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 Andrew Mooney, Vice President, Investor Relations and Communications. Please go ahead.

Thank you, operator, and thank you, everyone, for joining Coronado's third quarter investor call. Today, we released our quarterly report to the ASX and SEC, in which we outlined our production and sales volumes as well as other key information related to our safety results, development projects, coal markets and financial performance. A more detailed outline of our financial position and results will be released to the market on the 9th of November with our Form 10-Q earnings release. Today, I'm joined by our Managing Director and CEO, Douglas Thompson; and our Group CFO, Gerhard Ziems. Within our report, you will see our notice regarding forward-looking statements and reconciliations of certain U.S. GAAP financial measures. We encourage you to review these statements in conjunction with our other filings with the ASX and SEC. I also remind everyone that Coronado quotes all numbers in U.S. dollars and metric tonnes unless otherwise stated. With that, I'll hand over to Doug.

Thanks, Andrew, and welcome to everybody who's made the time to join us today. As we embark on the fourth quarter, I'm pleased to report that the operational headwinds experienced during the third quarter relating to the adverse geological mining conditions at Buchanan are now safely behind us and more normal mining operations have been restored. Additionally, the repairs to the mechanical failure on the propelled unit of 1 of our 4 draglines at Curragh is nearing completion. It's a testament to our teams who managed to pivot our mine plans and our maintenance resources to manage these unforeseen events and limit the impact, but also generate options to recover these deferred coal volumes in subsequent quarters. The business is focused on executing our revised market guidance plans and ensuring that our production levels remain above prior years. Despite these operational headwinds, the business achieved several milestones during the quarter, including the global business set new benchmark performance in safety and set regional safety records. As the Australian business segment nears completion of the improvement plans under the 1 Curragh plant, record waste movement set in -- the record waste movement set in the June quarter has been surpassed. A new waste record has been set in the September quarter and this has been achieved, albeit the failure of the dragline in mid-September. This reflects a return on investment from the 1 Curragh plant and the business will realize the returns of these investments in the 2024 business plan and beyond. We continue the development of our organic growth plants, both in the U.S. and Australia, and these are showing good progress and performance against set time lines for these projects. Our business took another tangible step forward in our emissions reductions during the quarter. We commenced the installation works on a second Ventilation Air Methane unit at Buchanan as part of our strategic plans to lower emissions and hereby, we accelerate our plans to reduce emissions by 30% by 2030. We also appointed 2 new independent non-executive directors to the Board, and we welcomed Aimee Allen and Jan Wilson to the Board meeting in September. Year-to-date, Coronado has generated more than $2 billion in revenue, with 92% of those revenues being generated from our metallurgical coal products. These products are mined and produced at 100% owned Met Coal mines, that being the Curragh Complex Mines, Buchanan and the Logan Complex of Mines. Independent industry experts and our own modeling is predicting tight future supply markets, thus anticipating higher for longer pricing. For this reason, Coronado continues to invest in itself. Investing in organic growth to increase our sales volumes over highly sought after high-quality Met Coal products from our already owned assets will drive enhanced and sustained return to our shareholders. Now before I elaborate further on our results, I'll turn and provide a short summary on our safety performance. I'm always hesitant to talk about our safety results as safety is integral to our daily activities and our holistic results. We are relentlessly focused on ensuring that what we do, we do safely. So my concern is if we pause and acknowledge great performance in this area, we may take our eye off the true award and that's been our people and their daily well-being in our operations. I'm again pleased to advise that both Australia and the U.S. reflected improvements quarter-on-quarter and we continue to remain well below relevant industry averages. In Australia, the 12-month rolling average total reportable injury rate as of September was 2.43. This is a 41% improvement on the same time last year. And in the United States, our 12-month rolling average total recordable incident rate was 1.6. This is a 25% improvement. Notably in the quarter, the Logan Complex continued their strong safety performance, achieving 1.5 million hours or more than 1 year LTI free. And at a group level, the