Ramaco Resources, Inc.
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Good morning, ladies and gentlemen and welcome to the Ramaco Resources Incorporated Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. . I would now like to turn the conference over to your host, Chief Financial Officer, Jeremy Sussman. Thank you. Please go ahead.

[Jeremy Sussman:]

Thank you, operator. On behalf of Ramaco Resources, I'd like to welcome all of you to our fourth quarter 2020 earnings conference call. With me this morning is Randy Atkins, our Chairman and CEO; and Chris Blanchard, our Chief Operating Officer.

[Randy Atkins:]

Thank you, Jeremy. As always, I want to thank everyone for joining us today to discuss our year-end results and our crystal ball forward look into 2021. We held our first Board of Directors meeting of the year a few days ago. I described to the Board that in looking back at 2020, it was kind of like you were transported into an Indiana Jones movie, where you would try and outrun some huge rolling boulder only to jump out of the way into a pit of snakes. It was a bad dream type of year that I'm happy to report looks like it may finally be in the rearview mirror. Sadly, it left a few battle scars on our reported earnings for the year, which Jeremy will detail for us in a moment. We basically spent half the year worrying about whether the world was coming to an end, whether we would be able to continue to safely produce. And if so, would we still have any customers. That drove us and into a mad dash to make as much liquidity and sanity as we could possibly do through our combination of actions. Although they were painful at the time, they did manage to get us about $50 million of new dry powder through the first half of '20, which included both CapEx and cost cuts. We were able to deploy funds to keep operations intact and the ship moving forward, even as our customers went into a freefall. The back half of the year shifted and we actually ended up having record sales, but realized that the demand had not quite kicked into gear to allow us to benefit price wise from the coming month recovery.

[Jeremy Sussman:]

Thank you, Randy. I am going to first go over our fourth quarter 2020 financial highlights and then I will turn to our forward outlook. To begin with, fourth quarter 2020 EPS and adjusted EBITDA were both down from a year ago. We unfortunately have lots of good company here, which is the result of operating in the middle of a global pandemic. Australian benchmark Met coal pricing fell under $100 a ton for the first time in roughly five years in the fourth quarter. In total, Q4 adjusted EBITDA loss was $1 million. The fourth quarter was negatively affected by a number of one-time cost issues described in our press release, which impacted EBITDA by over $5 million. Chris will describe the larger items in more detail. In addition, overall, second half 2020 EBITDA was negatively affected by well over $6 million, including $4 million in the fourth quarter alone, due to more than 200,000 tons of coal that was force majeure by our two largest customers, and subsequently resold into a weak spot market. The good news is that both of these unusual items are behind us. Of course, it naturally helps when your customers take their previously contracted shipments as they have so far in 2021 with the meaningful pickup in steel pricing and demand that Randy referenced. Lastly, as it relates to the fourth quarter, we were pleased that we were able to sell a record amount of company produced coal of 515,000 tons as well as record quarterly export volume of over 300,000 tons. While index pricing remained weak in the fourth quarter, our record sales volume foretold a material increase in demand for our product, which in turn, has now translated into a meaningful uptick in pricing. U.S. metallurgical coal pricing is up more than 50% from its 2020 COVID induced lows. Simply put, the same customers who caused us disruption in 2020, are now seeking more tons at materially higher pricing than just a few months ago. In fact, we recently signed a term contract with a domestic steel mill for more than a third higher on a price per ton basis, compared to our average 2021 committed volume. This of course, is not reflected in our committed volume tables as of December 31, 2020. Now, turning to our forward outlook, we anticipate overall 2021 company production of 1.9 million to 2.4 million tons compared to 1.7 million tons in 2020. We expect up to 350,000 tons of new production from the 2021 combination of Triad, Berwind and Big Creek as well as more tons coming from our flagship Elk Creek complex. At the midpoint of guidance, we anticipate mid-60s per ton Elk Creek cash costs down from $70 per ton in 2020 and more in line with historical figures as we anticipate being able to operate without the market related disruptions that we had to endure in 2020. We expect 2021 capital expenditures to increase to $25 million to $30 million, up from $25 million in 2020, largely on the back have roughly $12 million of growth capital for Berwind and Big Creek. Finally, we continue to anticipate paying minimal cash taxes for the foreseeable future due to over $90 million of net operating losses. Overall, I am pleased that Ramaco has emerged from the 2020 challenges with what I soundly believe is the strongest balance sheet in the space, including very minimal debt and AROs as well as no legacy liabilities. I feel that this puts us in a very solid position to be able to resume our previous growth trajectory and increase our production capacity by roughly 50% by the time Berwind is at full capacity by mid-2022. I would now like to turn the call over to our Chief Operating Officer, Chris Blanchard. Chris?

