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Corsa Coal Announces Financial Results for Third Quarter 2018

 

 

November 8, 2018 - Corsa Coal Corp. (TSXV: CSO) ("Corsa" or the "Company"), a premium quality metallurgical coal producer, today reported financial results for the three and nine months ended September 30, 2018. 

 

Unless otherwise noted, all dollar amounts in this news release are expressed in United States dollars and all ton amounts are short tons (2,000 pounds per ton).  Pricing and cost per ton information is expressed on a free-on-board, or FOB, mine site basis, unless otherwise noted.


Third Quarter Highlights


Corsa reported net and comprehensive loss from continuing operations of $1.5 million, or $0.02 per share, for the third quarter 2018, compared to net and comprehensive income from continuing operations of $7.5 million, or $0.07 per share, for the third quarter 2017. Net and comprehensive loss from continuing operations for the third quarter 2018 includes $6.7 million of amortization expense of which $2.7 million, or $0.03 per share, resulted from the asset impairment reversal that took place in December 2017.

 

Corsa's adjusted EBITDA(1) was $9.9 million and $8.5 million at its Northern Appalachia division ("NAPP" or "NAPP Division") and on a consolidated basis, respectively, for the third quarter 2018. Corsa's EBITDA(1) was $9.5 million and $6.9 million at its NAPP Division and on a consolidated basis, respectively, for the third quarter 2018.

 

Operating cash flows provided by continuing operations for the third quarter 2018 were $6.5 million, which was consistent with operating cash flows for the third quarter 2017.

 

Total revenue from continuing operations was $61.6 million for the third quarter 2018, a decrease of 2% as compared to the third quarter 2017. The decrease in revenue was attributable to the expiration of a thermal coal contract in December 2017.

 

Corsa sold a total of 455,525 tons of metallurgical coal in the third quarter 2018. On a year-to-date basis, low volatile metallurgical coal sales volumes are up 17% versus 2017 comparable period levels, and total metallurgical sales volumes are up 22% as compared to year-to-date September 2017. This growth has been accomplished despite supply chain disruptions to export terminals and rail service.

 

Corsa achieved an average realized price per ton of metallurgical coal sold(1) at its NAPP Division of $106.99 for all metallurgical qualities in the third quarter 2018. This average realized price is the approximate equivalent of $151 to $157 on an FOB vessel basis(2). For low volatile metallurgical coal sold, Corsa achieved the approximate equivalent of $157 to $162 on an FOB vessel basis(2). Corsa's sales mix for the third quarter 2018 included 40% of sales to domestic customers and 60% of sales to international customers.

 

Cash production cost per ton sold(1) was $77.94 for the third quarter 2018, a decrease of $15.52 per ton as compared to the second quarter 2018. Cash production cost per ton sold(1) increased $7.65 per ton, or 11% as compared to the third quarter 2017.

 

Corsa is at an advanced stage on discussions and expects to refinance or extend the maturity of our term loan beyond the August 2019 maturity date.


Similar to most U.S. metallurgical coal producers, Corsa reports sales and costs per ton on an FOB mine site basis and denominated in short tons.  Many international metallurgical coal producers report prices and costs on a delivered-to-the-port basis, thereby including freight costs between the mine and the port.  Additionally, Corsa reports sales and costs per short ton, which is approximately 10% lower than a metric ton.  For the purposes of this figure, we have used an illustrative freight rate of $30-$35 per short ton.  Historically, freight rates rise and fall as market prices rise and fall.  The low volatile metallurgical coal sales price is approximated at 3-4% above the equivalent metallurgical coal price on an FOB Vessel basis.  As a note, most published indices for metallurgical coal report prices on a delivered-to-the-port basis and denominated in metric tons.

George Dethlefsen, Chief Executive Officer of Corsa, commented, "In the third quarter of 2018 we began to realize returns on the investments made during the first half of the year, and we believe these investments will yield further improvement in the quarters ahead.  Overall, our cash mining costs per ton sold(1) were down 16% in the third quarter 2018 compared to first half 2018 levels.  This improvement in cash mining costs per ton sold(1) in the third quarter of 2018 was the result of experiencing more favorable geology and putting in service newly rebuilt mining equipment at the Casselman mine.  At the Acosta mine, we achieved full production levels and achieved our highest quarterly production rate since beginning the mine.


Low volatile metallurgical coal remains in very high demand both domestically as well as internationally as steel and coke prices remain profitable for producers.  Supply disruptions in the United States and Australia have created a fragile supply situation for metallurgical coal and specifically for the low volatile metallurgical coal that we produce.  Pricing on the US East Coast is at one-year highs and Australian spot prices are up approximately $35.00 per ton, or 20%, since the beginning of the third quarter.  The forward pricing curve now averages around $200 per metric ton FOB Vessel for all of 2019.  This uptick in pricing is expected to positively impact Corsa's fourth quarter 2018 earnings as well as 2019 earnings.  Port congestion on the US East Coast has improved significantly, which will serve to substantially reduce demurrage expenses in the coming quarters.