TRIR rate was 0.91 compared to 1.33 this time last year, a 32% improvement. Putting this another way, these results reflect a record low for the United States business unit and the lowest incident rate in Australia and for the group since early 2018. This comes from our people living our values and their relentless focus on safety. I'd like to take the opportunity to thank and congratulate our people for their strong performance and encourage them to hold their gaze on the true reward, that being our people. In addition, during the quarter, our Curragh team continued their work on the dragline proximity awareness project. This world-first solution protects people and equipment working in proximity to draglines. Solution has generated significant interest and several of our industry peers have visited Curragh to better understand our technologically engineered solution and we encourage them to adopt this in their operations and invite others to continue to visit us. Turning to our operations. We completed the third quarter showing improved performance year-on-year across waste movements, run of mine coalmining, salable production and this all came despite the unforeseen challenges in quarter 3. Year-to-date, group run of mine coal production was 19.3 million tonnes. This is 4% higher than the prior year and salable production was 11.9 million tonnes, also up on the prior year. In the third quarter itself, group run of mine coal mine production was 5.9 million tonnes and saleable production was 3.7 million tonnes. While production rates are higher on a year-to-date basis, coal production was lower during the quarter from the Curragh Complex of Mines. This is due to our mine plans focused on pre-strip activities under the 1 Curragh Plant and then also the impact of the dragline not being able to expose coal in the failure in late September. Additional to note in the quarter is we completed planned annual maintenance shutdowns on both our preparation plants through the quarter. Having 2 preparation plants with continued production, albeit at reduced rates, we continue to run 1 plant while the other was shut down. This is a benefit offered by a mine that has long life and excellent infrastructure. During the quarter, Curragh set new records on overburden movement, eclipsing the record set last quarter. The team moved nearly 52 million BCMs in the quarter, bringing total waste movement year-to-date to 144 million tonnes -- million BCMs. This is a 7% increase on prior year. I'll once again note that this record was set in a quarter where we did have an impact of having a dragline experiencing mechanical failure from mid-September. The repairs to the dragline continue and expected to be completed in the next 2 weeks. To ensure we take opportunity in adversity, while we're repairing the propelled unit on this dragline, we also took the opportunity to undertake maintenance that was planned to occur in 2024. The benefit from this will be reaped in the quarters to come. And while I'm talking about taking opportunity in adversity, the coal deferred into later quarters from the dragline failure will likely be sold at higher realized prices. For the remainder of 2023, the Curragh team were focused on delivering the production plan and the costs as advised by guidance. The budget process for 2024 is currently underway and the demonstrated systemic improvements realized in 2023 will be implemented in our plans in 2024. This will include fleet rationalization and cost reductions as we come to the end of the overburden advance and put geometry improvement programs identified under our 1 Curragh plant. At our U.S. business segment, the Logan Complex of Mines continued to perform well in the quarter. And as previously noted, production was impacted by the geological conditions in the coal seams at Buchanan and this slowed our production rates and impacted yield. This type of rock intrusion is not uncommon in underground mines and our team at Buchanan once again proved themselves in managing this very successfully and limited the impact of the event and also knock-on impacts of the event. While the geological conditions are now back to normal, we are focused on the remainder of '23 and early '24 to make every effort to recover the deferred tonnes and once again, potentially at higher prices. Turning to sales volumes for the group in September quarter. We sold 1 point -- sorry, 4.1 million tonnes. This is 3% higher than the June quarter. In sales volume from Australia and the United States operations, in Australia was 2.6 million tonnes. This is 5% higher and respectively, 1.5 million tonnes out of the U.S. The sales profile from Curragh is higher in the quarter due to the higher inventory stockpiles held at the end of June. These we've been partially unwinding during the quarter. The sales profile from Curragh could have actually been higher but for 3 shipments that were delayed into the December quarter due to logistic chain delays at port. This is about 130,000 tonnes. I'll now hand over to Gerhard, who will talk us through the financial position and market outlook.

