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

Thank you for standing by, and welcome to today's Coronado Global Resources Investor Call. [Operator Instructions] I would now like to hand the conference over to Andrew Mooney, Head of Investor Relations, Treasury and Business Development.

Thank you, operator, and thank you, everyone, for joining today's call. Today, Coronado released its Form 10-Q financial statements to the ASX and SEC as well as announcements relating to the declaration of special dividends and a senior secured notes purchase offer. Today, I'm joined by our Managing Director and CEO, Gerry Spindler; and our Group CFO, Gerhard Ziems. Within our investor presentation, you will see important notices and disclaimers and reconciliations of non-U.S. GAAP financial measures. We encourage you to review these statements as well as other filings with the ASX and SEC. I also remind everyone that Coronado quotes all numbers in U.S. dollars and metric tons unless otherwise stated. With that, I'll hand over to Gerry.

Thank you, Andrew. As previously announced in our April call, Coronado finished the first quarter of 2022 with record revenues, record net income, record EBITDA and record cash. Our balance sheet is strong, and we are delivering on our capital management plans. We are currently operating in unprecedented coal priced markets and continue to realize strong pricing for our high-quality metallurgical coal from both traditional and new customers. I am therefore pleased to announce that today, Coronado is declaring a special dividend to shareholders to the value of USD 200 million. This special dividend will have a record date of 31 May 2022 and will be payable on 21 June 2022. Gerhard will elaborate on the components of the dividend shortly. However, I am happy to advise that the full $200 million dividend will be funded from available cash and Coronado will remain in a net cash position following the payment. In addition, Coronado today has also commenced the process to purchase $100.6 million of senior secured notes at an offer price of 104% per the terms of the indenture. This is a necessary requirement for the terms of the notes each time Coronado declares a dividend. The declaration of the special dividend today comes on the back of our Form 10-Q audit review financial statements, the latest assessments of met coal markets and forward expectations. Additionally, following the release of our announcement last week, we have greater certainty on our forward plan, giving us the comfort to distribute funds at this time. Today's dividend announcements are aligned with our distributions policy to pay 60% to 100% of free cash flow each year and does not impact the previously announced biannual fixed dividend component. After payment in June, Coronado will have returned more than USD 1 billion to shareholders since our IPO in 2018. I'll now hand over to Gerhard.

Thank you, Gerry, and good day, everybody. Today, we announced to the market our first quarter financial results and the summary is included on Slide 3. Touching here on the key items. Coronado delivered record quarterly revenues of $947 million, up 152% compared to the March 2021 quarter. We delivered record quarterly net income of $270 million and record quarterly adjusted EBITDA of $411 million, both profoundly higher than prior year. We continue to maintain a very healthy balance sheet where for a net cash of $257 million and available liquidity of $671 million. During the quarter, Coronado generated $129 million in free cash flow. And additionally, we had a significant working capital build. Our trade receivables position increased by $227 million on account of higher realized met coal prices in the quarter. This working capital is purely a tiny matter, till we are seeing these moneys flow through to cash in the second quarter. The other components, as listed on Slide 3, we have already discussed previously with pricing iterations continue to increase on the back of strong price environment and costs are also increasing due to higher royalties, inflationary pressures and with the efforts of Curragh weighted to the second half of the year. On Slide 4, we reiterate Coronado's capital management plan. We are delivering on our strategy, which is broken down into 4 key buckets, which I mentioned previously this year: first, maintaining a strong balance sheet, with enhanced liquidity and debt levels; second, ensuring prudent and timely shareholder returns that we are doing today; third, prioritizing organic growth expenditure to increase existing production rates, particularly while prices demand elevated; and fourth, evaluating inorganic growth opportunities as they present themselves and maintaining the flexibility to pursue these opportunities as appropriate. Let me point out here that Coronado from time to time engages with other companies to consider potential transactions as part of its plan to drive shareholder value. We expect that over time, you will see a met coal consolidation in the market and as diversified miners look to exit coal. And with a strong and flexible balance sheet, we will be in a position to take advantage of any such opportunities. Turning to coal markets and our price realization on Slide 5. You can see in the graphs that Coronado is currently operating in unprecedented times with an Australian met coal index benchmark reaching $670 per tonne in March. In the first quarter, Coronado achieved record net price realizations for its products and expect realizations to further improve in the second quarter given for higher content. Coronado's record realizations are fundamentally underpinned by strong demand for our high-quality product, tight supply and in part also of course, the Russia and Ukraine conflict. The conflict between Russia and Ukraine has seen Europe impose a full ban on Russian coals from August this year. Japan is following suit. And as a -- besides Coronado is experiencing heightened interest from European standards therefore our met coal from both existing but also new customers. Additionally, and this is unique to Coronado, to us. Our diversification allows us to ship coal to China from our U.S. operations while the Chinese ban on Australian coal continues. Strategically, we are well positioned to supply our met coal to both the Asian markets, but also increasing our export to Europe. Turning to Slide 6 in terms of dividends. Upon completion and release of the company's first quarter 10-Q financial statements and review by auditors, the Board has decided to impair 2 special dividends to shareholders, and this is aligned with our dividend policy. Tranche 1 is a declaration of a USD 0.059 per CDI in special dividend to the value of $99.453 million unfranked. The special dividend component relates to the cash quarantined by the company that remained unsubscribed by the bondholders as part of the announced senior secured notes purchase offer following the release of our 2021 results. These moneys are not subject to another matching bond purchase offer, given they have already been offered once. As these moneys were unsubscribed by bondholders, the Board has decided to distribute these to shareholders. Tranche 2 is the declaration of the USD 0.06 per CDI special dividend to the value of USD 100.6 million unfranked. This dividend relates directly to the first quarter results and as loss. The distribution of USD 100.6 million equates to 78% of free cash flow generated in the quarter and is therefore within policy. So in total, our intention is to issue $200 million in dividends. In addition, as per the terms of the indenture, Coronado is required to make a maximum offer to bondholders for the $100.6 million at 104%. This purchase offer expires on the 9th of June U.S. East Coast Time. And given the lower acceptance rate from the last purchase offer, Coronado does not expect to offer, which will be widely accepted given the 104% mandated offer price is at a big discount to current market. We, therefore, expect total distributions dividend and bond purchase to remain between 60% and 100% of free cash flow. I will now hand back over to Gerry to go through the dividend policy.

