs in Australia are denominated in Australian dollars, but we report our results, of course, in U.S. dollars. And Coronado expects higher production and sales volumes in the fourth quarter, which we anticipate will see costs to reduce. On coal markets, during the quarter, we saw Australia and U.S. and Chinese index benchmarks hit record levels. Since the start of July, the premium [ low vol ] FOB Australian Index has risen dramatically from $198 per tonne to $390 per tonne at the end of September, while the [ low vol ] U.S. East Coast FOB Index increased from $217 per tonne to $412 per tonne over the same period. Australian prices continued to rise during the quarter with improved global steel demand and tight export supply from Australia, North America and Russia due to the same supply -- suppliers undertaking maintenance activities and weather events in North America impacting logistics chains. U.S. prices have continued to rise on the continuing tightness in the Chinese market. Following the ban on Australian coal, China has been unable to make up for the lost seaborne imports, which has been compounded by imports from Mongolia being restricted due to the COVID-19 border control measures. So that means basically the Chinese steel producers are competing for the little available tonnes that are coming from the North American market. Chinese domestic coal production has also been constrained by safety checks following various mine accidents and recent wet weather events. Additionally, firmer call shortage impacting power generation has led to Chinese domestic miners being directed to prioritize thermal coal production at the expense of metallurgical coal output. We have previously disclosed that Coronado seaborne contracts typically realized an average 3 months lag in price compared to the index price of the day. In Australia, cargoes are traditionally negotiated on a quarterly basis with reference to the average prior 3 months index. In the U.S., cargoes are determined on a negotiated price in advance, sometimes up to 6 months in advance. Therefore, given benchmark index prices were higher during the third quarter, we expect that the average realized metallurgical coal price for our operations in December quarter will be higher again. Towards the end of the year, we expect index prices to moderate from recent historical heights as supply recovers from disruption, response to the high prices and China continues its efforts to moderate steel outputs. However, any moderation in prices is not expected to materially lower as pricing remains underpinned by supply tightness from all regions, robust thermal coal demand over the Northern Hemisphere winter and historically low inventories across both power utilities and steel mills. And as we know, the thermal coal price is always an absolute floor price for anything metallurgical. So I now hand over back to Gerry to discuss updates to our market guidance for FY '21. Gerry?

Thank you, Gerhard. As we enter the fourth and final quarter of the year and have a firmer handle on our forecast revenue and cost positions, we can update the market on our previously announced guidance. On saleable production, we reaffirm our original market guidance on production between 18 million and 19 million tonnes. However, we guide to the lower end of that range for the full year. On mining cost per tonne, the consistent impact on our business from higher FX rates, as Gerhard mentioned before, has continued to put pressure on our U.S. dollar-denominated reportable costs. We, therefore, advise the market that mining cost per tonne is expected to be outside of the top end of the original market guidance. While we anticipate higher production costs and sales volumes in the fourth quarter will reduce the December quarter costs, we expect the full year cost guidance to be outside of the previously advised range. With regard to CapEx guidance, our year-to-date expenditure is 18% lower than spend in the prior year. This is due to prudent capital management and a focus on boosting liquidity levels and reducing net debt. We therefore advised the market that capital expenditure is expected to be outside the low end of the original market guidance for the full year. Additionally, as mentioned by Gerhard earlier, based on the current and forward metallurgical coal price estimates, Coronado expects to be net debt neutral or in a net cash positive position by year-end. Finally, I am pleased to announce that Coronado has successfully agreed annual fixed price and tonnage contracts for the calendar year 2022 with the majority of its U.S. domestic customers. We forecast to realize a volume-weighted average price across all grades of metallurgical products to U.S. domestic customers of approximately $187 per metric ton free on rail, reflecting a price that is $100 per tonne higher than in 2021. The successful completion of these negotiations, which represents 1/3 of our U.S. production, locks in revenue for the calendar year 2022 and covers approximately 92% of the entire U.S. operations cash cost base. This produces enormous leverage on the 68% of the tonnes that are available for export. I'll now hand back over to the operator to take any questions.

[Operator Instructions] Your first question comes from [ Jim Zhou ] with Barrenjoey.