Yes. Thanks, Douglas, and hello, everybody. As Douglas stated in his remarks earlier, Coronado has generated USD 2.2 billion in revenue year-to-date, with 92% of those sales being Met Coal sales. Our year-to-date revenues are lower than this time last year due to a 28% decrease in the benchmark index, but still remain our second highest September year-to-date revenue result for the group since the company's inception. June quarter revenues were USD 780 million, broadly on par with the prior June quarter. And the group realized Met Coal price year-to-date was USD 222 per tonne, which is a blend of FOB, FOR domestic pricing contracts, U.S. domestic pricing contracts. And it trades to a 78% realization on the average Australian hard coke and coal index price for the 9 months to September. So this reflects an improvement over the same period in 2022, where realizations were at 71%. Notably, Curragh's Met Coal price realization year-to-date represents 84% of the Australian PLV benchmark plus. And as of 30 September, the company's net cash position was USD 95 million and we maintained available liquidity of USD 487 million. Our net cash position consisted of a closing cash balance of USD 337 million cash balance and outstanding bonds totaling USD 242 million. The decrease in the closing cash balance is primarily due to timing factors and the payment of some irregular payments in the quarter. The biggest one is really a change in the Queensland government royalty payment frequency from quarterly to monthly resulting in a payment of 5 months royalties in the quarter. We saw an incremental USD 50 million cash outflow in the quarter. So it's a one-off. It won't happen again. The Queensland government switched in this quarter. The second one was an elevated quarterly capital expenditure of $20 million related to the investment in growth at Buchanan in the quarter. And during the quarter, Coronado spent $62 million on CapEx. The dividend payment of $8 million and the payment of our annual insurance premiums of $20 million that in prior years have been financed with this year, we paid in full as a prepayment in order to prudently reduce our interest costs. And then lastly, payments to our Queensland provider related to the June fiscal year, annual take-or-pay to up of $9 million. So year-to-date, average mining cost per tonne sold for the group $105.50 per tonne. Higher mining costs per tonne are basically due to inflationary pressures and the impact from lower sales in the March quarter from the significant above-average weather and train derailment on the Blackwater line and the issues navigated in the recent quarter. Now the rock infusions issues at Buchanan are behind us and the repairs of the covered dragline are near completion. The company expects fourth quarter production and sales volume to be higher with sales volumes being realized at higher price points as we look back 3 months or a quarter and the fourth quarter average mining cost per tonne to be lower. And as a side note, the benchmark index in quarter 2 was $243 per tonne. And in quarter 3, it was $264 per tonne. So we have benefit from the higher prices that we have seen in quarter 3 in the present quarter 4. Today, Coronado reaffirms our regards to FY '23 production cost and CapEx guidance. Today, we also advised the market of the completion of our North American annual contract negotiations for the financial year 2024. In 2024, Coronado anticipates a volume-weighted average price across all grades of Met Coal of approximately USD 161 per metric tonne FOR price, reflecting a price aligned with High Vol A and High Vol B, FOB, U.S. East Coast average index price that we have seen in June to August and forward curve pricing estimates at the time. These fixed cost tonnage contracts over -- cover approximately 38% of our anticipated U.S. production and cover approximately 60% of our anticipated U.S. mine cash cost in FY '24. So turning to coal markets. The benchmark Australian premium low vol index price for the September quarter was $264 per tonne, up 9% compared to the June quarter benchmark price of $243 per tonne. We have seen prices steadily increase since mid-September with the current Australian benchmark sitting at $350 per tonne today. The increase in pricing is primarily due to a combination of tight supply from Australia, which was impacted negatively by continued rail constraints and planned maintenance disruptions to operations at Queensland ports and heightened demand from Indian steel mills who are restocking as the monsoon season comes to an end. And the recent price increases are despite a generally weak global economic environment and weak steel demand outlook with the exception from India. Indian steel demand is very strong with the resumption of construction activity expected to provide higher demand for Met Coals during the December quarter and into 2024. The SGX forward curve is projecting pricing to be greater than USD 330 per tonne for the remainder of 2023 and for the pricing in 2024 to average approximately $294 per tonne. So by and large around $300 per tonne. These price projections indicate a higher pricing environment for longer and the pricing environment well above the long-term average of $194 per tonne. And we anticipate the current higher and projected prices will result in higher price realizations from the sales volumes in the December quarter. As we look more longer term, you see the AME forecast in the pack estimates global Met Coal demand to more than double to nearly 700 million tonnes by 2050, led primarily by blast furnace steel production in India. India is expected to lead all countries in import demand growth due to significant industrialization plans over the next 2 decades. India export Met Coal demand is forecasted to increase by -- well, it's almost quadrupled by 281% by 2050, the majority of which will need to be filled by supply growth out of Australia. In our view, it will be difficult to see how the supply growth will materialize to mass demand given the limited approvals and the incentives for new mines in the high-quality Met Coal regions of Australia and North America. In order to meet the projected 2050 demand levels, AME forecasted Met Coal production from Australia will need to increase by 140% from existing levels over that time. Structurally, a lack of supply should ensure higher prices for longer, which places more emphasis on companies like us to continue operating and developing our long-term, long-life 20-plus years assets. Our Met Coal remains in high demand. Our high-quality products and unique geographical diversification see us continue to support customers on all 5 continents. I'll now hand back over to Douglas to discuss the progress of our growth and emission reduction projects. Douglas?