Thank you, Gerhard. Turning to Slide 7. Today, we provide a little more granularity around our dividend policy and recent actions and time lines. I will not run through the specifics on this call. However, I will reiterate that our policy is to distribute between 60% and 100% of free cash flow per year. Within that policy, we plan to pay a biannual fixed dividend component that will be declared and paid following our half year and full year results every 6 months. Additionally, certain covenants within our senior secured notes as listed on the slide outline when and how payments can be made. In all cases, Coronado must maintain a minimum liquidity threshold of USD 125 million. I reiterate that today's declared special dividend will be paid from available cash and we will remain in a net cash position post distribution to shareholders in June. I'll now hand back to the operator to take any questions.

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

Good morning, Gerry. Good to chat again so sooner after the March quarterly production result. Can I just ask around, first of all, the dividend on an unprecedented times with respect to the coal price and cash flow. Should we expect a dividend on a quarterly basis going forward now?

As we said, these are special dividends, and that's within our policy. So we hold on to the policy and we'd not expect quarterly dividends, but we will update once the Board makes a decision on the half year guidance.

Okay. And I want to switch gears a little bit and just talk about the capital allocation and the point number 4 as far as priority is concerned, that's inorganic growth. And maybe a question to Gerry with respect to the media articles about discussions with any conservative discussions with Arch, which I know you've moved on from that now. But Gerry, I'd love to really just dig into the rationale behind that. And was this simply around value creation for shareholders. I'm sure that's your thinking about around what were the opportunities there? What was the synergies around CSX and DTA, the Logan, Beckley and Mount Laurels have seen between the 2 companies on those operations with respect to the rail and the port?

Well, look, we can't comment very much, but you're quite right. The driver for the discussion was to improve shareholder value and the discussion seize on their own terms. But that's really about all we can say. There was sufficient reason to begin the discussions and sufficient reason to continue them. I am -- we're up and running.

Okay. And then while we're talking about the coal markets, I'm just curious about or can I get an update on it on what you guys seeing at the moment? I know on the March quarterly conference call, you spoke about increased inquiries from European stimulus, in particular with the impending ban on Russian coal in August. And I know it's all about supply-side security to supply at the moment. But are you seeing -- what are you seeing on the demand front from steel mills and noting that European steel demand seems to be ticking down? And I'm also curious about what you're seeing from Asian steel mills just more recently?

Yes. Look, I think there's a healthy demand overall, China is, of course, idling at the moment. So there's not a lot of demand coming from China for international coal or for any coal imports because of the COVID shutdowns. That hasn't impacted the price. The price is there. I mean we came back up again or towards the end of last week and then even overnight, so I think what it is right now is a tightness in the market. As I mentioned, I think, a few weeks back, Russia owns about 15% of metallurgical coal exports. Russia owns about 30% of PCI and so we do see overall shortness, like a tardiness in that segment. And of course, PCI is a floor for anything metallurgical coal. We also see that given that Russia owns about more than just about 20% of gas, global gas exports, we see increased price leverage even in thermal coal. We're not a thermal coal exporter at all. But these prices are edging towards $200 per tonne. So at the moment, a lot of this goes back to the situation as we find it in Europe. That underpins very strong prices. The demand is still quite positive, particularly in India, rest of Asia, I would say Europe a little bit slowing down. What we have yet to see is the impact from the European and Japanese ban on all things Russian coal that comes into effect mid-August. So not -- we haven't even seen that yet. So I think that all means we will see continued supply tightness in the market and therefore, elevated prices.

