Coronado Global Resources Inc. (CRN) Earnings Call Transcript

Thank you for standing by, and welcome to the Coronado Global Resources Half Year 2026 Investor Call. [Operator Instructions] I would now like to hand the conference over to CEO and Managing Director, Barrie Van Der Merwe.

Thank you, Travis, and good morning, everyone. Thank you for joining us. I want to first just draw your attention to the customary disclaimers that are included in the deck before we start. Please make sure you familiarize yourself with these. Joining me in Brisbane for this call today is Sandeep Deoji, our Interim CFO; Mark Bolton, our Chief Marketing Officer; and Chantelle Essa, our Head of Investor Relations. Today, I want to step back a bit and spend some time talking about why I believe Coronado will create significant value over the medium to long term. It requires us to step away from the detail of quarterly results and look at the company, its history, its market positioning and other unique factors. I like listening to audio books on my daily commute and while doing the usual weekend chores like mowing. I recently came across a book from Vaclav Smil, a Czech-Canadian scientist called How the World Really Works: A Scientist's Guide to Our Past, Present and Future. The book examines the physical and material foundations of human civilizations. It identifies 4 pillars of modern society, being ammonia for fertilizer production, plastics, cement and of course, steel. Every road, bridge, railway, data center, port, transmission line and major piece of infrastructure starts with steel. As economies develop and urbanize, they consume more steel. Despite all the discussion around alternative technologies, metallurgical coal remains the dominant way steel is produced globally and is expected to be that way for decades to come. At the same time, new supply remains difficult to bring on. Permitting is harder, capital is scarcer. Economic policies of met coal reach territories are not always conducive to investment and new development of metallurgical coal projects are few and far between. It's a question of when, not if the market deficit for quality hard coking coal and PCI will occur. Coronado is inherently positioned and taking the right actions to ensure that, one, we will be operating when that happens; and two, we will make sure our shareholders get the maximum possible benefit from that upside. When you look at the left-hand column, it outlines our inherent positioning and value proposition. We have long-life, well-permitted assets that does not require significant major projects to run for the next 21 years. Our assets are in Tier 1 jurisdictions, providing certainty of ownership rights, but at the same time, providing some sovereign diversification. Current high-quality, low ash coking coals are some of the best non-PLV hard coking coals in the world. These coals are especially suited to stamp charging cokemaking technologies being installed in India and Indonesia where non-PLV coals are maximized in the cokemaking blends. Curragh PCI is also a deal use coal that can either be injected or used in the cokemaking blend, giving customers increased flexibility. Buchanan is considered one of the best U.S. low-volatile met coals with low ash sulfur and phosphorus. It is a brand that has been technically accepted globally for the past 40 years and is consistently sought after for its cokemaking properties. Curragh is also a strategic Queensland asset, primarily because it provides the fuel for 15% of coal-fired power generation at a very low cost. This position provides us some downside protection as was evident from the reset transaction we managed to reach with Stanwell late last year. When you look at the right-hand column, it describes what we are doing to ensure that we are a viable business in a position to maximize the benefit of the future market upturn. Buchanan expansion has been successful and is well on its way to pay back the capital investment. The mine generates a return through the cycle, and we will continue optimizing it. At Curragh, we have more work to do through the reset program and more about this a bit later. Our reset at Curragh applies to every step of the value chain from the mine to the market and is what is needed to ensure that we are there when the next upturn occurs and maximize our upside for shareholders. As part of this broader focus, we've also now added marketing led by Mark Bolton as a portfolio to the executive leadership team to ensure that the whole value chain is represented. Now for a bit more on the markets on Slide 5. Per capita steel consumption is a good indicator of the country's level of development to urbanization and industrialization. For India, with the population now approaching 1.5 billion, this metric is 115 kilograms per person per year, well below the world average of 220 kilograms and let alone China 600 kilograms. India's own government is targeting a development trajectory that sees this metric growing by 40% to 160 kilograms in just the next 4 years. India has large, rich iron ore reserves, relatively cheap energy and labor and the geographical location, allowing it to become a key player in the post-China steel growth story. Importantly, India has low-quality domestic metallurgical coals, so it must import from the seaborne markets. Critically for met coal demand growth, the vast majority of its new steelmaking capacity is through traditional blast furnace or coke battery technology. As India advances its development, steel demand and consumption will be increasing materially in the future, and this will need supply of high-quality met coal. Australia is very well positioned to supply the broad range of met coal India needs, especially the second-tier HCCs and PCIs like Curragh that are increasingly used in the flexible stamp charging coke battery technologies. While India and Southeast Asian markets are a good technical fit for Buchanan's products, too, the impact of freight costs could be a challenge. The domestic U.S. market and EU remain important to Buchanan and improvements in U.S.