Coronado Global Resources Inc
ASX:CRN
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Coronado Global Resources Inc
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Thank you for standing by. And welcome to the Coronado Global Resources quarterly report conference call. [Operator Instructions]I would now like to hand the conference over to Mr. Gerry Spindler, Chief Executive Officer. Please go ahead.
Thank you. And welcome to the call, everybody. Coronado has just released its first quarter report for the period up to the 31st of March 2020. It goes without saying that these are unusually challenging times. But I would like to take this opportunity to remind you that Coronado is a resilient business with excellent assets, low-cost structures, a robust financial position and superb people, and we are positioned to meet this challenge. Unfortunately, in January 2020, the contractor at the Curragh mine was fatally injured during a tire change for sudden activity at the main workshop. As a result of this tragic accident, mine operations at Curragh were suspended immediately. All workers participated in return-to-work safety sessions, and a comprehensive review of mine procedures with particular attention to tire handling was performed. Coronado is conducting a full investigation to understand the causes of this incident and continues to support the third-party reviews underway. With all of the various challenges of this business, this is the worst thing that can happen. Our condolences and sincere sympathies go to the family of Donald Rabbitt. Safety remains our #1 priority, and we continue to focus on further reducing injury and incident rates across all aspects of our business. Beyond safety, there are some key takeaways from the first quarter. Overall, the performance from our business was good when you consider the number of challenges we have faced since the start of the year, including the current fatality; the U.S.-China tariffs; softer demand from Europe; Queensland wet weather; and lastly, COVID-19. Run-of-mine production for the group in the March quarter was 6.9 million tonnes, up 4.3% over the December quarter, with the drop in production from Curragh offset by superb performance from our U.S. operations, particularly Buchanan and Logan. Saleable production and sales volumes were impacted but not to the extent that many predicted. Saleable production was down by 1.9%, and sales volumes were down 3.3%, respectively. This speaks well for the quality of the product and the strength of our customer relationships. Benchmark pricing for the quarter remained reasonably healthy, and currency remains favorable. Realized pricing increases for Australian metallurgical coal -- our realized price increase for Australian metallurgical coal was lower on a group-wide basis due to reduced demand from Europe and the Americas. Unaudited revenue was $409 million, down 8.1% due to lower sales volumes, and cost per tonne sold at $56.80 per tonne was, as we anticipated, higher than the December quarter, mainly due to reduced production from Curragh. The company's debt levels increased during the quarter due to working capital requirements while Curragh was shut down during late January and early February and also due to timing issues as we adjust to the new payment processes relating to tariff rebates for our China shipments and changes to shipping requirements with certain customers in -- from India. Headroom remains substantial, and liquidity is sound. I should also point out that, as planned, we have moved to new segmental reporting this year, reflecting our 2 key areas of operations: Australia and the United States. For those of you interested in the individual mine performance, we have included that information in the appendix. Having been in this business a number of years, we take pride in our ability to handle the volatility of the market. We are cautious with our capital, careful with our cost structure, prudent with our financing, and we pay attention to the supply and demand indices that we develop ourselves and then we consult with third parties to arrive at opinions. And even with all this, nobody has ever seen anything like the circumstances delivered by the current COVID-19 pandemic. We recognized fairly early the risks associated with this to the workforce and the properties, and steering committees were formed both in the U.S. and Australia. And it's appropriate to manage the U.S. and Australia when it comes to this particular problem differently because of the different ways we operate. In the U.S., all of the mines have 5-day normal rotation operations. People go to work, go home in the evening. The work is underground to a large extent, and social distancing and hygiene protocols are different than they are in Australia, where in Australia, we are drive-in/drive-out, pour-on/pour-off roster, requires that we provide camps. And they, as well as [ designing ] facilities, present their own unusual problems when it comes to distancing, social hygiene, et cetera. The steering committees have taken decisive steps to safeguard our employees, and these include protecting the health of our workforce through preventive measures and strict hygiene protocols; temporarily idling our U.S. mines; and furloughing hourly employees, which allows them to stay at home during a period of reduced demand from Europe, Brazil and North America. I should point out that while the mines are idled, sales are continuing from existing inventories of approximately 750,000 tonnes and that salaried employees have been retained to maintain the integrity of each asset, manage inventory, continue shipments and to ensure that we can rapidly recommence our operations once market conditions permit. And we've reduced our total capital expenditure by 40%, which includes the temporary deferral of expansion plans at Curragh. The metallurgical coal markets are still exploring to find the bottom, and we likely have not reached it, although likely will in the next 2 weeks.After that, we have opportunities that the industry as a whole will enjoy. And in the meantime, while we've idled our U.S. operations, customers in India, Japan and Europe have continued to work with Curragh as a strategic supplier of baseload metallurgical coal for coal plants. Curragh has also successfully moved more coal into the Chinese market during this period, reflecting emergence in a new market and the flexibility and quality of the product. Given the uncertainty in global markets from COVID-19 and the collapse in oil prices, we have decided to withdraw guidance. However, the dividend announced in February will still be paid. One final comment before questions. We've been through this. While not exactly this, we've been through times like this before. We know what it's like. We know how to get through it. We've done it before. And when the markets return, Coronado will be, as it always has been, in a uniquely favored position, given its low cost and its capital structure, to take advantage of an upturn market, take advantage of probably a reduced supply profile because there will be those companies who will not be able to survive this particular time. And times will get better, and Coronado will enjoy the benefit of those improved markets. I would like to open up the call to questions.