[Chris Blanchard:]

Thank you, Jeremy. Before turning to a bit of discussion on our new projects, I want to spend a few minutes reflecting on the full year results of 2020 and offer some granularity on the challenges that we faced in the fourth quarter. Navigating 2020 was a challenge for us like it was for everyone in the industry. Maintaining our workplaces for our employees in a safe and healthy environment as possible was our primary objective. After minimal COVID related impacts in the first three quarters of the year, we unfortunately did see an uptick in the number of confirmed cases of our employees as well as among their dependents late last year. The increase in cases tracked directly with the general increase nationally, and more specifically in the southern counties of West Virginia where the majority of our workforce resides. Fortunately, the direct impact from COVID has trended downward along with the broader national, state and local levels. Nevertheless, during December, absenteeism due just do test and quarantine and/or recovery from the virus, averaged 10%. We're thankful of our employees who have been directly affected, none have had serious complications or hospitalizations from the virus to-date. The direct impacts of COVID-19 in the fourth quarter financially were over $2 per ton sold between the absenteeism, subsequent loss of production for vacation and sickness, and the direct health related spending for additional personnel carriers, safety and cleaning supplies and personal protective equipment. Even more impactful was having to operate with shorter crews than normal and cover with temporary labor when it was available. In addition to the health constraints in the fourth quarter, nearly every one of our operating mines at Elk Creek had other geologic or operational challenges. Starting with our RAM surface mine, we lost our prime overburden mover during the month of December. While we mobilized with a rental replacement, the costs of this repair and the lower productivity of the rental unit weighed heavily on operating costs and metrics. At our Stonecoal mine both in November and December, mining encountered poor roof conditions with two roof falls and adverse ground conditions. We supported these roof areas modified our mine plans and moved our section in reaction to these conditions. This resulted in a reduction both in the available work days due to the section moves, as well as lower productivities and higher roof control costs during both months. Finally, at our Number 2 gas mine we completed retreat operations in early November and began advancing again in a low coal Sandstone zone, which had been previously identified and mined through on one side. While we knew and projected that production would be limited, the Sandstone zone persisted longer than our initial projections. While mining in this area, our clean tons per foot was lowered, productivities were lessened materially and our operating costs were substantially higher. Of course, none of these items are particularly abnormal for Central Appalachia mines to encounter, but to have each location have issues concurrently, while also dealing with a labor shortage driven by COVID-19 was unusual. Unfortunately, a negative perfect storm for our fourth quarter mine performance. Happily, each of these conditions has been largely worked through during late 2020 with overall Elk production returning to budgeted levels during January now. Now, to speak briefly about our new growth projects. As has been reported, we are moving forward to add two new mines to our low and mid vol portfolio. The first project will be the restart of construction on the slope from our Berwind Pocahontas Number 3 mine into the targeted, thicker, higher quality and lower cost Pocahontas Number 4 same reserves which lie directly above. In response to the uncertain market and economic conditions due to the pandemic, we put this project on hold in March of 2020. We now project the six-to-eight-month construction timeline. Following completion of the excavation of the slopes, we will move quickly to do the development mining at the top of the slope, with much of this completed in the fourth quarter of '21, which will add some modest new production. During the first half of 2022, we plan to ramp production to two full sections to bring the mine into full operation and at its full ratable production level of 700,000 to 800,000 clean tons annually. The other new project that we will start is a new High Vol A mid-volatile coal surface mine located in Tazewell County, Virginia, which we call the Big Creek mine. This mine permit and associated reserves were acquired in early 2020. These approximately 600,000 tons of recoverable reserves contain both High Vol A coal and mid-volatile coals, which are fully permitted and located in close proximity to our Knox Creek preparation plan. Much of the development work to reach this mine was done by a previous operator. We project that once we break ground on road and infrastructure projects, we can begin moving production overburden in the beginning of the third quarter '21 with coal production to follow within a month. At full production level, we will mine approximately 150,000 to 200,000 clean tons per year. With a relatively low mining ratio and layering in inexpensive high vol mining tons, we believe this mine will have projected mine cost in the mid $50 per ton range. The permits we hold cover enough mining for approximately three years that are projected run rates. We hope to find ways to expand the mine life on to some of our adjacent coal reserves, and potentially perpetuate this mine. In summary, we are glad to have navigated our way through 2020. We look forward to progressing through 2021 in markets that seem to ever return to normalcy with a generally improving world market driven by optimism about emerging from the COVID-19 shadow. We believe the timing is correct to have initiated these projects and restarted our measured growth trajectory, which we have discussed at several of our previous updates. I would now like to return the call to the operator for the Q&A portion of the call. Operator?

