3 June, 2022
The Insider: Meet the Fund Manager sessions are a great way to hear directly from leading fund managers. They share their approach to investing, favourite companies and their market view for the year ahead.
Net zero targets are fast approaching, and the fundamentals that these goals are based on have been lagging behind reality. Chronic underinvestment in renewable energy, new electrified manufacturing initiatives and fossil fuels have resulted in a broken coal market.
This scenario presents a strong opportunity, says Capital H Management Founder Harley Grosser, and one that he has suggested Allegiance Coal is capitalising on.
An ASX-listed owner and developer of metallurgical (steel making) coal, Allegiance Coal operates the New Elk coal mine in southeast Colorado and the Black Warrior coal mine in central Alabama, US.
Speaking during his appearance on The Insider: Meet the Fund Manager in June, Mr Grosser said the Australian company could be a “potential cash machine”.
“The numbers for this one, if they hit their targets, are really quite silly,” he said.
Allegiance Coal’s business model revolves around acquiring unloved coal mines and putting them to work, in what is possibly the last bull run for the fossil fuel before it goes extinct.
The company’s acquisition of New Elk came in early 2020, after it had been on care and maintenance since 2012 – when crashing coking coal prices put it out of production.
Metallurgical coal, or coking coal, is a naturally occurring sedimentary rock that is burned during the steel making process – first by itself at 1000 degrees Celsius, then at 2000C with iron ore to create molten ‘pig iron’. Impurities are then removed and alloys are added to create varying grades of stainless steel.
Mr Grosser used cost projections that were “double what analysts are expecting” and an assumption that Allegiance Coal would realise US$350/t during FY23, in order to forecast a forward EV/EBITDA ratio of 0.8 times, forward EV/FCF ratio of 0.9 times and forward free cash flow (FCF) of $290 million.
However, while Allegiance Coal has been endeavouring to sell into markets with higher coal prices, with the assistance of Marco International, it averaged just US$146/t in Q1 FY23.
In a rocky start to a partnership that looked promising, Marco International’s New York-based family office – to which Allegiance owes US$40 million, secured against its producing assets – has decided not to pay the company for its latest coal delivery. This has now forced Allegiance Coal to sell into the spot market and consider legal action.
The fund manager had said the company represented good value because of a “surprise capital raising in October 2021” that drew away attention from ramping up production, which was ultimately delayed.
The capital requirement issues were apparently solved with a $12.2 million convertible note raise from Collins Street Asset Management, but since then the company has opened a $5 million equity facility with Regal Funds Management and recently launched a $33.7 million entitlement offer.
While metallurgical coal is a separate commodity from thermal coal, which is used to create electricity, it is a taxing process on the environment. On average, it takes 770kg of coking coal to create the steel for a midsize car. Accounting for between 7% and 9% of global emissions, steel is the second-most polluting material on the planet behind cement.
A relatively new process called ‘direct reduction’ could be a solution to this, if it is powered with 100% renewable hydrogen – something that has been successfully trialled by innovative Italian hydrogen company Energiron.
Click here to view more videos from Harley Grosser’s The Insider: Meet the Fund Manager session.
Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position. Any advice contained within this presentation is general advice and does not consider your personal circumstances, you should consider whether it is appropriate for you.
The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.
Past performance is not a reliable indicator of future performance.
Meet the Fund Manager
Upcoming Session
Register for an Upcoming Webcast
This exclusive event gives investors unprecedented access to Australia’s leading fund managers to hear about their favourite companies, unique market insights, and the opportunity to ask questions.
This is a live and interactive online session, and participants are encouraged to ask questions. Spots are limited, so secure yours today.
Book into the next session
By clicking submit, I agree to the terms of the Reach Markets Financial Services Guide that includes the Privacy Statement.
Past performance is not a reliable indicator of future performance.
The CEOs of all the companies chosen as Fund Manager favourite stocks are invited to present at our Meet the CEO series. Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets position.
Any advice contained within this presentation is general advice and does not consider your personal circumstance, you should consider whether it’s appropriate for you.
The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.