-China trade relations will lead to reopening of demand opportunities into a region where Buchanan is a long trade history. To put things into physical perspective, we are showing you the frequency and the equivalency of how many harbor bridges weighing in at about 53,000 tonnes each, India will produce at different future rates of consumption. These are big numbers and indicative of the future demand that seaborne market can expect. At about 800 kilograms of coal needed to make 1 tonne of steel, if India's steel consumption increases to the world average, they would need the met coal output of about 10 more Coronado. As I said before, it's not whether the demand and upturn in price will come, the question is just when. The mines that are there and have low enough cost basis will benefit handsomely. Now turning to Buchanan on Slide 6. The chart on this page is self-explanatory. This new longwall, low-vol met coal operation makes money through the cycle. It is a reliable asset now with an expanded production base at around 4.5 million tonnes per year. We will continue optimizing it through further longwall automation, improving development efficiency, maximizing productivity and debottlenecking our plant with low capital intensity initiatives. It is well positioned for future upside when the markets turn. We are looking for more information about Buchanan, there's a detailed slide in the appendix. Now going to Curragh on Slide 7. Buchanan represents stability, Curragh represents material opportunity. Curragh is one of Australia's largest coal mining complexes. It's in the Bowen Basin, one of the most regarded metallurgical coal producing regions globally. The asset quality is exceptional. Reserve life is long. The infrastructure is already built. As I said earlier, this is highly sought after products, but has not performed to its full potential in recent years. That is why we launched the reset program, and I will briefly recap this. We are focusing our efforts and it's supported by AlixPartners and Odin Partnership, as we said before. As part of this, alongside our COO, Craig Manz and Head of Operations at Curragh Shaun Newberry. We have the advice, support and assurance over our plans from Tony O'Neill, the former Anglo American Technical Director; and Aaron Puna, the former CEO of Anglo American Copper. We are focusing on 4 things. We're changing our open pit mine plans and accelerating low strip ratio coal in the South to fund improved pit geometries in the North. This will drive future productivity and lower cost. We're also using the benefits from the South to establish inventory buffers at key points in the value chain to ensure system stability and continuous delivery. This calls for the acceleration of expert study, which is gated to feasibility recently. These new plans allow us to park 1 dragline and 2 crack and excavator fleets this year without impacting mining output. Secondly, we are washing as much coal as possible and the CHPP ease most recently the constraint. If we cannot wash it, we stockpile it, to wash later and maximize margin. This involves a laser focus on asset integrity and maintenance practices to extinguish maintenance deficits and improve uptime, throughput and yield. As reported with the production results, we are starting to reap some early benefits of adopting a very programmatic approach to this since the start of the year. Thirdly, the fatality at Mammoth understandably caused a significant setback to the ramp-up of this new underground asset. As we move forward, we learn and adapt and are doing work to improve the mine's output and productivity as well as the product mix to achieve the planned benefits, albeit a bit later. Fourthly, we are pulling all of this together in our cost base and commercial arrangements. Mining services contracts, reflecting the productivity designed into the mine plan, organizational structures reflecting a simple mine company, reducing costs to what is absolutely necessary to produce gold safely and maximizing our margin through our marketing efforts. The reset is underpinned by our renewed commitment to safety through our frontline supervisor leadership program as well as our values and culture. How we work at Coronado is as important as what we achieve. Both the software and the hardware matters in our business. Now turning to Slide 8. Historically, a lot has been said about Curragh and Stanwell, a Queensland government-owned corporation. Through last year's transactions, we consolidated all our debt, except the high-yield notes with this customer and established ongoing facilities that gives us the financial flexibility to better cope with price volatility and give us time to reset Curragh. Stanwell provides important support to Curragh and Curragh is very important to Queensland. It's a reciproally important relationship. Our coal provides 15% of the state's baseload electricity and is important to energy security. Our financial contribution to the state since 2018 through coal royalties, export rebates and discounted pricing is set out on the page and are material. Last year's Stanwell transaction improves the cash flow outcomes for Coronado. Stanwell is, however, still entitled to nominate a wide range of thermal coal tonnes every year, and we are obligated to deliver that until 2043. This nomination flexibility has an impact on our flexibility to set up structure and size Curragh differently and is part of the cost we are incurring for the support we received. This relationship will continue to receive a high level of priority from our management team, both to ensure that we meet our responsibilities to Stanwell and Queensland and to make sure that Coronado gets adequately compensated over time for our overall contribution. We'll now close with a couple of words on the company's inherent value and cash generation capacity. On Slide 9 now. Bulk commodities businesses are cyclical and earnings and cash flow profiles vary a lot over time. Coronado is exactly that. As the chart on the page shows, every couple of years when the market swings up, there is significant free cash flow, resulting in large benefits to those that are shareholders at the time. Therefore, taking note of how things look over the course of a full cycle and putting our current financial position and leverage into that perspective is important. Coronado's earnings capability through the cycle is strong. The average over the last 8 years is around USD 425 million per year. In one strong market upswing cycle that occurred since 2018, enough cash was generated to return USD 1.5 billion in dividends to shareholders, noting that, that was after meeting our stand-alone Queensland obligations. On only has to apply recent met coal transaction multiples to our through the cycle EBITDA to see the inherent value of the company and to see that this is very different to where it's been trading recently. The financial history also puts into perspective our $700 million of debt, $300 million of which is with Stanwell. In an upswing, this will reduce very fast and deleverage will occur rapidly. The work we are doing now is aimed at ensuring Coronado is set up to maximize its exposure to the next upward met coal cycle, and we are confident that we are well positioned to achieve this. At this point, I'll hand over to Sandeep, who will take you through the half year business and financial performance, liquidity and balance sheet. Thanks, Sandeep.

