Last month, Moody’s Investor’s Service downgraded Conuma’s corporate family rating from B3 to Caa1. B3 is “obligations considered speculative and subject to high credit risk,” while Caa1 is “very high credit risk.”
Moody also downgraded “its probability of default rating to Caa1-PD from B3-PD and its senior secured notes rating to B3 from B2.”
More importantly, the outlook for the company was changed from stable to negative. “The downgrade of Conuma’s ratings and negative outlook reflects the company’s weak liquidity position and potential refinancing challenges, with its credit facility due in October of this year and notes in May 2023” said Jamie Koutsoukis, Moody’s analyst.
According to the report, Conuma’s credit profile is “constrained by 1) weak liquidity with near term refinancing risk, 2) material free cash flow sensitivity to price (about $40 million per $10 change in met coal price expected in 2022), 3) little financial flexibility because of aggressive financial management together with operational underperformance, 4) execution risk of increasing production from 3 million tonnes back to 4 million tonnes in 2022 and new pit development, and 5) a relatively small production base (3 million tonnes for the twelve months ending September 2021) of one product (met coal) at three coal mines in one area of northern British Columbia.”
Of course, the news is not all bleak. According to Moody’s, Conuma benefits from “1) a favorable mining jurisdiction (Canada), and 2) its location near rail and port infrastructure, allowing it to easily sell on the seaborne market.”
Conuma’s performed better financially in 2021 than in 2020, but “low coal production and increased capital spending has left the company with limited liquidity.”
This is not an inditement of the company, but a caution for investors. The company’s net income (or earnings before interest, taxes, depreciation and amortization) has gone from $1-million in 2020 to $85-million between Sept 2020 and Sept 2021. However, this is far lower than 2019’s net income of $268 million.
“Moody’s expects Conuma’s operating results to continue to improve through 2022 as the company benefits from strong metallurgical coal pricing and expected higher production.”
In October 2020 Conuma closed a CAD120 million credit facility (the Large Employer Emergency Financing Facility “LEEFF Facility”) with Canada Enterprise Emergency Funding Corporation, a federal government agency, and has used $25.5 million of the $25 million it has available. This means that Conuma doesn’t have a lot of cash on hand, and as a result says Moody, “the company will be reliant on cash flow from operations to manage its short-term working capital needs.” And this lack of cash on hand is one of the biggest reasons for Moody’s downgrade of the company.
Trent is the publisher of Tumbler RidgeLines.
