Rating Action Overview
- We forecast Australia-based coal company Coronado Global Resources Inc. will generate robust positive free cash flow in fiscal 2021 and likely into fiscal 2022, after a sustained rebound of metallurgical (met) coal prices.
- We forecast the company's adjusted debt-to-EBITDA ratio to be about 0.7x-1x this year before consolidating at about 0.9x-1.2x in 2022 as we expect current high prices to ease.
- On Nov. 18, 2021, S&P Global Ratings raised its issuer credit rating to 'B' from 'B-'. At the same time, we raised the issue-level rating on the company's senior secured debt to 'B+' from 'B'. The recovery rating on the senior secured debt is '2' (85%).
- The stable outlook reflects our view that Coronado will continue building a liquidity buffer during the current period of elevated met coal prices while managing its capital investments and shareholder distributions.
Rating Action Rationale
Strong met coal pricing conditions have supported a swift recovery in Coronado's financial position, and we anticipate these conditions will facilitate robust cash flow generation for the next six months at least. Ongoing global industrial demand recovery and coal supply tightness with China's import ban on Australian coal have led to sustained met coal prices above US$250 per ton (t) since the beginning of September 2021. The premium low volatile Australia benchmark prices averaged about US$265/t in the third quarter of 2021. We expect the fourth quarter average to remain at elevated prices given prices in October were about US$400/t. Strong prices coupled with normalizing production in Australia and the U.S. should help the company's revenue recover significantly in the second half of 2021, with upside forecast into 2022. As Coronado's operating cash flow is highly sensitive to pricing changes, we anticipate that favorable pricing and efficiency initiatives should support US$300 million to US$330 million of free cash inflow in fiscal 2021. Coronado's leverage ratio, as measured by adjusted debt to EBITDA, could therefore deleverage to about 0.7x-1x in 2021 from 8.9x in 2020.
In our view, Coronado's liquidity position has materially improved, and management is committed to upholding a more conservative approach to liquidity management. Coronado's improved liquidity position has allowed the company to redeem 10% of its US$350 million senior secured notes. The company redeemed these notes at a redemption price of 103% of the principal amount of the notes, plus accrued and unpaid interest on the notes. Thus, US$315 million of the notes remain outstanding. Liquidity is supported by Coronado maintaining its undrawn US$100 million asset-based loan. Furthermore, the company announced a sale of its idled asset, Amonate, for US$30 million, which supplements the solid operating cash flow for fiscal 2021.
Further upward rating momentum is dependent on re-investment into the business to support resiliency against low pricing coupled with capital management discipline We expect a strong finish to fiscal 2021, which will in turn reverse the liquidity crunch in the first half. Consequently, we anticipate that Coronado will likely distribute dividends for the full year ending Dec. 31, 2021. Our analysis includes cash dividend payments of about US$180 million to US$200 million in fiscal 2022, reflecting the bottom end of the company's dividend policy of 60%-100% of free cash flow. We forecast Coronado to maintain robust levels of cash on balance sheet after making these distributions.
Our price assumptions for 2022 have the hard coking coal benchmark falling to US$170/t for the year, then down to US$140/t thereafter. At these prices we believe management will prioritize capital investment in the business to improve operational efficiencies and lower operating costs to improve resiliency against low prices. Even so, we expect the company to maintain a disciplined approach to capital management such that new investments would not stress the company's liquidity.
We note that Coronado has negotiated U.S. domestic annual contract prices across all grades of met coal products of about US$187/t (free-on-rail basis) for fiscal 2022. These fixed price and tonnage contracts cover about 32% of annual U.S. production and 92% of all U.S. operating costs. In our view, these prices are strong outcomes for Coronado and will support cash flow certainty in the event of falling benchmark prices, which would affect cash flow from the wider the business.
Outlook
The stable outlook reflects our view that the company will maintain a moderate liquidity buffer and financial discipline toward capital management activities. This should allow management operational flexibility if the external operating environment deteriorates.
Downside scenario
We could lower the rating on Coronado if:
- Its operating performance deteriorates, and leads to material negative free cash flow, likely due to a sharp reversal of the coal price trend; or
- The company is more aggressive in capital deployment than we forecast, by using for instance higher capital expenditure (capex), considerable dividend distribution, or conducting a large-scale debt-funded acquisition, thereby eroding sources of liquidity.
Upside scenario
Rating upside depends on an improvement in operating costs to better absorb lower prices, a commitment to conservative financial policies and ample liquidity to comfortably withstand bouts of sustained low prices. This would likely require a commitment to adjusted debt to EBITDA less than 1.0x during benign market conditions.
Company Description
Coronado and its subsidiaries produce, market, and export metallurgical coal. It owns a portfolio of operating mines and development projects, including the Curragh mine complex in the Bowen Basin of Queensland, Australia; and the Buchanan, Logan, and Greenbrier mine complexes in the Central Appalachian region in Virginia and West Virginia, U.S. The company sells its products to the U.S., India, Japan, Korea, Europe, Australia, Taiwan, China, and Brazil. In addition, in fiscal 2020 the company produced some thermal coal, representing about 30% of tons produced by its Australian operations; and about 7.6% of group revenues were from thermal coal sales. Coronado was founded in 2011 and is headquartered in Brisbane, Australia.
Coronado is a publicly traded company (ASX: CRN) with 50.1% of its equity held by Energy & Minerals Group, a private equity firm, through its ownership of Coronado Group LLC. The remaining 49.9% of equity is widely held.
