Updated Coverage of Bowen Coking Coal (ASX: BCB)

January 4, 2024

We have updated our coverage of Bowen Coking Coal (ASX: BCB).

The company has emerged as a Queensland, Australia based coking and thermal coal producer with a current capacity at its flagship Burton Complex operation of 2.75Mtpa raw coal and can expand to 5.5Mtpa raw coal at a very low cost. The response to the Climate Emergency is likely to drive above trend demand for carbon reduced steel so the world is likely to need coking coal for the next 100 years or more, and thermal coal is likely to have a big role in emerging countries for decades.

Bowen is steadying the ship after a very rough 12 months, however its new mines are performing to expectation. Broadmeadow East has performed to expectation, and with the Ellensfield South mine at the Burton complex coming online, we believe the company is now on a firm operational footing. We expect that additional development cost will be covered by cash flow. Based on our near-term coal price forecast, Bowen will be able to fund the expansion to 5.5Mtpa ROM or 3.6Mtpa saleable product, almost doubling free cash flow.

Evidence of strong operational cash generation should be in clear view in the March 2024 quarterly report due around 25 April 2024, and early evidence should be contained in the December 2023 quarterly report due around 29 January 2024. The December Quarter will include payment of costs built up in previous quarters which have to be separated from ongoing operating costs. EBITDA is expected to be A$30-40M per quarter depending on coal prices at current capacity of 2.4-2.7Mtpa ROM.

The quarterly is also likely to demonstrate that the company’s mines are producing as expected, and that operating costs and capital spending are becoming predictable, as are the prices Bowen is achieving relative to coal benchmark prices. Greater predictability means less risk for investors and a higher market rating flowing to a higher share price.

Commitment to the expansion to 5.5Mtpa adds long term cash flow and coal price leverage, but adds short term risk in the event of a sharp fall in coal prices. We do not see expansion as a necessary condition to share price performance and delaying expansion to build a cash buffer is a strategy worth considering.

Our base case valuation assumes no further share issuance other than conversion of existing warrants, options and performance rights and US$280/t Hard Coking Coal and AUDUSD 0.66 which generates a valuation of A$0.21/sh. On consensus price expectations of US$210/t, the valuation is negative, suggesting the market is ignoring consensus, but still reluctant to fully embrace the price levels of the last three years. IIR expects that reluctance should fade as the market becomes more confident in higher prices for coal long term.