[Operator:]

And your first question comes from the line of Lucas Pipes with B. Riley Securities. You may now ask your question.

[Lucas Pipes:]

Hey, good morning, everyone.

[Randy Atkins:]

Good morning, Lucas.

[Lucas Pipes:]

I first wanted to kind of turn to the marketing side. And, Randy, you mentioned the improving market globally. And then specifically the arcane to China. To what extent are you able to tap into that market, or would you say it's really more about taking advantage of the rising High Vol A, High Vol B price? Thank you.

[Randy Atkins:]

Thank you, Lucas. Well, first, congratulations on your new production edition yourself for '21. But as far as your comment about China, it's really a twofer for us. So, if you remember last year, we mentioned that we had initiated a relationship with a group out of Brisbane and Singapore called Square Resources to handle our marketing in the Far East. So we have already been in contact and indeed have decided that we will probably be making some offers on Chinese related bids that have come to us recently. So, we will be playing the uptick in the Chinese market directly. Indirectly, of course, because of the Aussie-Chinese political issues, as we’re all aware China has embargoed any new Australian calls coming in, and as a result you’ve got an ARB that’s gone from 60 bucks to 100 bucks, I guess, it’s about 80 bucks today. And when that lifts, we believe that there will be not only of course a rise in the Australian benchmark but that will find its way also into a rise on the Atlantic benchmark. When that happens, of course, as anybody’s guess, no one’s intelligence is particularly perfect when it comes to Chinese political policy. So, we will look forward to that happening at some point, because the economic reality too lifted its course. So well in place. So, we look forward to enjoying sort of two benefits from exposure to the Far East here this year.

[Lucas Pipes:]

That’s very good to hear. I appreciate that additional insight. Thank you, Randy. And then I wanted to also again this is more marketing related, but touch on the domestic markets last year, obviously, was very tough for the domestic steel industry specifically, Q2, Q3 but it’s been coming roaring back and you noted that in your presentation as well. But are you getting increase for additional domestic comps and I assume, if so, they’d have to compete with some of these higher international prices. So, would be curious kind of to hear your thoughts on those dynamics? Thank you.

[Randy Atkins:]

Yeah, so last fall was tough for us. Because we could see that the market was starting to wake up probably by let’s call it late summer. But the demand equation was not quite there. And as a result, when we came out for the domestic bids early in the fall, we were bidding into still what was a still somewhat weakened market on the domestic side which we knew was going to improve. And it indeed it has. I mean the demand has come pretty well roaring back on the metrics that I described earlier. And to your point, yes, we are indeed seeing some of those same domestic customers come back to us to try to get more tons that they had need to top off some of their demand that they’re looking at right now. And we’re having to poke them prices that are well like in excess of what they were able to buy their coal for in the fall. And I think, depending upon how the cards play up for the balance of the year, it should be an interesting domestic sale season coming next fall, because that’s somewhat when we estimate that the demand will start to be kicking in even perhaps even more so than it is today and in which case, we expect that the pricing dynamics for the 2022 business will be much different than this year.

