American Resources Corporation (NASDAQ:AREC) Q2 2023 Earnings Call Transcript

American Resources Corporation (NASDAQ:AREC) Q2 2023 Earnings Call Transcript August 14, 2023

Operator: Good day, everyone, and welcome to today’s American Resources Corporation Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mark LaVerghetta, Head of Corporate Finance and Communications. Please go ahead.

Mark LaVerghetta: Thank you, and good afternoon, everyone. On behalf of American Resources Corporation, I would like to welcome everyone to our second quarter of 2023 conference call and business update. We always welcome this opportunity to provide an update on our businesses and discuss our accomplishments we’ve made over the past several months and how we are uniquely positioned within the markets that we serve for our American Carbon, American Metals, and ReElement Technologies division. Also on the call today is Kirk Taylor, our Chief Financial Officer; Chairman and CEO, Mark Jensen, is currently en route to Africa for meetings relating to lithium ore partnership opportunities. So Kirk and I will provide some prepared remarks, then we will get into the question-and-answer part of the call.

Before we kick it off, I’d like to remind everyone of our normal cautionary statement. Certain statements discussed on today’s call constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act. These forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from the results discussed in the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors, uncertainties and other cautionary statements which are laid out in our press releases and SEC filings. We also do not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.

Lastly, for anyone wanting to ask questions today, I believe you will need to dial in by phone to get into the queue. We are going to begin today with a few comments from our Chief Financial Officer, Kirk Taylor. Kirk?

Kirk Taylor: Thank you, Mark, and thank you, everyone, for sharing a couple of minutes here this afternoon to listen about our Q2 results and business updates. Over the past several months, we have continued our execution on solidifying our strategic positioning within our addressable markets, which we believe positions our company’s for long-term value creation. In doing so, and in conjunction with the direction of our strategic committee, we have embarked on several initiatives to unbundle our unique platform of assets to better unlock value for all of our shareholders and position each entity as a standalone company. I will go into some further detail on each of these initiatives. First, the spin-off of ReElement Technologies.

As we’ve previously discussed, our intention is to spin-off our wholly-owned ReElement Technologies division into a standalone public company. This will give its strategic positioning and groundbreaking innovation as a world-leading refining technology platform using our patented chromatography technology to refine critical minerals. This past January, we had filed our Form 10 Registration Statement with the SEC to begin that process. Subsequently, we have filed the necessary amendments to update the financial information and address comments and questions raised by the SEC. All of our filings related to this can be found at sec.gov under ReElement Technologies. And at this time, we have addressed all comments and questions from the SEC. We’ve also engaged a top Tier 1 investment bank to advise us through this process, while also commencing a capital raising process at the subsidiary level.

This is to fund ReElement’s initial growth plans as a pure-play next-generation critical mineral refining platform. Feedback and interest from potential strategic investors have thus far been very positive. We expect to have this process completed later this year or early next year, and will communicate our progress as much as we are able to. Second, spin-off of American Carbon Corporation. This morning, we filed our initial Form 10 Registration Statement with the SEC to spin-off our wholly-owned American Carbon division into a separate standalone public company. The filing can be found as well on sec.gov under American Carbon Corporation. In conjunction with the recommendation from our strategic committee and approved via our Board of Directors, spinning off American Carbon into its own public platform better enables the business for growth, capital allocation, and to a dedicated separate operating team.

In basic terms of structure, American Resources shareholders will receive approximately 1 share of American Carbon for every 2 shares of American Resources common shares, which are owned. Additionally, American Resources Corporation will receive up to $300 million in the form of royalty payments from American Carbon over a period of time. Additionally, we have secured $20 million factory facility for American Carbon to support its normal course of business. And upon the spin-off of American Carbon, we are in negotiations with a $100 million equity financing facility and that will be in place under the American Carbon PubCo as an additional option to fuel acquisition and operating growth. Both of these financing facilities will go alongside the already closed and announced $45 million tax-exempt bond for expansion and development of Wyoming County, West Virginia, which cumulatively represents approximately a $165 million of financing capacity for a standalone American Carbon.

