Following the release of Contura's (OTCPK:CNTE) third-quarter financial report on November 29th and a conference call with management on December 5th, we have summarized the relevant information as an update to our initial recommendation on Contura.
Contura released its first set of financial information on November 29. The financials covered the period of July 26 to September 30, the date that the company began operations. For the stub period, Contura generated EBITDA of $25.6 million and free cash flow $20.9 million. The company also disclosed production and margins for each of its operating divisions. These results were generally in line with our estimates based on extrapolating the two-month stub versus preliminary guidance and other operational information provided during bankruptcy. The financial statements also confirmed a total of 10.3 million shares outstanding and net debt of $246 million (exclusive of restricted cash).
Of greater significance for valuing Contura on a go-forward basis, the company introduced formal 2017 guidance in its press release and updated investor presentation. We have reproduced the guidance in the attachment.
Coal Market Update
The seaborne coking coal market continues to show resiliency, with spot benchmark for hard coking coal FOB Australia currently at $300/tonne and High Vol A destined for Europe approximately $250/tonne (FOB east coast). Negotiations are currently underway for the Q1 contract settlement, and we understand that the bid/ask spread to be $250-$300/tonne as compared to $200/tonne that was settled in Q4. In addition, over the last month, a number of commodity analysts have increased their 2017 average met coal prices, with many settling between $185 and $200/tonne, a level that is still well below spot prices. We would note that the forward curve for 2017 is currently $192 and for 2018 is $160.
Based on the mid-point of the guidance provided by the company, we estimate 2017 summary financials assuming $130/t realized met coal (well below the forward curve) as well as spot pricing. Please see the attachment for more detail.
Valuation & Upcoming Catalysts
For the purposes of calibrating our Contura valuation, we believe that a comparison to Arch Coal (OTC:ARCH) to be the most meaningful given i) similar production mix of met and thermal coal and ii) the fact that both companies recently emerged from bankruptcy protection. Based on the table below, we estimate that Contura is trading at a material discount to ARCH on an EV/EBITDA and FCF Yield basis. Applying similar valuation parameters as ARCH would imply a share price of approximately $120 per CNTE share (assuming a realized met coal price of $130 per ton). Using a broader comp set highlights an even greater discount.
We believe that there are a number of pending catalysts that will serve to close the valuation gap between CNTE and ARCH as well as other peers. Specifically: 1) Pending listing on a recognized exchange, given demand registration rights become effective February 1; 2) management focus on investor relations, as evidenced by recent conference call and detailed investor presentation; 3) mainstream research coverage; 4) filing of audited financial statements by the end of February; and 5) coal settlement prices for Q1.
Disclosure: I am/we are long CNTE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.