[Operator Instructions] Your first question comes from Paul Young from Goldman Sachs.
Gerry, clearly, very tough markets, and you're doing all the right things to adjust to market conditions. I have some questions on your balance sheet and also, I guess, CapEx plans, et cetera. First of all, just on the net debt increase to $437 million. You mentioned most of that was working capital increases. How much of a working cap -- I know there's a lot of moving parts there, but how much of working cap unwind do you expect to see in the June quarter based on your, I guess, your line of sight at the moment?
Ayten, do you want to respond to that?
Yes, I can do that. Look, it will improve. There are some customers where we have extended credit terms towards the back end of last year. Gerry mentioned some of our Indian customers. So that's probably going to be more of a permanent difference. However, the situation in China with the implementation of the new tariff arrangement where customers have to apply for the rebate, that has taken some time to come through the markets. And I think by the end of June, we'll see an improvement on that as the cash flow comes through. So it's not a permanent difference. It is temporary. Having said that, if you compare it to historicals, our working capital will be slightly higher but not the extent it is today. Hopefully that answers your question, Paul.
Yes. That's a bit of context, Ayten. It probably doesn't -- I know there's, again, a lot of moving parts there on trying to lock down a dollar million sort of unwind number. But maybe moving on to the next question then. It's around your debt balance and also just covenants. I know your refi is not until 2023. But am I reading this correctly that you have about $100 million, as it stands, of undrawn syndicated facility, of the $550 million?
That's right. That's right. And look, some of the measures that we are implementing, cutting the CapEx, there are others that we are implementing, which we haven't talked about, taking some noncore assets off balance sheets and fleet and so forth. All of that will actually go down to increase our liquidity by the end of the year. So whilst we've got about $100 million or thereabouts available at the moment, that's going to actually increase. And that's assuming -- using the Platts Forward Curve, we've run that through the numbers, and we've presented those numbers to our banks as well.
Okay. And then, Ayten, covenants, are they just standard net interest ratio covenants, et cetera?
Yes. So the -- we've got -- it's all public, so I'm quite comfortable talking about it, but it's a net debt-to-EBITDA covenant. We also have an interest cover ratio as well as a tangible net worth covenant. And depending on what -- again, it's sensitive to price deck. But we are talking to our banks at the moment in the event that the prices, in particular, get worse than where they are today. But at the moment, with the measures that we are implementing, we don't expect to see any problems. However, these are volatile conditions. So how this moves around is anybody's guess. But we do have the support of our lenders. We always have had the support of our lenders. And the feedback we are getting is the measures that we've implemented are actually going to increase our liquidity, and that positions us very differently to our peers. A lot of companies are going to their banks to get waivers around their covenants, but they're also asking for more money. In our case, we don't have a liquidity issue.
Okay. So just to clarify, Ayten. Can you maybe give us some of those metrics on the net debt-to-EBITDA and the interest cover?