We feel the American Carbon platform will be the most well capitalized streamline operation in the met coal space. Further, we’ve looked at monetization of the Carbon platform in other ways other than spin it out. As we have reiterated, we remain highly focused on monetizing our substantial platform of carbon assets either through operations, leases, or divestitures. We’ve also previously communicated that we successfully closed our $45 million tax-exempt industrial development bond offerings to the West Virginia Economic Development Authority, which will fund expansion and technological improvements to existing metallurgical carbon processing facility at our Wyoming County Coal Complex. Subsequent to that closing, we have seen an increased interest in certain and all of our carbon assets from several parties.

These include an unsolicited bid for all the assets associated with American Carbon for an implied enterprise value of approximately $260 million, which was not accepted by our Board of Directors due to the duration and structure of the consideration payments, which we have previously announced. We also previously announced that we entered into a binding letter of intent to sell certain assets associated to our Deane Mining Complex for a total enterprise value consideration of approximately $20.6 million or $0.26 per share. More recently, we also received a non-binding letter of interest from a non-affiliated party to purchase the remaining assets of American Carbon for a total consideration of approximately $300 million or $3.83 per share.

We’ve also received a non-binding letter of interest from a separate non-affiliated party to purchase assets associated with our Perry County Resources complex for a total consideration of approximately $40 million in cash and enterprise value, or $0.51 per share. Management and our Board and strategic committee are currently reviewing these opportunities and will, of course, provide updates when appropriate. There are obviously several options for us to explore. We have a world-class set of assets, world-class operating team, and very well funded path to high production levels. We will pursue each of these scenarios and determine which best benefits our shareholders and our workforce alike. Next, I’ll turn to our SPAC that we have sponsored, AMAO, American Acquisition Opportunity, Inc.

When we IPOed AMAO as its main sponsor, we sought out to merge with a dynamic cash flowing company that did not require a complicated or highly diluted financing as part of de-SPAC process and which could thrive as a public company. Last June, AMAO announced a definitive merger agreement to merge with Royalty Management Corporation, whereas RMC would become a public company. As a reminder, RMC is a next-generation royalty company focused on expanding its current cash flow and revenue streams by identifying undervalued assets within sectors, including natural resources, land, sustainability, controlled environment, agriculture, and intellectual property, while constructively supporting the communities that those businesses operate in. Last December, AMAO filed its form S4 Registration Statement with the SEC, in conjunction with the planned merger between AMAO and RMC, and have since been working through the comments provided by the SEC.

On May 4th, AMAO filed its amended Form S-4 to update for December 31, 2022 numbers and to address questions and comments received from the SEC. In June, AMAO will file an updated S-4, further updating numbers as required by the SEC and addressing further comments and questions. Following the proposed de-SPAC merger, American Resources will remain a shareholder and will liquidate its interest over time when it bleeds it maximizes value to all shareholders and stakeholders. Our unique platform of assets is in a great position to deliver what we believe are attractive returns and value to our shareholders. Including our mining assets, our ReElement Technologies division, as well as our American Metals division, which we are in the process of strategic positioning within electrified economy.

Now I’ll turn to our quarterly summary for American Resources. As a reminder, on January 31st of this year, the remaining amounts of the convertible notes in the amount of approximately $9.8 million was converted into approximately 9.4 million common shares of the company, extinguishing all future liabilities under the convertible note. The only new debt we took on over the second quarter of 2023 was associated with the issuance of the tax-exempt industrial development bond for the development of Wyoming County, West Virginia Mining Complex. As of today, August 14, 2023, our current shares outstanding are just over 78.2 million Class A common shares. Cash on hand at the end of second quarter 2023 was approximately $51.5 million. Over the second quarter, we are able to showcase our operational flexibility to where we are able to operate at slightly cash flow positive while driving our value creation mission forward.