Thanks very much, mate. Turning to growth first. I'm pleased to report that the Curragh Underground Met Coal Project remains on target. During the September quarter, the project's environmental approval scheduled achieved all the required milestones. Exploration drilling programs for geological and gasing formations for the Phase 1 of the project is complete and a broader coal seam permeability testing program has also been conducted. More than 40 holes were drilled and granted in just over 1,000 -- 7,000 meters of drilling has been conducted in the quarter. The development of this project underpins Coronado's strategy to deliver sellable production of 13.5 million tonnes from Curragh Complex of Mines by 2025. Growth plans at our U.S. operations to produce 7 million tonnes by 2025, also pleasingly performing on target. At Buchanan, the capital investment into works to construct our new surface raw stockpile area is on plan and progressing well and also the second set of skips to increase our hoisting capacity is on plan and target. So now turning to our emissions reduction. In July 2022 at Buchanan, we commenced our first Ventilation Air Methane abatement project at vent shaft 16. Since commissioning, the VAM unit has destroyed more than 220,000 tonnes of carbon equivalent at a 94% efficiency. And this project alone had the group well on target to deliver our 30% reduction in emissions by 2030. Given the proven success of the original VAM unit, we commenced the installation of a second one at vent shaft 18. Construction works are now underway and is expected to be completed in mid-2024. The establishment of a second VAM unit is expected to substantially reduce Coronado's emissions even further. And this also establishes our company as a industry leader in the implementation and safe operation of this emission reduction technology. At Curragh, we continue to make progress on our Gas Pilot Project during the quarter. The project is intended to capture and beneficially use open cut waste mine gas. Our primary downstream use cases for this gas is power generation and it uses diesel substitution. Drilling works on this pilot program were completed in early July and subsequently, the surface and production infrastructure has been procured and we're in final stages of installation. Also in the quarter, we ran a truck trial to measure the performance of the dual fuel. The results from this has been satisfactory, and it lays the firm steps for the conversion of 5 to 6 trucks during 2024 for the use of this gas. Now before we move to Q&A, I wanted to address the announcement in late September regarding Sev.en Global Investments purchase agreement to acquire EMG's 51% major stake in Coronado Global LLC. As per the media releases, Sev.en GI and EMG, we understand that the transaction is subject to customary closing conditions, including regulatory approvals in the U.S. and in Australia. We remain committed to provide the market information as it becomes available to the company in accordance with the ASX continuous disclosure requirements. So with this, I'll now hand over to the operator and we'll be guided through the Q&A process.

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

The first question is on Curragh. And with respect to production in the quarter, Doug, I know the dragline was down for maintenance. And also just broadly speaking across the industry, all companies are playing catch-up on waste stripping. But I'm just curious around the fact that dragline went down for maintenance in September and which I would have thought wouldn't have had too much of an impact on coal production. So it was more a function of the truck and shovel fleet not being able to uncover the coal inventory or just a function of actually just being behind on waste stripping, which again is a broader industry issue?