[Lucas Pipes:]

Interesting, interesting. Thank you, Randy. Then, one last question from me. There’s been a lot of news headlines around the more difficult sureties’ markets, mostly on the thermal coal side I have been hearing much on the metallurgical coal side and Ramaco of course, is well positioned with its extremely low I guess the liability balance and strong balance sheet. Can you comment on maybe Jeremy, what the impact is for you if any? Would appreciate your insights. Thank you.

[Jeremy Sussman:]

Yes, Lucas I’ll start and then let Randy kind of finish up. So, I mean, the short answer is if we didn’t read the trade rags or look at some of our thermal coal competitor reports. Frankly, we’re seeing no change to how the surety providers are treating us or looking at us. Of course, when you have $15 million of AROs which is 98% below the Group average and no term debt, I think, and obviously only know mostly underground production, it's a vastly different profile than many competitors who have been producing large open pits for many years or have water issues and what not. So, it’s certainly interesting to read in the rags and go through other earnings reports. But the short answer Lucas is, no change to how we're looking at it.

[Randy Atkins:]

Yeah, Lucas, this is Randy. So, I have been saying for some time that I'm afraid ARO's are sort of the Achilles heel of our business in general, but certainly for the thermal space. And I've seen it as you know, we have on our private company some production operations out in Wyoming. And Wyoming over the last few years has done away with self-bonding. And then, in terms of the surety requirements has dramatically increased their requirements for operators in that state. And the same thing is playing off across the country. And as a result, a lot of us when we look at coal company balance sheets, we really overlook the ARO and the legacy cost, and we just go straight to the actual financial debt, but the ARO and the legacy liabilities are indeed real liabilities. And, as the recent issues relating to restructuring around Peabody have made clear, the sureties are coming back, and they're no longer simply relying upon the overall balance sheet of a company to secure those surety obligations and are, indeed are asking for hard liquid collateral. And as we all know, liquid collateral and liquid liquidity in general is not something that the coal industry has in great abundance at the moment. So, this is something that I think is going to start to play out a little bit more and I'm hopeful that there aren't any regulatory tweaks that the Biden administration may make in this regard, but I will be not surprised if the Biden administration does not take some steps to probably make the general operation of our coal industry a little harder than it was before.

[Lucas Pipes:]

Interesting, very helpful perspective Randy, Jeremy, thank you very much. And everyone continue, best of luck.

[Randy Atkins:]

Thank you, Lucas.

[Operator:]

Thank you. Your next question comes from the line of Nathan Martin with Benchmark. You may now ask your question.

[Nathan Martin:]

Hey, thanks. Good morning, guys. And thanks for taking my questions.

[Randy Atkins:]

Hey Nate, thank you.

[Nathan Martin:]

First, just a quick clarification, I think to make sure I heard the comment correctly. I think Randy, you mentioned on the domestic side, you guys recently signed a contract for; I think it was more than one-third higher of a price compared to your current 2020 committed volumes. I just want to make sure I heard that correctly.

[Jeremy Sussman:]

Hi, Nate. Yeah, it's Jeremy here. I think, I mentioned that and yes, indeed, you did hear that correctly.

[Nathan Martin:]

Okay. Got it. Great. And just to kind of goes along with some of the domestic demand comments Randy just made. So, thanks for that clarification. And then congrats again on the announcement to move forward with Berwind and Big Creek. I did notice, Berwind costs are now expected to be in the low to mid-70s. And I think in the past, you guys had always mentioned the cost 80 -- somewhere in the 80. So, what's got you more comfortable now and believing those costs should be even lower than originally planned? Thanks.

[Randy Atkins:]

Sure. I'm going to let Chris answer that specifically. But the simple answer is that once we hit the Berwind 4 slope, it is a substantially higher amount of coal. The amount of footprint inside the mine it goes almost to 70 feet of carbon. So, Chris why don't you provide Nate a little bit more granularity there on cost?

[Chris Blanchard:]

Thanks, Randy. And Nate, to your question specifically, the information we have now was afforded to us by the startup of our Triad mine, which is in the same seam that our Berwind mine will ultimately be in once we complete the slope. And so, we have some real live operating data and the most specific one is the mine recoveries that we are seeing at the coal mine coming out of Triad and the Pocahontas 4 Seam are substantially higher than our initial projections. For the same transportation, the trucking and the washing costs are one of our biggest cost components at that coal mine. So, the improved recovery is the driver on the cash costs.