2.5x. 2.5x net debt-to-EBITDA. Look, there's a lot of definitions, therefore definition and things coming in and out, but that's 2.5x EBITDA. The other one is the interest cover, which is 3x EBITDA.
Yes. Okay. So that's pretty standard, 3x. And you're in discussions, too, with the banks to potentially increase those ceilings.
Not necessarily increase those ceilings. I don't think we need to increase them at all, to be quite frank. As I said, we don't -- we certainly don't need more liquidity, our interest cover ratio. The EBITDA/net debt covenant, again, it's going to come down to the measures we implement how quickly we can get this debt down. There are some more opportunities that we are looking at, which we haven't obviously discussed publicly, but there are other measures we are looking at.
Okay. Great. Last question for me because I know there'll be lots others -- from others. But what are your -- roughly speaking, what are your fixed costs of the U.S. operations being underground mines? Are we talking sort of 60 -- between 60% and 70%, that sort of range on your fixed cost base for Buchanan and Logan?
Let me go ahead and answer that. It's not that much. And keep in mind that we are liquidating inventory. So we are cash positive in this particular time, in the interim. We're not absorbing idle costs.
Okay. I'm just trying to figure out actually just on both Buchanan and Logan, the EBITDA and free cash flow outlook for the year based on our price deck and particularly Logan on the restart. Its costs, I think, are around USD 90 a tonne last half, including royalties, and you've got that fixed volume offtake. I think it's about 3.1 million tonnes at USD 107 a tonne. So should we be thinking that Logan will have a $15 a tonne margin, maybe a touch more, post the restart?
If it doesn't go overseas, and nobody knows what the overseas market is going to be. Right now, we're enjoying good support from the U.S. steel mills. They have cut down a number -- they have shut down a number of blast furnaces. They have taken our tonnage and asked for 25% carryover. But other than that, the prices have remained.
I think if I can add to that, Paul, in the U.S., particularly for Logan, we've actually got a lot of fixed price contracts that are above market at the moment.
Your next question comes from Jack Gabb from Bank of America.
Please can you just give us a bit more color on the potential restart of the U.S. operations? I guess you said both Buchanan and Logan are planning to restart in Q2, but you haven't said anything on Greenbrier. Just kind of keen to get an update on that.
A lot of this will depend upon pricing. As it stands now, the Eagle mine -- Eagle 1 mine at Logan could start as early as the second week in May. The Buchanan has continued mining, at least with the wall, over the previous 2 weeks. And when it starts back up, it will go to a 3.5 million- to 4 million-tonne rate, which should be absorbed by the market as we see it. Of course, Logan's production when it comes on, and to the extent that production is pulled from Greenbrier, much of that will be covered by domestic contracts, which are fixed price. Export pricing determines ultimately the health of all of the operations in Greenbrier as well, and we need to see what that turns out to be when all of this settles down.
And then just secondly on Curragh. Just keen to understand the longevity of any kind of pushback on the expansion there. Is this -- you said it's just a temporary measure. Do we assume the expansion kind of restarts as markets improve? Or is this sort of a 6- to 12-month delay?
No. It's certainly as markets improve. I would imagine that depending on the markets, certainly by the end of the year, we'll be back figuring on capital for the expansion in 2021.
[Operator Instructions] Your next question comes from Sam Webb from Crédit Suisse.
Just stick with the U.S. just quickly. How many of your 750,000 tonnes of inventory have you got left at the end of the quarter? And just to be clear, has the decision actually been made to restart Buchanan and Logan already? And if not, what do you actually need to see to push the button there?
Let me make sure -- I'm not sure that I heard all of the questions. But right now, the inventory is principally -- of the 750,000 tonnes, it's split between Logan and Buchanan, more at Buchanan. I think we've been shipping -- we've been doing some shipping, so I'm not sure what the current inventory is. But my guess is, is that we're in the 300,000-tonne range at Logan, and we're low on high-vol B, I know that, and in the 400,000-tonne range at Buchanan.
And just -- sorry, you must have missed the second part. But the second part was, just so I understand, has the decision actually been made to restart Buchanan and Logan already? And if not, what do you need to see to make that actual decision?