Paul, as we communicated, 1 Curragh Plant that we've been running has had the intent to address those pre-stripping deficiencies caused by the weather and other matters. So that program has been ongoing. In the quarter, we did have a focus on pre-strip and that's why you saw the record out of our changes that we've been making in the mine plants over the last year or so. The results of that have been coming in great results in waste movement and stripping. Losing the dragline when we did is exactly as you said, it's timing. It's -- the dragline is intended to expose coal at the -- to the back end of the month that we would have mined. Unfortunately, we couldn't benefit from that. So that's why there's this deferral. In addition, in the quarter, we had the 2 planned shutdowns for both of our prep plants. So with the annual shutdowns, as I said, we try and use what we have to the best we can. So while one is down, we keep the other one running so we can keep product coming, but that also had a impact to the profile in the quarter and that was planned likewise at the pre-strip. What wasn't planned was the impact by the dragline in exposing coal. And then obviously, in the quarter, mentioning the impact of our intrusion in the United States also impacted the group ability to produce coal in the quarter from a time line perspective, but also deferred.

And then maybe just on waste stripping and profiles. I mean, great to see you hitting record numbers on waste movements. As far as catch-up is concerned on the waste stripping on the mine plant at Curragh -- and great to see you'll be selling coal in higher prices in the following quarters. But how far through the catch-up actually are you? And -- or another way to put it, how much longer will be before you sort of get on top of the waste stripping at Curragh?

I'm pleased to report that the impact in the first quarter that set the plan back, we're now coming to the back end of it. So the 1 Curragh plant, its intent to straighten up geometry. I think you remember from previous quarters we spoke about the capital investment into extra box cuts, so we could straighten up the mine and give our draglines additional strike length. That work is very well advanced and we're getting far better performance out of our draglines as a consequence. And then the pre-strip and advance work is coming to an end and that's looking ahead the rationalization and cost reductions that we'll see in plans into the future. As we finish that work, we will rationalize our fleets that have been brought in as additional capacity.

Okay. And just the last one on the U.S. Met Coal contracts. Maybe one to Gerhard around the reduction in the price. Gerhard, is that a function of just the fact that -- and noting that a lot of the U.S. companies have downgraded guidance. So also from a production standpoint, the U.S. industry seems to be struggling a little bit. But the drop in price, is that a function of just the fact that the European -- demand from European steel mills is a little lower and just demand from the U.S. steel mills is expected to be a little low?

Yes, that's basically correct. I mean, if you see the disconnect between the so-called benchmark, the Australian FOB and then the U.S. East Coast index, it's sitting at about 74%. Historically, it's closer to 90%. So the Atlantic market in which usually the U.S. ships into is very weak. The reason the benchmark -- the Australian benchmark is so high is purely India. And we are lucky that India is our biggest export destination. But that's basically it, Paul.

[Operator Instructions] Your next question comes from Chris Drew with Jefferies.

Just on the unit costs and the guidance, look, probably to do a little bit more work on the numbers. But it looks to me like you've probably got to need a fairly substantial turnaround in the December quarter to deliver to that cost guidance. Can you perhaps talk a little bit to how you see that setting unit cost playing out in December? And maybe it goes a little bit to what you just said around the strip ratios and things.

Yes, Chris, it's a good question. As you know, the unit cost right now sit at $105.5 and our guidance is closer to the $101. So it has come down. I think one important aspect is we should have sold more in the quarter. We missed the shipments, as Douglas highlighted. So the denominator is sales funds, so that should help in the fourth quarter. And we are trying to pull in more shipments into the fourth quarter, bring ships forward from December into earlier months, if we can. And then we need to cut costs out as well and we are on a good path to do it. So as Douglas said, we had fleets in there that helped us achieving record waste movements, but we started looking at the rationalization of these fleets.

Great. And then perhaps slightly relative, taking the question on the inventory position. Obviously, we saw that build into June too. That looks like it's at least partially unwound. How far through that are we now? Is there more to come in the December quarter on the inventory online? Or is that largely done now?