Thank you, Barrie. The key message from the first half is that operational performance improved materially through the June quarter, and we expect to sustain that momentum. To recap on the quarterly results, saleable production increased by approximately 39% from the first quarter to the second and adjusted EBITDA improved by approximately $96 million quarter-on-quarter, returning to positive territory. I want to draw your attention to the mining cash cost line. At USD 98 per tonne produced, Q2 was back in line with the same quarter last year, but that comparison understates what we achieved. The Australian dollar averaged USD 0.71 in the quarter against $0.64 a year ago, which added around $29 million to our reported costs. On top of that, we absorbed higher diesel fuel prices and general inflation. At last year's exchange rates, Q2 mining cash costs would have been $91 per tonne, around 7% below prior year. So the cost base is not simply recovering. It is improving underneath the headwind we do not control. The evidence sits alongside. The first quarter carried the planned major maintenance for the half, 2 longwall relocations and the Curragh CHPP shutdown. The second quarter was the first clear run at it, and it shows what these assets do when the work is behind them. Buchanan achieved record ROM production and both Buchanan and Curragh achieved record CHPP operating hours. The Logan sale was completed last month, removing a significant cash drag and our exposure to the high-vol A and B markets and the several arrangements strengthened liquidity. On a half-on-half basis, the picture is more mixed. First half unit costs remained around 13% above prior corresponding period and adjusted EBITDA was USD 9 million weaker. That is the first quarter showing through weather-related impacts and planned downtime. The second quarter is a better guide to where the business sits at the moment. There remains significant work ahead, but Q2 demonstrates that the operational reset is beginning to translate into financial outcomes. Moving to cash flows. Free cash flows improved by $70 million against the prior corresponding period from an outflow of USD 159 million to an outflow of $89 million. We are not yet cash generative, and I want to be clear about that, but the direction and the drivers are both right. Three items drove approximately $180 million of favorable movement. Stronger realized pricing contributed $41 million. The removal of Stanwell rebate contributed $53 million. As Barrie said, the Stanwell partnership is critical to Curragh, and this is one visible aspect of it. The lower capital expenditure contributed $89 million, reflecting the completion of the Buchanan growth program. Against that, we absorbed approximately $74 million from inflation, higher fuel costs and foreign exchange. I want to separate those from timing items because they are different in character. Fuel, inflation and currency are real cash costs, and we are managing them through the reset rather than waiting for them to reverse. The remaining $39 million relates to mining and inventory and shipment timing. We held 780,000 tonnes of export saleable inventory at 30 June, with shipments slipping into July on port congestion and co-shipment delays. As that inventory converts and on the basis that operational performance continues the momentum seen in the second quarter, we expect strong cash conversion in the second half. Moving to liquidity. Liquidity is our #1 financial priority. We closed the half with $98 million of cash. During the second quarter, we progressed the prepayment arrangement with Glencore. And on 7th August, our subsidiaries entered into 2 concurrent offtake agreements under which Glencore will advance prepayments of up to $75 million. That takes pro forma liquidity to $133 million. I want to be straightforward about what that facility is. It is 12-month working capital. It is reimbursed by applying the value of coal we deliver against the outstanding balance on a contractual schedule that takes it to nil by the end of the term and any residual at maturity payable in cash. It also carries interest at 14%. We took it to give ourselves a buffer while we deliver the reset. A large part of that is deliberately building inventory. Keeping coal in front of plants is what is reliability and carrying a buffer into the wet season. That costs working capital now at the end of the year and into the first quarter of 2027, and it pays for itself in volume and reliability on the other side. It is an investment in resilience, not a gap in cash flows. The Stanwell transactions materially improved our position and reduced refinancing risk. The prepayment mechanism provides downside support. Monthly prepayments are available while our liquidity remains below $250 million and repayments will occur through coal delivery from the second quarter next year once liquidity exceeds $300 million. We also expect to release around $70 million of cashback guarantees on the basis that our credit metrics improve. On the balance sheet, we have no near-term debt maturities. Our senior secured notes mature in October 2029 and carry no maintenance covenants. The Stanwell ABL facility endorsed by the Queensland government matures in 2030 with gearing and interest cover covenants commencing at the end of December 2027. With major growth capital now complete, our focus is on preserving liquidity, restoring cash generation, reducing leverage over time and strengthening the balance sheet and in time, working our way back to shareholder returns. Our capital allocation framework remains unchanged. Liquidity first, then deleveraging, then growth and shareholder returns. Thank you for your time. I'll now hand back to Barrie.

