Gerry Spindler, the straight shooting chief executive of IPO hopeful Coronado Coal, says investors who want a window into the direction of metallurgical coal prices should look to the big price Rio Tinto received for its big coking coal mines earlier this year.
Coronado will look to raise between $1.2 billion and $1.4 billion in the biggest float of the year, and the biggest mining float in the world for some time.
The company shot to prominence in Australia in late 2017, when it paid $700 million to buy the Curragh mine in Queensland’s Bowen Basin. When it lists next month, Coronado will have a market value of between $3.8 billion and $4.4 billion.
The company has forecast earnings before interest, tax, depreciation and amortisation of $US737 million in the 2019 financial year, based on a price estimate of $US176 a tonne from consultancy Wood Mackenzie.
But that would lift to $US959 million on the current spot price of $US205 a tonne. So the question of for fund managers is: Where does that price head now?
Speaking on Monday as the prospectus for the float of Coronado was released, Spindler said he believes the $US2.25 billion sale of the Kestrel mine in Queensland in March would need a coking coal price of about $US185 a tonne given the price paid.
“I take that as learning opportunity,” he says.
“I am willing to believe that others who know the price environment better than I do have continued faith it will remain that high.”
Spindler’s own outlook sees the coking coal price remaining above $US170 a tonne at least until 2021.
While that view is informed by the continued strength of demand from China, and a pick up in demand from Europe and the United States, Spindler also believes the supply picture will remain tight.
There is relatively little new supply in the pipeline, and the veteran believes what projects are slated are likely to face problems.
“There is a real dearth of recent investment on the supply side for metallurgical coal.”
Coronado is the world’s fifth biggest producer of metallurgical coal, with 76 per cent of its annual output of 20.2 million tones coming from coking coal. In addition to Curragh, Coronado has three coal mines in the US: Buchanan, Logan and Greenbrier projects in the states of Virginia and West Virginia.
Spindler and Coronado, which is backed by Houston-based private equity firm EMG, have worked hard to make this proposition as easy as possible for local investors.
This is fairly simple business that digs coal up at its four mines for between $US49 a tonne and $US88 a tonne (cash costs, freight on board, excluding royalties) and then sells it to regional producers.
The thermal coal the company produces goes to the Queensland Government’s Stanwell power station, under an agreement that has been extended until 2037 in time for the float.
The company will pay out 100 per cent of its free cash flow from the time of the float to the end of calendar 2019, and will then target a dividend policy between 60 per cent and 100 per cent from cash flow after the 2019 financial year.
That implies a 2019 financial year dividend yield of between 10.3 per cent and 12.4 per cent – which is one reason EMR intends to hang on to its post-float stake of 69.1 per cent, Spindler says.
“They like the ideas of continuing to hold the shares.”
As with all floats, this one will come down to price. Coronado’s shares, which will trade as CHESS Depository Interests and will trade between $4 and $4.80 a share.
That implies a multiple of 3.7 times to 4.4 times 2019 earnings, on an enterprise value-to-EBITDA basis.
The likely local point of comparison, Whitehaven Coal – which, it should be noted, sells mostly thermal coal, not met coal – is trading on and 2019 multiple of 5.3 times, according to Bloomberg.