Yes. Not really, to be quite honest. And that's, in a way, pleasing, although that's also working capital, but we still have very large warm-stack inventories. And of course, we had product inventories. You will see that in -- when we release the 10-Q, the product inventories, of course, also driven because we couldn't sell 130,000 tonnes. But pleasingly, we had large warm-stack as well and that will be converted into sales tonnes in quarter 4.

Your next question comes from Paul Young with Goldman Sachs.

A question on Sev.en Group. I know, Doug, you mentioned it's still working through sort of regulatory, et cetera, situation. Can you maybe just talk around about this company? I know they own Black Hawk in the U.S. or that complex of mines. Has there been any discussions with Sev.en Group so far? And any thoughts around potentially the synergies between the Black Hawk complex and Logan and Buchanan?

Well, Paul, I think the first thing to note, probably the most useful is this is a shareholder transaction between EMG and Sev.en GI, so not management. So it's a matter between them. Myself and [ Gerry ] have had meetings with Sev.en, but by thinking by design, these have been introductory meetings and nothing more than that because the transaction needs to stay where it is, is between those 2 shareholders. Your comments about [ Blackwater ] -- Blackwater, apologies, Blackhawk, they clearly are a very capable operator of mines and assets already if you look at their portfolio.

Okay. Back on to the -- Gerhard, back onto the cash flow and in the quarter. Your comments around the Queensland royalty payments, just to clarify, that 5-month payment, was that a prepayment for next quarter? Or was that just a lag payment for the last 5 months?

No, it was a lag there. So we paid -- and don't hold me to [indiscernible]. I think we paid USD 130 million royalties in the quarter, of which $80 million was just the usual payment in July for the prior quarter payment. So that was based on the oil-driven. The payment we always made in July. But then we also made payments for July and August in that quarter as well. And that was the $50 million that we normally wouldn't have seen. From here on, it's just every month, the royalty payment. So it's a one-off in that quarter and from here on, we just pay every month the normal royalty.

Okay. Understood. And then maybe back on to Doug on Buchanan. I know it's been such a consistent mine over the decades and especially around the geology. So the unknown rock intrusion sounded like kind of as a surprise. I know you're through that now. But any color you can provide on any sort of mapping seismic, anything you've done to sort of identify other intrusions? Or was this truly in your view, you're confident it's a one-off?

I don't think you ever call an intrusion a one-off, but the team have got the mine very well mapped through a number of areas. It's a mine that's well understood, it's well drilled. So we got very good geological information. When you're doing a primary development in setting up the longwalls, you generally have an opportunity to shore up the geology that you'd pick up for your drilling. And then thirdly, when we do drilling for gas, that provides a whole lot of geological information as well. Unfortunately, when you have these kind of events where you don't pick it up in your head-gate or your tailgate or your gas drilling and it's a selling type event where it dips down out of the hanging wall into your coal seam and narrows the seam that you're mining through, it is unforeseen. That's the style of event that occurred, yes. So I'd strongly say that what we have in place is best practice and has served us very well in the past. Where we've picked up geological features, we've been able to plan them well. We've set up jump fences and we've gone around them and moved around them very productively with limited impact. So this really was an unforeseen, but the team managed it well. You normally have not only delays or slowdown in your progress rate and yield impact, you can quite often have an impact to your material handling system out of the mine. The team ensured that knock-on effects are minimized. And once we go through, we could get back to normal production rates and then some really good production rates since then as well.

Okay. And just last one, just moving on to the other underground, which is -- well, soon to be developed at Curragh. I know you just said you've received environmental approvals. Do you still need any other approvals from the Queensland government? Just remind me, the first continuous mine is set to go into the end of next year, correct?

Yes -- sorry, no, we haven't received approval yet. Our milestones in achieving approval have progressed really well within the quarter. We've achieved all our set milestones in gaining that approval, but we haven't gained approval as yet. That will come next year and that is on our critical path. The procurement strategy is well worked. We've got it defined. The intent is that we put the first miner into it at the back end of next year. And then once we've done the development, phase production into 2025.

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