With the challenging geology at Casselman behind us, the ramp up at Acosta complete, the newly rebuilt underground mining equipment in service, the future reduction in demurrage expense and the increase in pricing we expect further increases in Adjusted EBITDA in the fourth quarter.  We are providing guidance for the fourth quarter 2018 of $11 - $13 million of Adjusted EBITDA.  We expect higher average realized prices and margin expansion to continue through the fourth quarter of 2018 and into 2019, leading to strong free cash flow generation in the quarters ahead.


We continue to aggressively pursue volume growth, given the attractive returns profile of our organic projects.  In the quarter, we upgraded our equipment at the Horning mine, which is now producing a low ash, low sulfur metallurgical coal that is very strategic in our Sales & Trading platform.  Additionally, in the quarter, we upgraded mining equipment at our Casselman and Acosta mines.  We continue to await the issuance of the mining permit for our Keyser project and expect this to be received later this year.  Finally, we have had success drilling around our flagship Casselman mine and expect to significantly increase the reserve life of that mine.


The Company is well positioned for the quarters ahead.  Our face mining equipment rebuild initiative is complete and fully funded, we foresee favorable geologic conditions at our mines and the supply-demand balance for metallurgical coal remains favorable for metallurgical coal producers.  We are well advanced in constructing our sales order book for 2019, having achieved price increases for our domestic orders and building a diversified international customer base with price exposure to both Australian and US-linked indices.  Corsa's customer relationships, preparation plant infrastructure, rail access and coal storage capacity allow for full participation in the seaborne market and significant operating leverage to the rising price environment."


Metallurgical Coal Sales Volume


Corsa's total metallurgical coal sales and low volatile metallurgical coal sales have increased significantly for the nine months ending September 30, 2018 compared to the same period in 2017, as presented below.

 




Corsa's metallurgical coal sales figures are comprised of three types of sales: (i) selling coal that Corsa produces ("Company Produced"); (ii) selling coal that Corsa purchases and provides value added services (storing, washing, blending, loading) to make the coal saleable ("Valued Added Services"); and (iii) selling coal that Corsa purchases on a clean or finished basis from suppliers outside the Northern Appalachia region ("Sales and Trading").  For the nine months ended September 30, 2018, Corsa's sales were broken down into the following categories.


Coal Pricing Trends and Outlook


Over the past quarter market conditions have grown more constructive as there were several notable supply side-issues that constrained an already tight global supply chain.  In addition to near term supply-side challenges, our global customer base expects continued growth in demand going into 2019. In response to supply disruptions and a positive demand outlook, prices have responded with United States East Coast export low volatile metallurgical coal pricing increasing 7% during the quarter and Australian premium low volatile metallurgical coal prices having increased by more than 6% for full-year calendar 2019 contracts. Corsa has been able to benefit from the strong global market by booking sales on indexed pricing mechanisms for the fourth quarter 2018 and into 2019.


Global steel production is up 4.8% year-to-date ("YTD") and, excluding China, the rest of the world grew at 3.7%, according to the World Steel Association data. Chinese steel production grew 5.8% YTD while India is up 6.7% YTD. Global steel capacity utilization is approximately 79% and has been above 70% since early 2017. The strong global steel markets continue to drive a healthy US export market. US steel production is up approximately 4.0% YTD. Most of our domestic customers started the annual procurement process early this year as the global markets continued to tighten. We were able to capture increased sales prices from our domestic customer base while also growing our sales volumes.


We continue to watch rising global freights rates, trade tariffs and the effects of a strong US economy which has made it difficult to find qualified workers throughout the supply chain. US port congestion and rail road performance have been considerable challenges to export shipments this year, but we have witnessed a recent improvement in both areas. Given these points, the forward curve continues to focus on the global supply side risks and we continue to expect a constructive forward price environment.


Stock Options Granted


Corsa also announces that its Board of Directors has granted stock options to purchase a total of 2,692,500 common shares of Corsa to certain directors, officers and employees of Corsa, which grant represents approximately 2.8% of the total outstanding common shares.  These options were granted in accordance with Corsa's Second Amended and Restated Option Plan (the "2017 Plan"), are exercisable for five years at a price of the higher of (a) C$0.90, being the closing price of the common shares on the TSX Venture Exchange (the "TSXV") on November 6, 2018 or (b) the closing price of the common shares on the TSXV on November 9, 2018, being the date following Corsa's "blackout" period in connection with its third quarter 2018 financial statements, and are subject to the terms and conditions of the 2017 Plan and TSXV approval.  Such options will vest one-third on the first anniversary of the date of grant, one-third on the second anniversary of the date of grant and one-third on the third anniversary of the date of grant.


Officers of Corsa were granted an aggregate of 1,195,000 options, Corsa's non-executive directors, other than Robert C. Sturdivant and Kai Xia, were each granted 75,000 options and other employees of Corsa received an aggregate of 1,122,500 options.  Messrs. Sturdivant and Xia are representatives of Corsa's significant shareholder Quintana Energy Partners L.P. and its affiliated investment funds, elected not to receive any options.