Conuma Coal Resources Limited Issuer Credit Rating Lowered To 'CCC+' From 'B' On Liquidity Concerns; Outlook Negative

  • We believe Conuma Coal Resources Ltd. faces heightened risk of a liquidity shortfall given its negligible cash position and credit availability.
  • The emergence of COVID-19 and S&P Global Ratings' expectation for a global recession are key risks to Conuma's near-term cash flow and liquidity position.
  • We now believe Conuma is vulnerable to near-term cash outflows, which could result from relatively modest declines in its production and metallurgical coal prices.
  • As a result, S&P Global Ratings lowered its issuer credit rating (ICR) on Conuma to 'CCC+' from 'B'.
  • At the same time, we lowered our issue-level rating on the company's senior secured notes to 'B-' from 'B+'. The '2' recovery rating on the notes is unchanged.
  • The negative outlook reflects our view of the risk that Conuma could face a liquidity shortfall this year, most likely from cash flow generation modestly below our expectations.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above. We believe Conuma has limited financial flexibility to manage unexpected near-term weakness in its operating results. Conuma generated earnings and cash flow below our expectations in 2019, and we estimate the company's liquidity position is constrained. Lower average metallurgical coal prices, as well as rail and port disruptions that negatively affected sales and cash flow were notable headwinds. The company has a negligible cash position (C$7 million as of Dec. 31, 2019) and limited availability under its US$25 million credit facility. We now consider the company to be vulnerable to near-term unexpected cash outflows. In particular, production disruptions that could stem from the COVID-19 outbreak, which have affected mining companies globally, or weaker-than-expected metallurgical coal prices, are key risks to Conuma's liquidity. S&P Global Ratings expects a global economic recession this year, and provided a further update to its assumptions on March 24, 2020 to include a contraction in the first quarter and a steeper than previously expected contraction in the second quarter (see article links below).
The negative outlook reflects our view that the company depends on favorable conditions to meet its financial obligations. We believe Conuma could face a liquidity shortfall, given its negligible cash position and availability on its revolving credit facility, in the event the company generates operating results modestly below our expectations. In our view, Conuma has limited flexibility to absorb unexpected cash outflows.
We could lower the ratings if we believe Conuma will generate a free cash flow deficit within the next 12 months to the extent that it increases the likelihood that the company faces a liquidity shortfall or contemplates a distressed exchange of its debt. In our view, this could result from lower–than-expected sales and cash flow related to the curtailment of mining operations, transportation disruptions, or weaker metallurgic coal prices. In this scenario, we would expect Conuma to default without an unforeseen positive development.
We could revise the outlook to stable if Conuma's liquidity sustainably improves, most likely from meaningful positive free cash flow available to repay amounts drawn on its revolving credit facility and build its cash position. In this scenario, we would expect a material increase in metallurgical coal prices in tandem with reduced risk associated with global macroeconomic conditions and visibility regarding its planned Hermann project.
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