Allegiance Coal Limited (AHQ) - Pending strategic review...

Allegiance Coal Limited (AHQ) - Pending strategic review Production and operating costs continue to lag budgeted figures and AHQ has commenced a Strategic Review, expected to be completed in August. To provide interim funding, AHQ has established a A$5M facility with Regal Funds Management. This facility provides breathing room whilst new mine plans are established. Pending increased certainty post the review, we have significantly reduced our assumed ramp-up at New Elk. Despite this, value is still apparent, primarily at Black Warrior, and we back the new MD to deliver an achievable plan. Maintain Buy, TP reduced to A$0.32/share (prev. A$1.22/sh).Another quarterly missWhile volumes are trending in the right direction, AHQ delivered another big quarterly miss in Jun.Q’22 (Fig. 1).Critically, we did not see the scale of improved production that was needed. Pending the outcome of the Strategic Review, we have reduced our ultimate scale to 0.3mtpa (sales) at New Elk and 0.5mtpa (sales) at Black Warrior, with development of Short Creek deferred to FY25 (from FY23).A lost year, multiple issues now impacting AHQMultiple issues are affecting both production and sales, with staffing, underground roof conditions, equipment availability/reliability, and lack of equipment finance all impacting production rates, and staffing issues within the rail provider impacting exports.With thermal coal now achieving record prices, the company is looking to supply into the highly priced ARA Rotterdam thermal market. US High Vol Met is well suited to thermal coal replacement.As a result, recently appointed Non-Executive Chairman, Paul Vining, has resigned to avoid strategic conflict with Westmoreland where he is Chairman.Pending review outcome, we assume nominal debtCommentary in the quarterly suggests capital expenditure is required at New Elk, on existing continuous miners, and at Black Warrior on additional mining equipment. Additional funding will be required to replace equipment finance facilities that AHQ has been unsuccessful in obtaining, to sustain planned production rates at Black Warrior.With delayed ramp up, and a concomitant delay in materially lower operating costs, we see additional funding being required; we assume A$5M debt in FY23.Key Dates AheadAugust 2022 - completion of Strategic Review.September 2022 – FY22 Annual Report.