The first one I have is on Greenbrier. I'm conscious you're currently trying to sell it. But given you have access to a flexible workforce in the U.S., is there any ability to turn it back online just to take advantage of the current market? And the second question is just on costs. You pointed to the higher Aussie dollar as a driver of higher costs. But when you initially issued guidance at the start of this year, the Aussie dollar was roughly $0.78 and it's currently $0.75. So FX really should be a tailwind relative to the original cost guidance. I guess for our understanding, you mentioned previously that $8 cost at Curragh are expected to be flat in FY '21. Is that still the case?

Let me handle the Greenbrier question and turn it over to Gerhard for the cost question. We have no intentions of restarting Greenbrier in the current circumstance. The considerations for restarting production go beyond the current price, and we would want to see further clarity in not only the operating characteristics we would anticipate from Greenbrier, but also market price before we consider any operating alternatives for Greenbrier. It remains an asset for sale.

Yes, Jim, good to see you online. Can you repeat your question on the cost?

Sure. So you pointed to the higher Aussie dollar as a driver of higher costs, but the Aussie dollar was around $0.78 at the start of this year when you initially issued guidance, and it's currently $0.75. So I guess relative to where the FX was when you issued guidance, FX should be a tailwind. And I guess for a pure measure of how costs are tracking, what are $8 costs at Curragh doing? And are they still expected to be flat year-on-year?

Yes. Look, I mean we talk our cost guidance based on our estimate at the time, and we took guidance also then from last year, and you have seen the difference between last year, this period and where we ended up. I think we have also seen a lot of volatility this year, we have seen the FX rate coming down to $0.72, and there was almost talk, it goes down to $0.70. Now I think as markets recover, we do see that this exchange rate is going to recover. So essentially, we have taken our cost guidance from the forward curve, and that's what it was at the time and not from the FX rate at the time we have seen it. So that was based on the forward curve.

[Operator Instructions] Your next question comes from Jon Scholtz with Macquarie.

Just two quick ones from me. One is on the U.S. domestic contract. I was just wondering, was there -- or is there any overriding factor that you need to place a certain amount of volume from U.S. operations into the U.S. domestic market? Or if you have the optionality, could you actually export 100% of that product? And I'll get to the second one after.

We have that optionality. The -- we treat the U.S. pricing as a hedge, and it operates as a hedge very well and should this year as well judging from the forward curves on the coal market price.

Excellent. And then just on the dividend policy. So is there any restrictions currently to being able to pay a dividend? And just getting back to a net cash position. But I mean, is there just any restrictions around shareholder returns following the recent refinance?

Yes. The restrictions are linked to DON of the bond and the dividends are possible and they are allocated through 4 baskets. So that's probably all I can say at this stage, but dividends are possible. And of course, the higher the cash flow the more possible dividends become. However, as we said, we also focus on reducing our net debt here. And if it's -- if there's any cash flow over and above what we expect to be a healthy net debt position to be, then we, of course, consider dividends as a logical consequence. But that's all I can say here at this stage.

Your next question comes from Paul Young with Goldman Sachs.

A question on the coal markets. I guess the first observation is sensational price outcome for the U.S. domestic contracts are well done on that front. I just want to focus on the seaborne market at the moment. You called out the strength in China, particularly for U.S. coal. Can you maybe comment on what you're seeing across the other traditional markets being India and JKT? And then also what the product mix at Curragh is doing from a PCI semi-soft and hard coking coal perspective, I'm talking on sales split? Has there been any sort of major change there?

Yes. Paul, good to hear you. Listen, I think when you look at oil markets, and let's not just focus on Japan or Korea, oil markets basically have recovered. And India is a good example as well. We see a strong demand coming from all corners in the steel market right now, basically. And I think that will continue also because two points. One is government stimulus packages that have been issued. The U.S. is talking about $1.5 trillion government stimulus package in the infrastructure project space. Worldwide, these projects have been kicked off, no matter where you look. And they are usually not like 3 months or 6 months project, they're usually like 3 years to 10-year project. So I think the steel demand is very strong right now and continues to be strong. And the second point is also due to the chip shortage we see due to the Taiwan issue of burned down factory, the automotive demand is very subdued right now. So once that is rectified, we expect to see more steel demand coming from automotive, Paul. I think it's a very buoyant market for the steel industry. And therefore, the steel margins right now allow higher than normal met coal prices.

