Ground Breakers: Met coal miners are switching to thermal to chase higher prices

Coronado Global Resources has opened coal’s earnings season with a massive US$562 million half year profit
The US-Aussie met coal firm is converting steelmaking coal sales to thermal coal to chase higher prices caused by a squeeze on energy supplies
CEO Gerry Spindler says markets are not rewarding met coal companies for “purity of intent”

For a while now a somewhat crazy situation has persisted where thermal coal has fetched a growing premium to steelmaking coal, something which pretty much never happens.

The reversal of fortunes has meant some hard, introspective thinking for those in the industry.

Big miners like BHP (ASX:BHP) and South32 (ASX:S32) have been happy to say their coking coal operations stack up in a greening world given the need for steel in all forms of renewable energy and electric vehicle construction.

But they’ve given the cold shoulder to thermal coal, previously thought to have a challenging demand profile as governments across the globe set targets to reduce their emissions.

Enter a global energy shortage post-Covid and Russia’s invasion of Ukraine and that has changed.

Thermal coal out of Newcastle is paying US$361/t and was until recently fetching upwards of US$400/t. Coking coal futures meanwhile are down around US$215/t, triggering what those in the biz call an arbitrage.

Brands of coking coal that can be shifted to the thermal market will and are being shifted, starting with Coronado Global Resources (ASX:CRN).

The US-Australian coal miner has typically branded itself as a met coal producer with limited thermal output — it’s saying is ‘Steel starts here’.

But that mix is shifting as it looks to supply European power plants which have been reliant on Russian coal and are moving away ahead of a formal ban on imports from the warmongering country tomorrow.

CRN already made a record US$562m profit (up 685%) for its 2022 half-year, announced today, with a strong net cash position of US$171m prompting the company to declare a US$125m half year dividend and US$25m purchase of senior secured notes.

With adjusted EBITDA of US$849m (up 3000%, yeah you read that right) and average coal prices of US$293/t in the first half (up 193%) it stands to reason CRN wants to keep that run going as long as it can.

Steel markets slowing, power market sprinting

Coronado boss Gerry Spindler says he expects markets to revert to historical norms over the medium term.

But for as long as the arbitrage exists Spindler says Coronado will play into it, saying markets are not rewarding strict coking coal producers for “purity of intent”.

“We’re faced with a very unusual circumstance where thermal coal is higher than even the lowest quality of met coal. (It’s a situation) that I’ve really never seen last very long at all, but this one seems to have legs,” he said this morning.

“We have already moved coal into this market. I cannot say how much, but we are beginning to take advantage of this arbitrage and since the arbitrage continues, our ability to take advantage of it continues as well.”

As well as the price differential, Coronado is also increasing its realisations compared to its low ash steelmaking product, because it can ship product with a higher ash content and get greater realisations, with 8t of met coal converting to 10t of thermal coal.

“We’ll do this as long as that arbitrage exists since frankly, there is no reward for not doing it,” he said.

“We continue to see thermal companies at high multiples so the market is clearly not rewarding a met coal company for its purity of intent.

“We’ll continue to do this for as long as it makes sense but it has not changed our fundamental mission.”

Coronado Global Resources (ASX:CRN) share price today:

Copper stocks still on the bounce

Copper prices edged towards US$8000/t, falling US$12 short overnight as rising Chinese copper imports supported demand in the market.

There’s also that big BHP (ASX:BHP) bid for OZ Minerals (ASX:OZL), which has every copper miner looking over their shoulder to see where a potential bid could be coming from.

After a big run yesterday, 29Metals (ASX:29M) shares rose 4.7% this morning, with OZ up early before paring gains to 0.6% or $25.75, still 75c above BHP’s offer price revealed yesterday.

Lithium stocks and Coronado were also strong performers, with Nickel Industries (ASX:NIC) poking its head in with a 6.71% gain after raising over US$200m in debt yesterday to complete financing for its Oracle nickel RKEF project in Indonesia.