Lastly, it is probably worth reiterating given the recent regional bank events that all of our excess cash above FDIC limits are held in the Top 2 U.S.-based bank. I’d now like to turn over the call to Mark LaVerghetta for some additional comments. Mark?

Pixabay/Public Domain

Mark LaVerghetta: Thanks, Kirk. I’d first like to applaud our team on another exciting quarter of continued execution in positioning all of our divisions within our end markets while also leveraging our processing and groundbreaking refining technologies into new and exciting markets. We truly sit at a very interesting position with our ability to bring cost competitive refining of critical minerals to our domestic market in the most environmentally safe and sustainable methods ever developed. At no point in our history, has our business been better positioned to serve the markets we operate in and to capitalize on our broad asset base, our talent, and our ability to produce, process, and refine raw materials that are in very high demand.

We are extremely excited about the opportunities for all of our entities, and we continue to execute on our strategic plan to unbundle assets to extract value and to better position each division for growth, capital allocation and with separate operating teams. Let’s dive into some of these. First, American Carbon. I will first address the revenue shortfall for this past quarter. As global met carbon market softened over the second quarter, we chose to idle carbon production. Over most of the second quarter, our customers became constrained when taking product due to port logistics and bottlenecks within the supply chain. We believe this was largely a result of the shift in China’s and Australia’s relationship around product sourcing, which created significant shifts within supply chains and the timing of product deliveries.

Our ability to idle back production showcases our operational flexibility and also highlights that given our expansion around our ReElement division, we do not want to take unnecessary risks associated with inventory expansion and rather focus on cost constraints. In other words, we chose not to run our mines just to build up inventory, but rather focus on value creating initiatives, such as ReElement Technologies, the closing of our tax-exempt bond and potential divestitures of American Carbon assets. We are seeing the short-term bottleneck and logistic issues within the supply chain being resolved and believe carbon prices will respond accordingly over the near, medium, and long-term. As such, we are beginning to look at restarting mining operations at our Carnegie mines in the near-term to capitalize on market demand and pick up where we left off earlier in the quarter where we were realizing some of our best fundamental production levels, while executing on the vision of our American Carbon team, including the development of Wyoming County coal to prepare for its operations next year.

As Kirk just mentioned, we are in receipt of two letters of interest for all of the mining assets of American Carbon and Perry County Resources respectively, which provide us ample opportunities to execute on our mission to monetize our carbon assets to best benefit our shareholders. It’s worth reiterating, our platform of carbon assets is unique given the significant mining infrastructure that we own, the quality of carbon that we produce, and have access to the restructuring efforts and investments we have made over the past several years to right-size and streamline the operations along with a substantial embedded organic growth we have to provide incremental high-quality carbon products to the global markets. With the recent updates we have provided, I believe we are beginning to see the fruits of that labor materialize.

And on a side note, we continue to see the industry drive consolidation as evidenced by today’s news of Cleveland-Cliffs making a $7.25 billion bid for U.S. Steel. We feel that we are in great position with the assets that we own today. ReElement Technologies. As we frequently state, our ReElement Technologies division represents an incredibly exciting and very strategic opportunity for us. We’ve never been involved with an entity that in our opinion has a higher ceiling. As we continue to strategically position ourselves in the global supply chain for critical minerals, I think it is important to reiterate and emphasize our position within that market. ReElement is an innovative and advanced refining platform for critical minerals. While we believe we are high value component within the recycling value chain, we are not solely recycling platform.

However, we do believe our position in the recycling market and a sustainable supplier of critical minerals is highly important as we move towards a highly mineral dependent electrified economy. That being said, and again, in our opinion, recycling platforms alone are going to have a hard time bringing – bridging the gap to when end of life for manufacturing scrap volumes materialize to levels that can support their CapEx and OpEx fundamentals. That is where our innovative and distinctively different – are distinctively different in how we are positioned. Our innovative and advanced refining methods using chromatography, displace the toxic conventional methods used in China, and we believe is an important linchpin in making the United States competitive within the electrified economy.