Okay. Maybe moving on then to Curragh, another probably softer-than-expected quarter at Curragh. And I guess probably for the 18 months, just on reflection, it's -- the asset has fallen short of expectations. So I know you're doing some stripping at the moment, but what I'm really thinking here is that well maybe can ask on a 1-year view to 2-year view, what is the strategy at Curragh? Is it really to increase efficiencies from a perspective of equipment productivity and focus on cost reduction rather than production increases? Just trying to think really how -- what we need to do here, what we need to see for this asset to really start improving?

The strategy for Curragh right now is to maximize the efficiency of the pre-strips so that we can optimize the use of the draglines. The more yards we move with the draglines, which are prime and not rehandle, the longer the dragline strike. And the better the dragline efficiency, the lower the cost and the higher the production rates at Curragh. And this, as always, remains a function of the long-term plan. Plans don't change. We have started down this path, got diverted and have restarted the path and are successfully implementing the strategies. The long-term strategy for Curragh is once we have completely optimized the dragline performance and factored enough pre-strip in there to achieve that, then we'll begin to look at ways of expanding the production. And there are a number of ways of doing that through both additional pits, additional low ratio pits of different quality of coals, different mining methods, and we do still intend to fill the prep lengths, we have additional prep length capacity, and we do intend to expand Curragh.

Excellent. And just on that as far as timing is concerned, can we expect an update on the medium-term plan at Curragh in February? Or is that too early?

It's -- it will be whenever we report on the budgeting process and the prospects and give guidance for next year.

And then a question...

It should be a [ ball park ].

Okay. A question on asset sales. Can you maybe provide an update on the sale process at Greenbrier [indiscernible] And also the housing portfolio at Curragh?

All are progressing. We are reexamining under changed circumstances the rates of return and the rationale for all, but all are progressing. We are not at all disappointed with the progress. We do not have announcements to make right now, but the quarter we'll -- during the quarter we'll resolve all outstanding issues and see where we stand.

Yes. On the housing part, we have made good progress on the mechanics. And it's just -- look, we are looking -- we are reviewing it right now. It really needs to come down to is it a good deal, we're going to do it. If it's not a good deal for us, we don't need to do it. So that's where it's at.

While you're there, Gerhard, just a final one for me, just on working capital. Obviously, if price is increasing, then working capital increased. What roughly has been the working cap build during the quarter? And I guess you expected working capital to continue to build in December quarter?

Yes. No, look, I mean, we don't give guidance on this one. But at the moment, that's not a concern at all, to be quite honest. And as I said before, we established a very good credit risk process, which we review almost weekly at the moment, I get your point. But at this stage, it's not an issue at all.

Your next question comes from Alex Ren with Credit Suisse.

Congrats on the U.S. domestic contract negotiation. Finally you get to get that upside to see it come through. Just got 2 quick questions. One is on the U.S. price realization. I guess, leaving the U.S. domestic volumes aside, roughly, what's the price difference between what you can realize at [ mine gate ] and for export? And the U.S. East Coast index, I think you previously mentioned freight and rail costs are linked to the index. I guess what I'm trying to estimate is what you can realize in the December quarter? You mentioned September quarter, your cost index is about 280. And because of the 3-month lag, we should have pretty good visibility on what you can realize over this quarter. So could you provide us some color on that? Then I'll revert back on the second question.

Yes. Look, yes, it's a good question, but it always comes up. So let me just repeat what I said before. The U.S. is basically negotiated. It's a forward negotiation. So some of the price utilization, you see now was negotiated up to 6 months ago, all right? And that's just basically on the basis of where we and our customers saw prices develop over the following months. And of course, that has developed probably a little bit better than expected. And therefore, we see a higher price realization in the future. But it's always important to highlight when we look at the U.S. sales. The biggest difference between the prices you see right now, U.S. East Coast, FOB is, number one, don't forget, we sell most of our tonnes FOR. So you have a large proportion of rail costs and there's a percentage attached to it, that comes out of your FOB price. And then there might be some discounts as well attached to it in tariffs. And then the second biggest after the railing cost is really the time difference. So that can be -- is, on average, probably 3, 4 months, but it can be also a little bit longer. So it's a little bit more difficult to model that one. And we have to be patient to the -- until we release the 10-Q.