Our Base-Case Scenario
Assumptions
- U.S. real GDP growth of 5.7% in 2021, followed by 4.1% growth in 2022;
- India real GDP growth of 9.5% in 2021, followed by 7.8% growth in 2022;
- Japan real GDP growth of 2.3% in 2021, followed by 2.2% growth in 2022;
- South Korea real GDP growth of 4% in 2021, followed by 2.8% growth in 2022;
- S&P Global Ratings' Australian Newcastle hard coking coal price assumptions (free-on-board basis) of US$250/t for the rest of 2021, and declining to US$170/t in 2022;
- Export sales volumes of about 9 million tons (mt)-10mt for Australian operations, about 3mt of thermal coal supply to Stanwell Corp., and about 5.5mt-6.5mt of sales from its U.S. operations in fiscal 2021;
- S&P Global Ratings' exchange rate assumptions of Australian dollar to U.S. dollar of about US$0.73 in 2021 and US$0.74 in 2022;
- Adjusted group EBITDA margins of 20%-25% in fiscal 2021 and fiscal 2022, driven mainly by improved prices;
- Stay in business capex of US$135 million to US$155 million; and
- US$180 million to US$200 million in cash dividends in fiscal 2022.
Based on these assumptions we expect the company's S&P Global Ratings adjusted debt to EBITDA to be about 0.7x-1x in fiscal 2021 with free cash flow generation of about US$300 million to US$330 million. We forecast debt to EBITDA to stay at about 0.9x-1.2x in fiscal 2022, supported by solid free cash flow generation offsetting the dividend payments assumed to be paid in fiscal 2022.
Liquidity
We assess Coronado's liquidity position as adequate, including sources over uses of liquidity greater than 1.2x over the next 12 months, and sources less uses will be positive even if its EBITDA declines by 15%.
Although the company's liquidity position has much improved, we still believe it could be difficult for the company to absorb a high-impact and low-probability event without refinancing. We do not include proceeds from uncontracted noncore asset sales and other initiatives in our base case; however, completion of such activities would support Coronado's liquidity.
As of Sept. 30, 2021, we expect Coronado to have the following sources and uses of liquidity over the next 12 months:
Principal liquidity sources:
- About US$196 million in cash holdings;
- US$100 million in undrawn asset-based loan facilities;
- Cash funds from operations of about US$380 million to US$410 million; and
- US$30 million from the sale of Amonate.
Principal liquidity uses:
- Stay-in-business capex of about US$135 million to US$155 million;
- About US$37 million to meet redemption of senior secured notes; and
- US$180 million to US$200 million in cash dividends.
Issue Ratings - Recovery Analysis
Key analytical factors
- Coronado's capital structure consists of a US$100 million asset-based loan facility maturing in 2024, US$350 million in senior secured notes, and about US$77 million in cash collateral for bank guarantees as of Sept. 30, 2021. We note that Coronado has redeemed US$35 million of its senior secured notes in November 2021, thus, US$315 million are outstanding.
- Our 'B+' long-term issue rating and '2' recovery rating on the senior secured notes indicate our expectation for substantial recovery (70%-90%; rounded estimate: 85%) for noteholders in case of payment default.
- Our simulated default scenario contemplates a prolonged downturn in international met coal prices due to an oversupply of met coal in the market or a meaningful decrease in demand for the product. As a result, the company would idle certain operations and continue to fulfil its fixed obligations, which will lead to deteriorating liquidity and subsequently a default in 2024.
- We assess recovery prospects based on a going-concern value of about US$365 million, reflecting US$73 million of emergence EBITDA and a 5x multiple. The 5x multiple is consistent with that for industry peers.
- At the time of default, we assume Coronado's US$100 million asset-based loan is 60% drawn.
Simulated default assumptions
- Year of default: 2024
- Emergence EBITDA: US$73 million
- Valuation multiple: 5x
- Gross enterprise value (EV): US$365 million
Simplified waterfall
- Net enterprise value (gross enterprise value less 5% administrative costs): US$346 million
- Priority claims (asset-based loan): US$62 million
- Remaining enterprise value: US$285 million
- Total senior secured claims at default: US$332 million
- Recovery expectation: 70%-90% (rounded estimate: 85%)
Note: All debt amounts include six months of accrued but unpaid interest at default.
Ratings Score Snapshot
Issuer Credit Rating: B/Stable/--
Business risk: Weak
- Country risk: Very low
- Industry risk: Moderately high
- Competitive position: Weak
Financial risk: Highly leveraged
- Cash flow/Leverage: Highly leveraged
Anchor: b
Modifiers
- Diversification/Portfolio effect: Neutral
- Capital structure: Neutral
- Financial policy: FS-6
- Liquidity: Adequate
- Management and governance: Fair
- Comparable rating analysis: Neutral
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
| Upgraded | ||
|---|---|---|
| To | From | |
|
Coronado Global Resources Inc. |
||
| Issuer Credit Rating | B/Stable/-- | B-/Stable/-- |
|
Coronado Finance Pty Ltd. |
||
| Senior Secured | B+ | B |
| Revised | ||
| To | From | |
|
Coronado Finance Pty Ltd. |
||
| Senior Secured | ||
| Local Currency | B+ | B |
| Recovery Rating | 2(85%) | 2(80%) |
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Victor Lai, CFA, Melbourne + 61 3 9631 2008; victor.lai@spglobal.com |
| Secondary Contact: | Richard P Creed, Melbourne + 61 3 9631 2045; richard.creed@spglobal.com |
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