It depends on the inventories -- entirely on the inventories. And it is -- the decision has been made that the mines will restart. We are certainly in the process of working down inventories. We have existing sales. We have, at Logan, more of a book of sales than we have inventory. So they will restart. But exactly when depends on exactly when -- if the inventory can justify the restart. It will be somewhere between the middle of May and the first part of June, the very first part of June, probably more towards the middle of May.
Okay. And then just moving to Curragh and maybe just markets a little. Is there any opportunity to tap China for Curragh coal potentially in this market?
We are doing that. We are developing new inroads with new customers and new regions into China, utilizing the opportunity that has been presented by the repeal of the rebate or the tariffs and the fact that we now have coal of quality that's available to China when we did not before. So we are utilizing that market, and we'll keep most of the market that we develop.
Okay. And then one last one on India. What are your customers telling you there about the speed or lack thereof that they're expecting to come out of their restriction period?
It depends entirely on which customers you talk to. The response varies widely across the piece. The more established mills like Tata can be a bit more exact in what they see in terms of a resurgence than the smaller operations. We sell to all across the range, so we're expecting to see a wide variety of restart procedures and steps taken to restart. When they begin and how fast they progress, not even Tata can tell us.
[Operator Instructions] Your next questioner is Glyn Lawcock from UBS.
Just a few quick ones. We're a month into the June quarter. Have you seen working capital start to improve yet? I understand Ayten said you hope to see it improve over the quarter. But have you seen any improvement to date 1 month into the quarter? The second question is I'm still a little bit unclear just with regards to the U.S. restart. I mean you obviously said it'd restart once market conditions permit, and you've just, in answering the previous question, talked about India. If lockdowns get extended and steel mills keep their blast furnace idle as they've currently telegraphed, does that -- could you still start the U.S.? Or do you need to see relaxation in those blast furnaces that were idled restarted? And with that, have you seen any deferrals from your customers? I know Stanwell coal, small player, yesterday said they won't sell any coal in the month of June due to deferrals. I'm just interested in your comments to that. And then finally, just CapEx. You said a 40% cut to discretionary. You gave guidance of roughly $200 million for the year. I would have thought maybe $120 million sustaining, $80 million discretionary. Does that mean you've really only cut discretionary by about $30-odd million or 40% of the $80 million?
A couple of issues. One, I don't want to start giving immediate debt or headroom readings. But suffice it to say that since the beginning of this quarter, we have gotten comfortable. Ayten has gotten more comfortable, and she's tough to please. So you can take your comfort from that without my being able to give exact numbers to it. As far as the -- go ahead.
No. You're up. Sorry.
As far as the markets go, and let me be sure that I have all of the questions that you mentioned in mind, from the U.S., we of course will ship Buchanan to China. That market is a price-driven market, but it is still robust. We will still ship. We are bolstered by about -- for about 800,000 tonnes of Buchanan and about 2-point -- or about 1.5 million tonnes of Logan with domestic contracts. Those are fixed price. Those are contracts we negotiated in February of last year. Those are going to serve us well compared to the existing market. They're going to serve us very well compared to the existing market. So it's going to be incremental production that goes overseas. We can expect that the incremental production that goes overseas will be challenged. How challenged depends as much on what supply is able to survive this period as what demand is required on part of the European customers.And if you're following the situation in the U.S., you know that a number of U.S. met coal producers shut down supply. They are all working off of inventory or not working at all. And this is likely to continue given the face of this market. This is one of the advantages we have. As others stumble, we can take place -- we can take their place in whatever market is there. And when the markets come back, we can enjoy a favorable position. And I have to admit that I'm not sure I could accurately repeat your last question.
It was on the CapEx, Gerry. If I can answer that one, Glyn, the 40% includes the expansionary CapEx, so the guidance we gave. But if you take the midpoint of that guidance, we've literally taken 40% off that. There's a very small amount that we will be spending on expansion for Curragh, but it's a very small amount. But predominantly, it's come off the expansion and a little bit of the stay in business CapEx.
Okay, Ayten. So roughly, call it, $80 million then?
Roughly, yes. That's exactly right. And if we did need to do more, there is room to move more if we needed.
There are no further questions at this time. I'll now hand back to Mr. Spindler for closing remarks.
Okay. I very much appreciate your dialing in and listening to the first quarter's report. Please stay safe. And we look forward to an improved market. And I know we'll be able to take advantage of it when it occurs. Thank you.