Investing.com -- S&P Global Ratings has downgraded Coronado Global Resources Inc.’s long-term issuer credit rating from ’B+’ to ’B’ and its long-term issue rating on the company’s senior secured debt from ’BB-’ to ’B+’. This decision is due to the weak metallurgical coal prices and the company’s high cost base, which is negatively affecting Coronado’s profitability, cash flow, and liquidity. The negative rating outlook reflects the possibility of coal prices remaining below expectations while Coronado’s mining costs remain high, potentially accelerating the company’s cash burn over the next six months.

Coronado is unlikely to generate positive cash flow at current market prices due to its high cost position and capital expenditure (capex). For fiscal 2025, the company’s cost guidance implies a marginal cost improvement. However, operational and weather setbacks in 2024 have hampered its ability to meet its original guidance.

Coronado’s mining cost is expected to be around $100 per metric ton, which exposes the company to the recently revised Queensland royalty regime. This means the company will be paying royalties at coal price levels for which it is not profitable. The company’s Curragh mine is expected to stabilize mining costs, but material improvements are not expected until 2026.

Coronado is undertaking expansion projects at its Mammoth underground mine and Buchanan mine, which are expected to increase production through 2025. These projects are expected to lift volumes by up to 2.5 million metric tons per annum once fully ramped up. However, the company is expected to spend between $230 million and $270 million in 2025 to bring these projects to fruition.

The Curragh mine is facing financial challenges due to the company’s Stanwell supply agreement, which requires the mine to supply about 3 million metric tons per annum of thermal coal to the Stanwell power station at deeply uneconomical prices. The supply agreement is expected to expire in early 2027, which will then improve the company’s profitability.

Coronado’s credit metrics are expected to remain elevated over the next 12-24 months due to weak coal prices. In fiscal 2024, Coronado had a debt to EBITDA ratio of 5.2x, significantly higher than the expected 2.7x. The company may have marginally negative EBITDA in fiscal 2025, assuming an average price of $200 per metric ton.

Coronado’s liquidity could weaken over 2025 and breach the key rating support level of $200 million due to the uncertain recovery in met coal prices and negative operating cash flow. This could erode the company’s cash balance over the coming months. Liquidity could come under further pressure if the company cannot extend bank covenant waivers for its $150 million asset-based loan facility.

Despite these challenges, Coronado’s financial sponsor, The Energy & Minerals Group (EMG), could potentially provide funding support to preserve the valuation uplift from the expected increase in profitability when the Stanwell contract expires in early 2027. EMG had previously provided equity support in 2021 during a restructuring of Coronado when coal prices crashed.

S&P Global Ratings could lower the rating if Coronado’s liquidity weakens or if its operating performance deteriorates, leading to persistent negative free cash flow. The outlook could be revised to stable if Coronado improves its profitability such that it can maintain positive operating cash flow and its liquidity position. This could occur if the company can improve operating costs and coal prices broadly recover.

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