Deploying these conventional refining methods such as solvent extraction or hydrometallurgical here domestically will be very challenging. They are extremely expensive to build and operate due to the harsh chemicals, waste output, and maintenance. Can they separate and purify critical minerals? Yes. But there is a reason why most of these facilities are located in remote areas of Inner Mongolia. Our ability to refine a variety of critical mineral feedstocks from urgent ores, manufacturing scrap, end of life and unconventional sources in a low-cost, low impact, modular, and small footprint allows us to grow congruently with the market’s needs. Meaning, we spend less to produce ultra pure products. The world has never really needed innovation and critical mineral refining until now, or maybe we just became complacent with China’s dominance of the market.

And that is the value proposition of ReElement Technologies. The world needs advancements in refining these raw materials and we believe we provide the most efficient solution. It’s worth noting a few of our recent milestones at ReElement as well. We recently achieved the production of ultra-pure lithium carbonate, which is needed in battery cathode manufacturing, verified by an independent third-party laboratory at 99.9978 purity. From LFP, lithium iron phosphate, battery manufacturing scrap at commercial scale. We believe we are the first that we know of to achieve this milestone worldwide, a very significant achievement. This achievement comes on top of us achieving a 99.986 pure lithium carbonate produced at commercial scale, which was recycling end of life LFP lithium ion batteries.

What makes these milestones unique is our ability to effectively and vary cost efficiently, refine materials from LFP battery chemistries. Typically, lithium and a lithium iron phosphate battery is very difficult to recover using conventional refining methods. Usually, it’s lost. And without the inherent cobalt and nickel that resides within NMC battery chemistries, it hasn’t been remotely cost effective. We are able to flip the paradigm where actually LFP battery chemistry is more economical for us to refine given our ability to quickly extract and capture the lithium at high purity. And as we see it from our perspective, the market, especially EV, is migrating more towards lithium ion phosphate batteries. We expect about 60% of the market will eventually migrate to LFP versus NMC battery chemistry, which puts us in a great strategic position.

This is also why we are aggressively pursuing sourcing agreements for lithium spodumene ore given how we technically are able to refine lithium. Obviously, Mark Jensen is currently pursuing such opportunities right now, and we look forward to communicating future developments on that front. We believe the opportunities to provide low cost and environmentally safe lithium refining around the world in a collaborative manner to meet the needs of the energy storage market are abundant. We’ve had early success in developing partnerships, such as the one we have established with our magnet and battery partners, which we have already announced, and we continue to have good success with several other pilot programs where we are fostering collaborative opportunities within the automotive, wind energy, consumer power tool, and broader energy storage and recycling markets.

We are really excited and confident about developing these pilot programs into long-term commercial partnerships. The number of opportunities we are seeing to provide our next-generation advanced refining capabilities as a value-added service continued to accelerate. We are confident as we continue to showcase our competitive distinction, including performance, a lower cost structure, environmentalism, flexibility, and collaborative value ReElement Technologies will garner significant value for our shareholders. I’d like to recognize our ReElement team for the groundbreaking success that we’ve had – that we’ve achieved to date and in the quick time frame we have achieved it. We do believe that time is of the essence. We also believe as we put together the best team to continue to drive this revolutionary refining technology and from a technical perspective, we believe we have the world’s best chromatography experts and team behind our ReElement division, whether it’s from our university partners, at or from Purdue; our engineering team, that has had longstanding success developing and commercializing the foundations of our technology at Eli Lilly.