[Nathan Martin:]

Got it. Thanks for that information, Chris. I appreciate it. And best of luck to you guys.

[Randy Atkins:]

Thanks, Nate.

[Operator:]

Your next question comes from the line of David Gagliano with BMO Capital. You may now ask your question.

[David Gagliano:]

Hi. A lot of my questions have been asked and answered. But I just want to ask one on the operating side. Obviously, the Elk Creek complex is a huge engine of the volumes and ground conditions or roof falls and sandstone intrusions are not ever really, I mean are typical I guess I would say in general in Central App. But I did want to ask about the guidance for 2021, 1.9 million to 2.4 million tons. And what you're factoring in to that guidance in terms of any potential additional production disruptions. And also, if you could just comment a little more detail on what you're doing to if there's any you intend to address some of the issues that came up in the fourth quarter? Thanks.

[Randy Atkins:]

Chris, why don't you handle that one? At least to start with.

[Chris Blanchard:]

Well, I mean, as you said, Dave, roof falls and ground conditions and sandstone, particularly in Central App aren't unusual. And we've definitely had them in our minds, since 2017, when we started ramping the property up. We just had multiple occurrences of all of the above in the fourth quarter so that normally with four operating mines at Elk Creek, if we have anyone that's struggling the others or operating normally and we've got enough built into our budgeting that the other three or four carry the one that's struggling, we just happened to hit where everyone struggled, particularly last half of November, first part of December. So, we aren't expanding our coal mines anymore as far as getting deeper into the coal mine. We generally speaking know the conditions that we'll have throughout 2021 and 2022 at these coal mines. And while the sandstone persisted longer at Number 2 gas it was by a matter of weeks, not months or large part of the year. It just had an outsized impact in fourth quarter was two vacation periods already. That said, if we were to run into prolonged conditions that caused the downturn at one of the mines at Elk Creek, we have the ability to go to a second operating section at our Number 2 gas mine or do some other operational things to cover the gap in production. Currently, as we're running, the mines that we have in place can outperform our Elk Creek preparation plan, they can produce more raw coal in a week than the plant can process at full capacity. So, we do have some slack built in there already.

[Randy Atkins:]

Yeah. And Dave, this is Randy. A couple of points just to make on an Elk. So, when we prepared our guidance, we kind of talked about this a little bit. So, we've got about a 300,000 ton delta there in our guidance for Elk. But you got to remember that, we've got a number of mines on that complex. So as Chris said, we do have some optionality to move around, I really think the main constraint we've got on Elk Creek of course, is our processing capability. And to that point, one of the things that we've got on our to-do list at some point over the next few years is probably expand our prep plant capacity there at Elk which will probably at least in our current plans, probably bump that production up by then another 0.5 million tons. So, your points absolutely well taken on the geologic issues that Central App has a tendency to define more often than not. But I think particularly at Elk, we've got a number of workarounds for that.

[David Gagliano:]

Okay, great. That's very helpful. Thanks. So just the difference between the low end and the high end of the range, the 1.9 to 2.4. Is that more operating based or more kind of marketing based in terms of that -- what would it take to get to the high end versus and what's kind of baked into the low end?

[Randy Atkins:]

Yeah, so Dave, my strong admonition to the Board was that, gang we need more tons to sell. This is a rising market. We feel it's a strong market that's got some legs and we want to get as much production into that market as soon as we can. So, the constraint on the range is really more of a production related issue, not a market one. We feel pretty good that if we had 2.4 million tons, we would be able to sell them this year. We had -- frankly, we'd love to have more. But we're pretty comfortable on the marketing side of that.

[David Gagliano:]

Okay, perfect. Thanks.

[Randy Atkins:]

You bet. Thanks, David.

[Operator:]

That concludes that question-and-answer session of today’s call. I would now like to turn the conference back to Randall Atkins, Chairman and CEO.

[Randy Atkins:]

Okay, thank you operator and thanks again for everyone participating on this. We hope that all of us have a healthy, safe and prosperous New Year and we at Ramaco are looking forward to having this beep perhaps one of it not our best year. So, thanks very much again.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. And have a wonderful day. You may all disconnect.