Rating Action Overview

• In our view, Australia-based coal company Coronado Global Resources Inc. will generate robust positive free cash flow in 2022 following a sustained increase of metallurgical (met) coal prices.
• We forecast Coronado's adjusted gross debt-to-EBITDA ratio at 0.2x-0.3x in 2022 due to the current high prices, and expect the company to be in a net cash position.
• On March 30, 2022, S&P Global Ratings raised its long-term issuer credit rating on Coronado to 'B+' from 'B'. At the same time, we raised the issue rating on the company's senior secured debt to 'BB-' from 'B+'. The recovery rating on the senior secured debt is '2' (85%).
• The stable outlook reflects our view that Coronado will operate with more prudent liquidity levels, maintaining at least US$200 million of liquidity, as well as low absolute debt, while managing its capital investments and shareholder distributions.

Rating Action Rationale

Continued elevated pricing conditions for met coal have delivered robust cash flow, consolidating the recovery of Coronado's financial position.  Supply disruptions have driven met coal prices above US$300 per ton since September 2021, reaching levels above US$600 in early March 2022, compared with about US$100 a year ago. Pricing momentum, sparked by economic recovery from the pandemic impact, has continued due to tight supply conditions stemming from factors including unseasonal weather impacts and the Russia-Ukraine conflict. These macroeconomic trends led us to lift our 2022 met coal price forecast to US$350 per ton from US$250.

Continued strong prices and normalizing met coal production in Australia and the U.S. have delivered robust cash flow to Coronado. The company has effectively deleveraged to be in a net cash position as of Dec. 31, 2021. This compares with an adjusted debt-to-EBITDA ratio of more than 8x in 2020. At an average met coal price of US$350 per ton, we expect Coronado to achieve a gross debt-to-EBITDA ratio of 0.2x-0.3x for 2022.

Coronado redeemed 10% of its US$350 million notes last October. Given the expected strong cash flows for the remainder of 2022, we believe the company is likely to redeem a further US$35 million later this year and internally fund capital expenditure (capex) while keeping its dividend policy of 60%-100% of free cash flow.

Coronado's improved liquidity reflects management commitment to a conservative liquidity policy, providing buffer against periods of low prices.  Strong cash flows have boosted the company's liquidity to more than US$500 million as of Dec. 31, 2021 (US$438 million in cash and an undrawn US$100 million asset-based loan [ABL]). After Coronado survived a liquidity crunch in mid-2021, we believe the company will take advantage of its strong cash position to operate with a more conservative liquidity policy. Coronado is likely to endeavor to retain a minimum of US$200 million in available cash, plus its US$100 million ABL. Such liquidity levels should give the company the buffer to meet its liquidity needs even at low price levels for six to 12 months, depending on how deep and protracted the weakness in met coal prices may be.

Further upward rating momentum is limited due to Coronado's financial sponsor ownership and relatively high fixed cost position. The financial sponsor ownership (The Energy & Minerals Group [EMG] owns 50.4%) and our view that such control creates an inherent skew for aggressive shareholder returns constrain the company's creditworthiness. Our assessment of Coronado's financial risk profile as highly leveraged reflects our view that corporate decision-making will prioritize the interests of the controlling owner, in line with our view of the majority of rated entities owned by private-equity sponsors.

Coronado's cost base is also relatively high so that when prices trend at the 10 year average price of about US$160 per ton or lower, earnings are modest resulting in a natural increase in leverage from present low levels. In addition to royalties, the company's thermal coal supply contract to the Stanwell power station has an obligation to pay volume-based export rebates until 2026. These rebates are linked to reference prices on a 12 month look-back weighted average. We note that despite weak coal prices in the low US$100s per ton in 2020 and 2021, Coronado still had a liability of US$55 million in 2021, exacerbating financial pressure from low coal prices in 2021. This obligation also weighs on cash flows when prices begin to recover, causing a lag in the concurrent improvements in the financial position relative to peers'.

We expect Coronado to utilize its current strong cash flows to reinvest in the business to improve its mining and operational cost position; in particular for its Curragh mine in Queensland, which we expect will provide about 60% of the group's met coal. We assume hard coking coal benchmark price will fall to US$190 per ton in 2023 and US$150 per ton thereafter. Therefore, we anticipate the company will need to lower its operating costs to sustain strong earnings.

Outlook

The stable outlook reflects our expectation that Coronado will maintain robust liquidity and its leverage will not materially exceed 1x through the met coal price cycle.

Moreover, we expect any acquisitions to sustain or improve the company's position on the met coal cost curve without materially weakening credit metrics.

Downside scenario

We could lower the rating on Coronado if the company's liquidity materially weakens, for example if total liquidity falls to less than US$200 million (including the undrawn ABL of US$100 million).

