Why did ASX coal share Allegiance just plunge 65%?

Money's too tight to mention.

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Key points

  • ASX coal share Allegiance has plummeted in value today 
  • The company has announced a strategic review to assess its ongoing liquidity needs and management of its mines 
  • Allegiance has also obtained a $5 million equity facility to tide it over while the review takes place 

The Allegiance Coal Ltd (ASX: AHQ) share price has cratered on Tuesday.

The move follows the ASX coal miner releasing its quarterly activities and cash flow report and announcing an equity facility and strategic review.

The company's coal production was "considerably below our target" in the June quarter. The company has also secured a $5 million equity facility to tide it over while it reviews its liquidity requirements.

Allegiance Coal is focused on the development, operation, and supply of steel-making coal to the seaborne market. It has operating mines in the United States and a development project in Canada.

It currently has three mines online called Tenas, Black Warrior, and New Elk.

Allegiance share price crashes 65% on liquidity concerns

The ASX coal share has plummeted by 63.39% to trade at 21 cents at the time of writing.

Here are the key points from its activities report for the three months ending 30 June:

  • Coal sales revenue totalled US$32.1M compared to US$14.5M in the prior quarter
  • Cash receipts from customers of A$50.5M (approximately A$6.2M were carryover receipts)
  • Positive net cash from operating activities of A$13.6M
  • Run-of-mine (ROM) coal production totalled 220kt against 148kt for the March quarter. This was up 48% and "continuing the strong upward trend, but still considerably below our target".

What happened in the June quarter?

Allegiance Coal told ASX investors that "severe labour shortage within BNSF [Railway] and Union Pacific rail systems due to COVID lay-offs" had caused problems at New Elk.

This includes "a build-up of coal inventory at New Elk's rail load-out and mine stockpiles and, more critically, a delay in getting coal to port for sale".

In its statement, the ASX coal miner said:

New Elk is due to receive a second rail set end of this month which will double capacity to move coal to port notwithstanding an increase in train cycle times. Ongoing delays at McDuffie Coal Terminal caused a New Elk 80kt vessel scheduled to load on 25 June to be delayed with loading now scheduled in July.

The impact of strong commodity prices

Allegiance reported average coal sales prices of US$258/t in the June quarter against US$261/t in the March quarter.

The prices ranged from US$360/t for high-vol A to US$222/t for a trial cargo of high-vol B product.

The price for premium low-vol hard coking coal continued its recent downward trend but remained historically high.

Allegiance said thermal coal prices "look extremely strong". This is due to the European ban on Russian coal purchases, and the threat of imported Russian gas disruptions.

Allegiance said this meant "excellent opportunities for high energy low sulphur coals sales into Europe".

The company said weakening demand for steel in Asia and Europe amid recession fears had resulted in coking coal prices falling "quite dramatically" in the June quarter, with thermal coal prices now outperforming coking coal.

"We have already taken advantage of the strong prices for thermal coal contracting two small cargoes for delivery in H1 FY 23 into Europe and are assessing medium-term opportunities in this market".

What did management say?

Allegiance Coal CEO Jon Romcke said:

The results for the June quarter demonstrate the impact of strong coal prices coupled with improvement in the production capability of both the Black Warrior and New Elk mines where the quarterly ROM production figures were the best on record since Allegiance commenced operations.

Unfortunately, the ability of the mine to port logistics chain to keep pace with production has affected the timeliness of cashflow receipts for the Company from sales and inventory finance arrangements.

We are working to address the logistics constraints and improve the working capital position at Allegiance.

What's next for Allegiance coal?

Allegiance Coal has entered into a A$5 million equity facility with Regal Funds Management. It has already drawn down $3 million. In exchange, the fund will be issued with shares at a discount.

Allegiance Coal explained why it had decided to obtain the equity facility:

The Company has been unable to successfully ramp up production to previous expectations at its two
operating mines. In addition, the Company has been unable to secure medium term equipment financing at both Black Warrior and New Elk, which has driven lower than expected performance.

In light of the lack of available financing, the Company is considering different capital initiatives to fund equipment acquisition and upgrades at both mines.

Legacy coal sales contracts at New Elk, coupled with production constraints, staffing issues and poor logistics performance in transporting coal to port, have meant that the mine is running at an operating cash flow loss which has significantly constrained cash flows.

It is currently unclear if Black Warrior or New Elk have the capability to meet, within a material margin,
previously advised target production rates.

Allegiance expects to complete the strategic review before the end of August.

The value of the ASX coal miner's shares is down 71% over the past 12 months. This compares with a 9% loss for the S&P/ASX All Ordinaries Index (ASX: XAO).

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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