The death of coal has been greatly exaggerated

The case for Coronado

The Collins St Value Fund established a position in the stock in mid September 2020 at an average price of $0.72 per share. As of the date of writing, the stock is now worth ~$0.89 per share – a 20% uplift in two weeks which, in our view, is just the beginning of an immensely compelling investment opportunity that began in earnest after their recent USD$180 million capital raise at $0.60 per share in early September 2020.

Beyond the longer-term infrastructure tail winds supporting Coronado, there are three more immediate reasons why the stock represents a compelling investment opportunity.

1. Capital management

Post the recent capital raise the company has been able to bring net debt/equity down to below 50% with the company’s liquid cash position expected to be enhanced by a further $50M - $100M post the sale / lease back of assets at the Curragh mine in Blackwater, Queensland. With its balance sheet back in order, dividends are expected to return with the company dividend policy suggesting that 80% of free cash flow will be paid out each year – quite attractive given the reduced yield on offer elsewhere in the market.

Another relevant consequence of the recent capital raise is that the dilution of the major shareholder has seen the company’s free float stock increase to 44% (up from 20%), providing greater liquidity for investors as well as opening up the prospect for being included in the ASX300 index and attracting greater analyst coverage as well as passive ETFs coming onto the register for the first time.

2. Geographical Diversity

Coronado have eight operating mines, with one of those in Queensland and seven in the central Appalachian region in the United States of America (USA). This geographical diversity provides an excellent opportunity to cost effectively sell and export coal to a wide range of markets across South-East Asia, Europe and internally within the USA.

3. Operational excellence

Given the ‘price taker’ status afforded to most commodity producers it is important that costs are managed closely. Coronado are in the lowest cost quartile globally and have a strong executive team in place in order to maintain that position into the future.

Safety is also key. With Total Reportable Incident Rates (TRIRs) historically less than a third of the industry average it is clear that this is something the company takes seriously.

Outlook for the share price

With metallurgical coal futures pointing to a further 50% uplift in price into the first quarter of CY 2021, lower debt and increased liquidity the outlook is extremely positive. Notwithstanding the short term price action seen throughout September we maintain the view that Coronado could see further appreciation of 70% or more, with a price target north of $1.60 by this time next year.

Structural (again, pun intended!) tail winds driven by increased global infrastructure spending provide ample opportunity for Coronado’s long life mining assets to deliver for shareholders well beyond the next 12 months, representing an excellent example of how looking behind the scenes can uncover overlooked, under loved and misunderstood opportunities in a bigger value chain. 

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