Rating pressure could also arise if Coronado's leverage stays materially above 1x (after netting cash balances above US$200m) over the longer-term price cycle. This could occur if the company's:

• Operating performance deteriorates, which leads to material negative free cash flows, likely due to a sharp deterioration in coal prices; or
• Capital deployment is more aggressive than we forecast, such as from higher capex, large dividend distributions, or large-scale debt-funded acquisitions that erode available liquidity and increase gross debt levels.

Upside scenario

We consider rating upside to be limited.

Any rating upside would likely be reliant on Coronado materially improving its business position, including significantly reducing its break-even costs across its portfolio, while maintaining conservative leverage. A moderation of the influence of the financial sponsor EMG through a material decrease in its shareholding would also be required for any positive rating action.

Company Description

Coronado and its subsidiaries produce, market, and export metallurgical coal. The company 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. Coronado sells its products to the U.S., India, Japan, Korea, Europe, Australia, Taiwan, China, and Brazil. In addition, the company produced some thermal coal, representing about 30% of production from its Australian operations; in 2021, about 5% 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 50.4% of its equity held by EMG, a private equity firm, through its ownership of Coronado Group LLC. The remaining 49.6% of equity is widely held.

Our Base-Case Scenario

Assumptions

• U.S. GDP growth of 3.2% in 2022;
• India GDP growth of 7.8% in 2022;
• Japan GDP growth of 2.4% in 2022;
• S&P Global Ratings' Australian Newcastle HCC price assumptions (free-on-board basis) of US$350 per ton for the remainder of 2022, and declining to US$190 per ton in 2023;
• Export sales volumes of about 9 million tons (mt)-10mt for the Australian operations, about 3mt of thermal coal supply to Stanwell Corp., and 6.0mt-6.5mt of sales from U.S. operations in fiscal 2022;
• S&P Global Ratings' exchange rate assumptions of Australian dollar to U.S. dollar of about US$0.75 in 2022;
• Capex of US$170 million to US$190 million in 2022 and
• Cash dividends of US$150 million payable for 2021 and a first half fiscal 2022 dividend payable in the second half of 2022 in line with the policy of 60%-100% of free cash flow.

Based on these assumptions we expect Coronado's ratio of S&P Global Ratings adjusted gross debt to EBITDA to be about 0.25x in 2021, reflecting EBITDA of about US$1.6 billion. Given the strong earnings we expect that on a net basis, Coronado will remain in a net cash position for 2022.

Liquidity

We assess Coronado's liquidity as adequate. The ratio of sources to uses of liquidity should be greater than 1.2x over the 12 months ending Dec. 31, 2022, and sources less uses will be positive even if EBITDA declines by 15%.

To support liquidity, and in line with a more prudent approach to managing liquidity, Coronado will likely maintain a minimum level of US$300 million of liquidity including US$200 million cash and the undrawn asset based loan facility.

As of Dec. 31, 2021, Coronado had the following sources and uses of liquidity over the next 12 months:

Principal liquidity sources:

• About US$438 million in cash holdings;
• US$100 million in undrawn asset-based loan facilities;
• Forecast cash funds from operations of about US$1 billion.

Principal liquidity uses:

• Capex of up to US$190 million; and
• Cash dividends of US$150 million payable for 2021 and a first half fiscal 2022 dividend of at least a similar amount.

Environmental, Social, And Governance

E-4, S-3, G-3

Notwithstanding the rating upgrade, environmental factors are a negative consideration in our credit rating analysis of Coronado. While the company primarily focuses on met coal production, we expect it to face similar climate-transition risks over the longer term as thermal coal companies given the greenhouse gas emission intensity of its products. Accordingly, adherence to strict and evolving environmental regulations will remain a key rating driver.

Social factors are a moderately negative consideration given the inherent risks in Coronado's workplaces, noting that the company has experienced periodic fatalities notwithstanding an overall improving trend in its injury rates that is more comparable to peers'. Coal mining is also a major source of economic activity in the regions where the company operates, underpinning the need to maintain strong community relationships.

Governance is also a moderately negative consideration given EMG has a controlling ownership share in Coronado.

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$315 million in senior secured notes, and about US$46 million in cash collateral for bank guarantees as of Dec. 31, 2021.
• Our 'BB-' 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$370 million, reflecting US$74 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: 2026
• Emergence EBITDA: US$74 million
• Valuation multiple: 5x
• Gross enterprise value (EV): US$370 million

Simplified waterfall

• Net enterprise value (gross enterprise value less 5% administrative costs): US$352 million
• Priority claims (asset-based loan): US$62 million
• Remaining enterprise value: US$290 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: Positive (+1 notch)

Stand-alone credit profile: b+

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