Yes. Got it. And the second question is on cash management. I guess, given the healthy free cash flow you're generating these days, what are you and the Board are thinking about on taking out some of that earlier than [ due ].

Yes. Look, I mean, I can't be too specific, but you can imagine the discussions we have amongst ourselves and with the Board. And of course, I'll just repeat what I said before, we are very much focused on reducing our net debt position. And that includes the possibility, as you know, under the DON, we are allowed to buy back 10% of our bonds, that's a possibility. And then, of course, we look at anything, surplus cash could be available for distributions. But I cannot be clear about it yet, simply because that hasn't been decided yet.

The next question comes from [indiscernible] with Bank of America.

This is [ Chen ] from Bank of America. Just a follow-up question on your price realization. For this quarter, your met coal price realization is roughly 50% of the Australia [ SDC ] index, while previously was around between 74% or 75%. Is that kind of percentage which we think for the December quarter? I have another question to follow up.

Yes. Look, I mean, from -- if you do the simple math, I've done that myself, I think it's closer to 60% by the way. But that's really a factor of what I said before. We have seen a dramatic steep rise of prices over the last few months, and that's a time lag, right? So you can't just take this quarter and then apply -- take the realized price this quarter. You need -- it's almost an amalgamation of a little bit of this quarter and a lot from last quarter and then with the correlation.

Right. Just another question -- follow-up question, the deleveraging options you have for your high-yield bond to further reduce your interest expenses. I'm just wondering what other options you have for that?

Sorry, I'm not sure whether I got it. But of course, under the DON, what I said before is we can, first of all, we can buy back 10% of the bonds, right? And then you have other options to buy bonds back if you wanted to, but that's all theoretical because none of that is decided.

Okay. My last question is just a follow-up on your dividend policy. So just considering the option of Curragh expansion versus dividend, what is the management priority at the moment?

I'm not sure that I completely heard all the question. But if the question has to do with the allocation of cash between operating circumstances and dividends, we'll obviously look for high rate of return, long-term operating improvements as a first order. We would always do that.

The next question comes from Stuart Howe with Bell Potter Securities.

Two quick questions from me. Firstly, on, I guess, well done on getting the Xcoal receivable down. Just if you could remind us on your terms and arrangements for marketing of the U.S. coal into the export market now or around Xcoal still in the mix in terms of marketing arrangements?

Yes. Look, I mean what has changed is we have a number of customers, blue-chip customers, long-term customers, Xcoal is one of them. They just are a customer like everybody else and they're treated like everybody else, and they undergo the same credit policy we apply to everybody else.

So I guess since listing, that means you've sort of ramped up your own marketing expertise?

Can you repeat that again? I didn't get this.

I guess since listing, you've ramped up your own internal marketing expertise, initially Xcoal is managing all of your export sales from the U.S.

Yes. Got it.

No, we haven't ramped up our -- first of all, we haven't done anything with our own marketing expertise. But one thing that has happened with the market that has resulted from the price increases, our options for brokered coverage in Europe, in Brazil and in China have improved. So we have options now that we did not have before, although we have not committed to the long-term expense of direct marketing coal in Europe, something which very few coal producers in this environment do.

Okay. And just secondly, obviously, ocean freight is pretty topical at the moment, rates are going up. Could you perhaps remind us on how you are exposed or leveraged to that? And what the impact could be? Or is it -- you just don't see that as a risk at the moment?

Well, it's -- we have the same risks that nearly everybody who ships as we do incurs, the draft limitations at Newport News limit the utility of Capes and you begin to get more Panamax. And Panamax prices are, to some extent, more expensive than Capes. But on an adjusted basis, they work out about the same, but everybody is in that boat. So those -- that's about the only thing we can say when it comes to the seaborne freight rates, they are a little -- they are higher now than they have been and...

What I can add is like we're not exposed to them at all because our customers carry these costs.

Yes. So no demurrage or anything like that, that you're concerned about?

No, demurrage is our cost. But there is -- it depends on the situation. But when you refer to higher freight costs, we are not shipping. So that's on the customers.

Yes. Obviously, in the realized price, you're looking at a deduct of the real transportation costs. So we're indirectly impacted.

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

Thank you, operator. That concludes our conference for today. Thank you for participating. You may now disconnect.