A ‘Materially’ Different Take on Infrastructure: Betting Big Behind the Scenes on Coronado Global Resources (CRN.ASX) +20% in 2 Weeks with More to Come!

According to the Global Infrastructure Hub USD$3.3 trillion will be spent on infrastructure within the next ten years. Of this amount, over USD$420 billion is earmarked for rail, USD$71billion will be spent on building new / upgrading existing ports and USD$1.1 trillion will go towards building out the energy grid.2

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Interestingly, the consensus is that these figures aren’t anywhere near enough, with an identified global gap of USD$600 billion between now and 2030 across all major infrastructure sectors.

In an environment of low interest rates, low productivity growth and an unequivocal need to ‘grow our way out’ of the economic havoc unleashed by COVID-19, it is fair to say that this gap will attract the attention of policy makers keen to get back on the front foot.

But how best to invest in this thematic? Where’s the overlooked opportunities available right
here and now?

Looking behind the curtain:

One way to go about this is to take a step back and look behind the scenes – what type of inputs are common to the majority of infrastructure projects that are already in the pipeline (pun intended!)?

The obvious answer to this is steel. To make steel the two main inputs needed are iron ore (which has undergone a significant upward re-rating, even during the COVID-19 pandemic) and metallurgical coal (which hit a four year price low only a few months ago and, for the first time in 10 years, traded at a discount to iron ore).

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Figure 1: Metallurgical Coal Prices

Naturally, metallurgical coal, on a pure pricing basis, looks attractive and, following June’s lows the price has rebounded strongly to approximately USD$118 per ton, with futures contracts indicating a further uptick to over USD$150 per ton by Q1 CY 2021.

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Figure 2: Key Features of Metallurgical Coal3

So how can investors gain exposure to metallurgical coal?

Most of the mid to large listed coal mining companies on the Australian Stock Exchange (ASX) offer thermal coal exposure with just a little metallurgical coal as a byproduct. Coronado Global Resources (Coronado) is the only Australian producer that offers an almost pure play metallurgical coal exposure (>80% of coal production being metallurgical coal).
The distinction between the two types of coal is important.

Whilst many private and institutional investors have shunned thermal coal in recent times the same can’t be said for metallurgical coal – indeed, one of the biggest institutional shareholders of Coronado is Australian Super, the largest industry superannuation fund in the country!

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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.

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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.

1. 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.

1. Operational Excellence

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.

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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About the Collins St Value Fund

The Collins St Value Fund brings a distinctively different approach to the management of Australian equities.

Boutique by design, bespoke by nature. The Collins St Value Fund is:

• Always seeking to challenge the status quo in the delivery of superior investor outcomes, with a focus on capital preservation first and foremost. This can lead us towards quite a unique portfolio of investments which, over time, have been underpinned by a range of bespoke convertible note, take-over arbitrage, special dividend and management buy-out investments, alongside
  unconstrained access to any ASX listed stock.
• Genuinely high conviction and does not attempt to be ‘all things to all people’. The number of portfolio positions is typically between 8 – 20 and we are not afraid of putting up to 10% into an idea regardless of where it sits in the All Ordinaries Index. We believe superior returns are best achieved with deep and differentiated insights into a small number of stocks – after all, the wider the research and more diverse the holdings the more ‘index’ like returns you can expect.
• Passionately unconstrained. True value knows no boundaries and a true investor should be free to pursue them, wherever in the market they may be found. The Fund has, in the past, taken significant exposures to Gold, Uranium, selected Pharmaceutical stocks and niche Property Services and Infrastructure companies, whilst maintaining the freedom to allocate to Cash in the absence of an otherwise compelling opportunity.
• Truly aligned. Investors in the Fund need to make money before our business does. If your investment does not increase in value we receive no management fees, it’s that simple. The complete absence of any fixed management fees incentivises both capital preservation and careful management of capacity.

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