Your next question comes from Glyn Lawcock from Barrenjoey.

Good morning, Gerry. Gerry, could you just remind me on your thoughts then strategically now for thermal coal within the portfolio. Is your thinking changing at all? That's the first question.

Our thinking has not changed although in looking for improvements in shareholder value, we would normally have expected to see a difference in the multiple for thermal coal companies and metallurgical coal companies. We're not seeing that. But we remain committed on independent acquisitions to looking at met coal and met coal only.

Okay. I would note that mean very different multiples really in the American market and the Aussie market as well and the way we treat different companies. Just your thoughts then obviously, maybe a different way to think about it, clearly, you are looking at M&A and last week's announcement suggests that and confirms it but then today, you've declared special dividends, which obviously keeps you at a net cash position. So does that mean that when you think about M&A, your first priority there is just to maintain that liquidity buffer of $125 million and not build a war chest or -- because I would have thought there were some assets that may come to market in the next 12 months, particularly here in Australia from the majors, letting them go. So do you think about -- how do you think about balancing your returns versus maybe holding some cash back for what could come to market? Or do you just think if it comes to market will deal with it then and figure about how you fund it in the future? Just your thoughts around that.

I think your last comment is exactly right. We are not going to build war chest. We are not going to accumulate cash for an unidentified acquisition. If one comes along, we will begin to make plans on the most efficient way to do it. But in this market, it may take a while for a good one to come along and building a war chest is not something that we're going to do. We'll distribute the cash.

Okay. That's very clear. And maybe just a very open question then Gerry to finish on. The markets are great and never know how long they're going to last. Is there anything that you sort of see creeping in that you're concerned about at the moment that whether it's controllable or uncontrollable that's outside of the markets?

No. We're having weather in Queensland, as you well know, the good part about that is everybody has the same weather. So we are holding our own and others will be experiencing some difficulty. There are the railroads in the U.S. but on the M&W where most of our export coal goes, we're experiencing reasonable service and the CFX is delivering reasonably well domestically. So frankly, we're looking at a operating circumstance that is and I hate to say this because it always changes, but it's reasonably favorable.

Your next question comes from Chen Jiang from Bank of America.

Just 2 follow-up questions. In regards to your inorganic growth for the met coal portfolio. Are you looking for assets that have synergies with CRN, such as synergies from infrastructure or you are looking for assets that have better coal quality or volume growth?

We're looking for both. Obviously, if it has synergies, it enhances the economics and may improve the price. Where we're looking at complementary qualities that tends to be very important, particularly as we build out our portfolio of met coals. So really, the answer is that we look for good opportunities and the 2 attributes that you have described would characterize excellent options for an opportunity to come along.

Okay. Second question, as you mentioned in the call, Russia is a big supplier for the PCI. Just to remind me if there's any capacity, you can increase to replace Russia coal because CRN has a lot of PCI coal just to replace those Russia coal to Europe.

We are probably looking at being able to increase production, not immediately, but in the interim future at Curragh. But right now, the PCI from Buchanan is flat out and fully booked.

Right, right. So not in the short term, probably...

Let me just add that it's going to be very difficult to replace the tonnes that we'll be missing with the PCI tonnes that we'll be missing out of Russia. That will be difficult for the market to farm these tonnes. And therefore, the price we have set before, you see elevated price levels probably for quite some time.

Right. Okay. So not in the short term or even medium term. Okay. Last question, if I can. Just a follow-up on how CRN is going to fund for future M&A. Congratulations on the special dividends declared this morning. As you mentioned, CRN is not going to war chest or build it, have any cash buffer in your balance sheet. Just wondering I mean, CRN is distribute dividends to shareholders with 60% to 100% of free cash flow. Any preference on how CRN is going to fund the future transactions for the M&A, if there are any?

No particular. First of all, we're going to maintain sufficient liquidity. In any case, we'll not run that down. And frankly, as a public company, we have any number of options to provide capital for acquisitions. We'll investigate all of them and including retained cash when we have an identified opportunity that we can take advantage of but not until that point in time.

Your next question comes from Greg Hoffmann from Hoffmann Capital.

Just with regard to the abbreviated account shown on Slide 3. It's not my area of expertise here, so just bear with me because it's a silly question, but can you please explain to me where does the standard royalties and the Stanwell arrangement, where do they show up in those accounts? Are they in the operating costs? Are they netted out above the realized price line? How did royalties and the Stanwell rebate fit into those accounts?