Well, thank you very much, Sandeep. Thanks to all of you for taking the time to dial into the call and listen to us. If you have questions after the call, after the Q&A, please do not hesitate to get in touch. Also, a big thank you to all our people for your continued dedication and support of Coronado. The Board and the ELT really appreciate it. Before I conclude, a quick word on guidance, a question we often get. This is also covered in the earnings release that we put out on the ASX this morning. As you heard today, we are busy with a structural reset of the business. The focus ultimately is on margin and cash flow. And looking at our production guidance, the 16 million to 17 million tonnes of product tonnes includes met and thermal. What we will not do is produce a whole lot of bypass loss-making thermal at the end of the year to hit the tonnage number. We will keep the inventory and process it when the plants can. Remembering the plants are the constraint in the Curragh value chain currently. If we had done this in the December quarter of last year, we would have had more cash today. So the way to think about it is we will probably mine close to what is needed to produce 16 million tonnes this year, but all of it may not be salable production by the end of the year. Some may be on ROM stockpiles to prepare for the wet season, some may be on crush stockpiles ahead of the plant. Wherever this lands will also flow through to the cost per tonne metric in the denominator. Remembering that the dollar spend is expected to be better than planned from the fleet changes and the early reset savings, but may be adversely impacted by FX and diesel costs. Now for a quick conclusion, and then we'll go to Q&A. The medium- to long-term market outlook for met coal is good. India will be the driver of seaborne met coal demand. Question is when, not if this will happen. Coronado is the long-life assets, products and long-standing customer relationships to capitalize on this when it occurs. Buchanan generates returns through the cycle without any external funding. We will continue to optimize it. Curragh is getting a lot of attention currently to make sure that we reap the full benefits when the upturn happens. Until then, our job is to relentlessly focus on productivity and cost and ensure that we are in the best shape possible through the tougher times to reap the maximum benefit in the good times. We believe that our strategic relationship with Stanwell and Queensland is a key foundation of our future and that our shareholders will, in time, be rewarded for their ongoing support. With that, I'll hand you back to Travis to open us up for questions. Thanks, Travis.

[Operator Instructions] The first question today comes from Daniel Roden from Jefferies.

Just wanted to ask on the Glencore security and ranking. And I guess how do you think -- or what's the ranking of assets and receivables for that liability? And how does it rank in terms of standalone obligations and other debt commitments?

Dan, thanks for that. So the Glencore deal is unsecured. It's actually the first unsecured debt that we've taken on since I've joined the company. So there's no ranking. It sits just above the equity.

Yes. And I guess, are there any other terms or market-linked terms such as price discounts or anything beyond the 14% interest payable for that repayment, please?

