Coronado abandons merger talks with Peabody, flags moving into thermal coal on its own

Whether it’s a knee-jerk reaction or not remains to be seen, but the market is clearly more upset about a ‘no dice’ decision by Coronado Global Resources (ASX: CRN) on a proposed merger with New York-listed coal pure-play Peabody than it was last week's downgraded full-year guidance.

But to be fair, for the first nine months of 2022 Coronado reported group revenue of $US2.85bn – more than double the previous year’s US$1.374bn.

Coronado’s shares, which have been on a tear since late September, were down around -5% in early afternoon trade after the met (aka or coking) coal producer abandoned plans to create what would have been a $9bn powerhouse by merging with Peabody.

To the uninitiated, Peabody – which Peabody is the biggest coal producer in the US - has a portfolio comprising both thermal and metallurgical coal mines in Australia and the US.

4Q plans won’t be impacted

Meantime, Coronado’s management was quick to reassure investors the group will continue to pursue and implement its existing capital management plans, and that today’s announcement will in no way impact Coronado’s fourth quarter plans.

Cashed-up Coronado, which operates Queensland’s Curragh mine, and Buchanan and Logan mines in the US, has not explained on why merger talks were ditched.

But had the company been fully committed to this merger in the first place, it may not have been so keen to declare a special dividend in last week’s quarterly report.

Market whispers suggest Coronado may have become sensitive to suggestions that a takeover deal by Peabody - comprising scrip instead of cash - especially given its exposure to thermal coal, would have been ‘on the nose’ to a lot of shareholders.

Ironically, Peabody management has flagged plans to re-weight long-term production and revenue towards coking coal.

Foray into thermal coal

However, in what appears to be an about-face on previous strategy of focussing solely on coking coal for steel making, Coronado is now hinting at plans to move into thermal coal on its own.

Having previously lamented investor reluctance to reward Coronado for steering clear of the contentious fossil fuel, Coronado’s CEO Gerry Spindler also reminded the market that thermal coal - which is currently commanding unusually high prices for Australian producers - may be more valuable for an extended period.

“Right now ... thermal coal is priced above met coal, something we haven’t seen for this length of time in as long as I can remember and something that seems to have persistent legs,” Spindler noted last week.

“It evidently is not in any way, shape or form in the interest of our shareholders to simply take the view that we are not going to participate in the thermal coal market.”

What brokers think

Coronado’s share price is up 65% over 12 months.

Consensus on the stock is Strong Buy.

Goldman Sachs maintains a Buy and target price of $2.20.

Based on Morningstar’s fair value of $2.91 the stock appears to be undervalued.

Based on the four brokers that cover Coronado (as reported in by FN Arena) the stock is currently trading with 15.7% upside the target price of $2.47.

Coronado Global Resources share price over 12 months.