You will find all the royalties in operating costs.

Your next question comes from [ John Anderson ], private investor.

I'm just wondering whether -- when you might be able to start paying frank dividends? Or alternatively, how much tax losses have you got left to absorb before you start paying frank dividends in Australia?

Well, we're not giving outlook on this, but you can imagine it cannot be far away given the profits we are turning out. That's all I can say now because we don't give outlook on net profit.

So tax losses left to absorb must be quite low.

Not far away.

Your next question comes from Alex Clark from Renaissance Asset Management.

Sorry, it's David Fleming from Renaissance here. I was just wondering the acquisitions that you're looking at a quiet -- that it could be a high exposure to your thermal coal in that. And I wonder if you have a limit of the total exposure to thermal coal that you'd be looking at for the group if you make an acquisition?

We won't look at thermal coal as an independent acquisition. And look, any time you look at a metallurgical opportunity, there could well be some thermal associated with it, and we'll limit our exposure to that, if it is, in fact, a stand-alone acquisition. I say that, although, again, the observation has to be made that the investor doesn't seem to distinguish between earnings from thermal or earnings from met very much.

Your next question comes from Alex Ren from Credit Suisse.

I've just got 1 question. So basically, with the equivalent bond off of USD 100 million. You guys -- no one is expecting really a material takeoffs, it's a long time. So does that mean, I guess, and in the market holds up, I think this may implicitly say a large chunk of this $100 million will be reserved for another special in June also.

Let me respond to this, Gerry. Look, you're not giving bondholder any dividends that we potentially announced after the half year results. But technically, these amounts, if unsubscribed would be available for further dividends.

Your next question comes from Paul Young from Goldman Sachs.

Gerry, a follow-up on the U.S. met coal industry. Are you seeing as far as production growth is concerned, are you seeing anything or hearing anything in addition to Leer South and Blue Creek as far as new projects are concerned? Also, are you hearing anything about restarts in light of higher prices and also can you comment on the challenges of some of the rail operators are experiencing at the moment?

Well, first of all, you've mentioned the big projects coming on. CONSOL is bringing on it. I'm not sure when it will come to production. And there are smaller operations that are coming online with the other major metallurgical producers. But the -- right now, there are large inventories across the piece. Most of that is due to the transportation issues. And most of the transportation issues have been pointed out to be on the CSX for the coastal movement. That's the biggest issue and has been pointed out by a number of producers as one of their largest concerns. Again, I hate -- I need to complement the railroads, but they are not performing badly or the M&W is not performing as badly as apparently the CSX is, and we do not rely on CSX for our domestic movements.

Thanks, Gerry. That's useful again. That's correct.

Maybe, Paul, let me expand on this because I think it's quite exciting to look at the market. First of all, in terms of comps that are coming online in the U.S., it's predominantly high-value products that are coming online, including Blue Creek. But overall, when I look at the recent analyst reports, if you know in 2050, you will see what the demand for metallurgical coal will go up by probably up to 50%, which means in the order of 150 million tonnes per annum, additional tonnes. Overall, in order to meet that demand, if you are now in 2050, you need to find 178 million tonnes from new projects coming online. And you don't see that at all. Now I don't want to even look too far ahead to 2050. But when I look at recent analyst calls, they show actually that between now and 2030, we will see an undersupply of met coal of between 40 million tonnes and 50 million tonnes. And it even got closer between now and 2023, we will actually see -- or 2024 in the A&D report and the recent released one. The demand for met coal was up 15%. So I think it's a very, very exciting story for met coal in the short term, medium term and long term.

I completely agree, Gerhard. Maybe just on that or sticking to the U.S. was the last question. Any update on Mon Valley, your study work, permitting work, and it's a great market to be selling assets. So maybe you can give us some thoughts around that process and what's happening there.

Permitting continues. And frankly, that's about the only news we have. Permitting continues to be the next step that we have to go through. We're continuing with it. It has gone more slowly than we would like. But other than that, the project still looks promising.

Okay. And Gerry, no plans to put that -- what is the plan here? Is the plan to put that asset on the market once the study, the permitting is done?

It depends on what the market is. The property is very economic, particularly from a transportation advantage in its own right. And we would hope to take advantage of that ourselves. I mean, everything at the right prices to sell, but that would be one that if we have to see real value in moving on or selling before we did so.

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

Thank you, and thank you for your attendance and your attention in participating in the call today. Should you have any follow-up questions, please reach out to our Investor Relations team. In closing, I will reiterate that Coronado's balance sheet is strong, and we continue to deliver on our capital management plans as evidenced by today's dividend announcements. Coronado continues to operate in an unprecedented coal price environment, and I look further to -- look forward to further strong quarters in the imminent future. Thank you.

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