Look, I mean it is in the nature of a customer offtake agreement. So there is commercial sensitivity to that. I think the best way to think about it, it's in the nature of what these prepaid deals usually are and at market for prepaid deal like this. If you look at the interest rate of 14%, so it's a bit higher than the ABL, but the ABL is fully secured. So ABL sits at 9% to 12%. This sits at 14%. So it just reflects the fact that it's unsecured. The rest of it is similar to a customer arrangement really.

Okay. And I just wanted to clarity on, I guess, the rationale for drawing down the 75 hasn't been drawn yet this time, but the rationale for making that 75% available given you continue to have Stanwell, I guess prepayments and liquidity options available that I assume would be at more favorable terms for this like it's the is pretty short term in nature and it's got a pretty high cost relatively. What's the rationale, yes I guess, having that option available?

Yes. Look, the rationale does fit in with what we're busy with currently. I think it is safe to say that I think Sandeep and the team has been managing the liquidity position well. But a company of our scale with $100 million in cash doesn't have a lot of buffer for either unexpected operational events or things going wrong. So the first rationale is a bit of buffer that it gives us. The second is, as part of the reset program, there is a big focus on getting the inventory levels right. ROM stockpiles, crush stockpiles to get us to a place where the system can be ran more stably. And so some of this is to allow us to set those inventory buffers and to get that in place while we just run the business normally. So it's really down to that, a bit of buffer for unexpected things, one; and then two, to enable us to follow through with the reset program and then ultimately get to a place in the next 6 to 12 months where the benefits from the ramp-up program is fully realized. That's both cost savings baked into the cost base, but also the CHPP at Curragh running such that we're getting the right mix, getting the full margin. By that time, Glencore will be paid back, but we would have improved the business such that we then generate hopefully more than that, that we got from Glencore to take us forward.

Yes. And I might just sneak one more in before I hand it over. But just I guess, at the June quarter, and I just wanted to unpack, I guess, Mammoth a little bit more and how the -- I guess, the mining conditions are going at the moment. What rates are you seeing into Q3 to date, if we could get color there? And noting that we've presumably, I guess, deferred Stage 2 and 3 a little bit just in the revised, I guess, plans, what conditions would you need to see to, I guess, reinstitute an acceleration of the Stage 2 and 3 growth plans there?

Okay, Dan. No, that's very good. I mean, as I said in the presentation, the impact of that fatality on the mine that was in ramp-up at the start of the year was significant. So coming back from that has been a bit harder than what we hoped. I mean I think if you look at the rates, we are working the rates hard to get up to that. We think about it per day to get to 6,000 tonnes per day. So that's kind of 2,000 per continuous miner fleet unit. I'd say it's mixed. At times, we -- 2 of them hit the 2,000 and one doesn't, mainly a result of geological conditions that we encounter at times, faulting, et cetera, that sometimes sets us back. I'm confident we'll get it there. But for this year, we won't get to the 2 million tonnes we said because there was the fatality and then the ramp-up is taking a bit longer. But I'm confident we can get it up there. Will we get it to 2 million tonnes, pushing as hard as we can. We may end up getting closer to 1.8 million, if you look at it. We've had good collaboration with our U.S. team on that. We had that whole U.S. team from the ex Logan mines that we sold out there. I mean those guys are the expert board and pillar miners. They've done a lot of work with us and looking through what can be done to optimize both the sequences, development sequencing. There's a whole 17-point plan that we've got to kind of get it to where we should. So a long way of saying not quite where it should be, but I'm confident we'll get it to a place where it contributes. A big part of it is getting it to make a PCI coal, a low ash PCI coal and get it through the plant successfully. And recently, we've had some good success with achieving that as well. And so I think things are looking up for Mammoth. When you look at Phase 2 and Phase 3, I'd say that is on pause a bit simply because with this new mine plan, we had to jiggle things around to bring forward exit. So we just need to cross the bridge with exit. We look at our longs again as we do that at the end of the year and then think a bit more as to with exit coming forward, where could the next phase or 2 of the underground come in.

The next question comes from Glyn Lawcock from Barrenjoey.

Just back on the Glencore prepayment, roughly works out about just under 0.5 million tonnes of coal to be delivered at sort of prevailing prices. Do you have a choice as to where that comes from? Or is it one particular mine it all comes from?

Yes. So I mean, I think you're right in terms of the net number of tonnes or the gross number of tonnes at full value that will replace it. The way the things structure is it is more tonnes within a smaller discount that repays it, but that's fine. The mix is -- it's from both Curragh and Buchanan. So there's -- as Sandeep said, there's 2 agreements, one is with Buchanan and one is with Curragh.