Merger With Arch Resources Could Improve Efficiency Despite Operational Challenges And Market Uncertainties

Key Takeaways

• Merger completion is expected to enhance operational efficiencies and revenue growth through synergies and streamlined operations.
  
• Increasing international coal demand could boost revenue streams and profit margins, especially in china.
  
• Production issues, market fluctuations, and merger complexities threaten Core Natural Resources' revenue stability, export potential, and profit margins.

Catalysts

CONSOL Energy Inc., together with its subsidiaries, produces and sells bituminous coal in the United States and internationally.

• The completion of the merger with Arch Resources is expected to create synergies and form Core Natural Resources, which could drive operational efficiencies and potentially enhance revenue growth and net margins through combined resources and streamlined operations.
  
• The deployment of new mining equipment at the Itmann mining complex is anticipated to improve productivity and efficiency, possibly increasing output and reducing costs, positively impacting net margins and earnings.
  
• Increasing coal demand in international markets, particularly for crossover metallurgical products in China, has opened up new revenue streams, potentially boosting future revenues and profit margins.
  
• The establishment of a Global Water Treatment Trust Fund helps manage legacy liabilities by reducing surety bond requirements, which could lower future operating costs and increase net margins and earnings by freeing up cash flow.
  
• Potential final settlement of the insurance claim related to business interruption from the Francis Scott Key Bridge collapse may provide a financial boost, enhancing free cash flow and earnings recovery in the near term.

Core Natural Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Core Natural Resources's revenue will decrease by -1.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.4% today to 17.6% in 3 years time.
• Analysts expect earnings to reach $372.4 million (and earnings per share of $19.26) by about January 2028, down from $412.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from 6.9x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.1x.
• Analysts expect the number of shares outstanding to decline by 13.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Core Natural Resources Future Earnings Per Share Growth

Risks

• Ongoing equipment delivery delays and adverse geological conditions have impaired production at the Itmann mining complex, which could hamper revenue and earnings growth.
  
• Low domestic natural gas prices and inventory overhangs have been limiting coal consumption at power plants, possibly affecting future revenue in the domestic market.
  
• Temporary closures, like the Port of Baltimore incident, can disrupt export capacity and result in significant business interruptions, negatively impacting revenue and earnings.
  
• Fluctuations in international coal demand, particularly in India due to the prolonged monsoon season, and the volatility in pet coke prices create uncertainties in export revenue projections.
  
• The integration challenges and execution risks associated with the proposed merger with Arch Resources could lead to increased costs, potentially impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $127.33 for Core Natural Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $142.0, and the most bearish reporting a price target of just $105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $372.4 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $96.86, the analyst's price target of $127.33 is 23.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.