Ramaco Resources: 2022 Will Be A Record Year For The Company (NASDAQ: METC)

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Natural black stone coal background top view

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Introduction

Ramaco Resources (METC) is a producer of metallurgical coal in the United States. I was originally drawn to this company as a call option on the price of metallurgical coal as I liked the low cost basis of Ramaco’s operations and its very clean balance sheet. As the met coal price is now indeed taking off

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Data by YCharts

The 2021 results were good

During 2021, the company sold approximately 2.24 million tonnes of metallurgical coal, of which approximately 98% was produced in its own mining complexes. An additional 47,000 tonnes of metallurgical coal was purchased from third parties and subsequently sold (at a profit). The average price received for the full year was $ 108 / t resulting in a margin of $ 38 / t.

Data compilation

Ramaco Resources Investor Relations

As you can see on the image above, Ramaco started to see an acceleration of the received coal price in the final quarter as the metallurgical coal prices started to increase in the second half of the year. As Ramaco had pre-sold the vast majority of its expected production at lower prices, the company did not fully take advantage of the higher coal prices but that will change this year, as I’ll explain later.

The total revenue in the fourth quarter came in at almost $ 88M which resulted in an operating income of $ 22.5M. The net income during the quarter was $ 18.6M for an EPS of $ 0.42 per share. This brings the full-year EPS at $ 0.90. A very satisfying result, especially when you know the average revenue per ton was just $ 108.

In my previous articles on Ramaco, I was focusing on the cash flow as I wanted to determine how “safe” the senior notes are. Looking at the full-year free cash flow result, I’m pretty satisfied.

The reported operating cash flow was approximately $ 53.3M and after taking the changes in the working capital into account, as well as the $ 2.5M in lease payments and other small cash outflows, the adjusted operating cash flow was just under $ 69M.

cash flow statement

Ramaco Resources Investor Relations

The total capex was just under $ 30M resulting in a free cash flow result of $ 39M. The majority of that free cash flow was used to acquire the Amonate assets, and Ramaco is continuing to grow its asset base it is also announced the acquisition of Ramaco Coal.

Ramaco Coal’s main asset are royalties on coal-bearing lands and the majority of Ramaco Coal’s land is actually leased to Ramaco Resources. Ramaco thinks merging the operations will have a positive impact on the financial results of Ramaco as the royalty payments will be eliminated.

Ramaco Coal will be acquired for a total of $ 65M of which $ 5M is payable immediately while Ramaco Resources will have to make four quarterly payments of $ 5M during this year and four quarterly payments of $ 10M per quarter next year. A well-balanced structure and flexible payment terms and although Ramaco Resources and Ramaco Coal both have the same CEO, and I would like to see more details. What we do know is that in 2020, with an average coal price of $ 85 / t, Ramaco Coal received $ 4.5M in royalty payments (according to the 2020 annual report). Given the current strong coal prices it’s easy to see Ramaco would owe $ 15-20M in royalties to Ramaco Coal so a $ 65M price tag does not seem to be exaggerated.

You should care more about what 2022 will bring

While Ramaco’s results in 2021 were okay, it’s important to focus on 2022 as this will be a year where Ramaco will produce and sell almost 50% more coal at a price that will likely be twice as high as in 2021. The guidance below allows us to fine tune the expectations.

2022 Guidance

Ramaco Resources Investor Relations

So assuming a production of 3 million tonnes of metallurgical coal at a production cost of $ 90 / t (the higher end of the guidance) and a revenue of $ 200 / t would result in $ 330M in net operating cash flow.

After deducting the SG&A, depreciation and interest expenses, the pre-tax income would be $ 266M resulting in a net income of $ 200M using the higher end of the tax rate guidance of 25%. In my November article, I was already expecting to see $ 200M in free cash flow this year so it is good to see the official guidance now confirming my preliminary expectations.

Divided over 44.1M shares outstanding, this represents an EPS of $ 4.50.

I think an average FOB / FOR mine of $ 200 may be even a little bit on the conservative side. The company has already pre-sold 1.8M tonnes at $ 187 / t and added 0.5M tonnes at $ 270 / t subsequent to the end of FY 2021. This means that approximately 2.3 million tonnes of the 3 million tonnes have already been pre-sold at an average price of $ 206 / t. I think my EPS guidance is quite realistic and that means Ramaco is currently trading at approximately 3 times its earnings.

Investment thesis

I’m very surprised to see the market reaction on Ramaco’s results. The drop is not warranted at all and the only reason I can think of is potentially the market being underwhelmed by the Q4 and FY 2021 results. That’s hardly a surprise as Ramaco tends to sell the majority of its output a year ahead of delivering them which means it will only start to see the impact of the much stronger coking coal prices in the current financial year.

I expect an EPS of at least $ 4.50 for this year while the reported free cash flow will likely come in at around $ 3.5-3.75 / share, and that includes the growth capex that will be spent on the Elk Creek mine as part of a production expansion program.

I currently have no position in Ramaco Resources, but I have written put options that are currently out of the money. I also own the 9% senior notes trading as (METCL) on the exchange. These notes are callable in the summer of 2023 and I now fully expect Ramaco to call those notes next year considering the balance sheet will be awash with cash.



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