We have and will continue to add top talent to further execute on our vision, as well as position ReElement as a standalone company and as a global refining leader. Our goal is to build ReElement into a multi-billion dollar business, and we believe we have the team and the line of sight to do just that. At American Resources, we will continue to execute on our strategic plan. American Resources is focusing on its highest value opportunities and will look to expand its asset base within the natural resources industry utilizing cash generated from any asset sales, royalties to acquire interest in high value, critical and rarer mining assets that can feed our ReElement Technologies division to be refined in its cost-effective environmentally sustainable method.

In closing, we remain very confident in the positioning of all of our assets and the long-term value they provide to our shareholders. We remain hyper focused on unlocking that value. We have ample liquidity to do – and do not foresee us needing to issue equity at the AREC American Resources level to raise cash, especially with some of the sources of non-dilutive capital that we have available. Just to reiterate, as the largest shareholders of American Resources, our management team is committed to maximizing the value of all of our businesses and believe our continued execution and the unbundling of certain assets will help us achieve that. With that, I’d like to turn the call back over to the moderator for questions and answers.

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Q&A Session

Operator: [Operator Instructions] And we’ll take our first question from Mike Niehuser. Your line is open.

Mike Niehuser: Hey, Mark. Interesting press release as always. Just a couple of questions for you. I’m not quite sure I understand the reduction in revenues on the carbon side, but it sounds like it just made a lot of sense in order to not to be able to maintain a positive cash flow. And my interest – my curious – I’m curious if you’re flexible enough to do that or if there’s any degradation to the assets by such a significant swing in pausing production or slowing?

Mark LaVerghetta: Hey, Mike. Well, first, appreciate your questions and all of your support. Hope you’re doing well. So…

Mike Niehuser: Yes, thank you.

Mark LaVerghetta: The first answer on the degradation of assets, no, we don’t believe there’s any degradation. I think from how we’re positioned within all of our businesses, and we look at the overall platform and taking a conservative approach for the business. And as I mentioned earlier on the call, we weren’t just going to produce through a, what we view as a blip in the supply chain, given we’re relatively in the – on a global landscape, we’re relatively small producer of met coal, met carbon. Our customer base is somewhat limited and we have good customers. However, we weren’t going to sacrifice the overall execution of all of our platforms, including ReElement Technologies, just to put inventory on the ground.

Our customer, our main customer became constraints, just given some of the supply chain dynamics. So we chose not to overextend ourselves, dial back on production, focus on continued execution. We continued to assess a variety of options that came out in front of us. We executed an LOI to sell our Deane Mining Complex. As we just mentioned, we’ve received multiple LOIs in all of our assets. We closed on our Wyoming County tax-exempt bond issuance. So our execution was still head down driving forward. But from a capital standpoint and from an overall risk profile, we weren’t just going to spend a bunch of money to put inventory on the ground just given the execution that we’ve – that we continue to have on the ReElement side of the business.

I hope that makes sense for you.

Mike Niehuser: Absolutely. Thanks for the answers. Sorry just to dive into the question. But – so it sounds like you’ve got the flexibility where you can do that between the Carnegie mines and et cetera. And I guess, it’s interesting that there’s just a flurry of activity between Deane and Perry and Wyoming County and these LOIs. What sparked all those things to come to ahead this quarter? Is it just coincidence? Or a lot of these things been worked on for six to 12 months? Or is there something in the environment that’s causing this to happen right away? The reason I’m asking is I’m going to try to get an indication of where you’re going with this side of the business. Obviously, you can answer.

Mark LaVerghetta: Sure. No. Well, I think it’s – you can read between the lines. I don’t think it’s a secret. I think we’re – as we’ve said, we’re steadfast and focused on monetizing our assets, and that includes selling of specific assets or all of those assets. I think the closing of our – of the tax-exempt bond issuance are fully capitalizing that as one of the last virgin boundaries of mid vol met carbon in the Appalachia region, brought back some parties to take a better look at our carbon platform. Additionally, we press release that we received a – an unsolicited bid coming out of the gate post the closing of that bond issuance. I think that had – people that were kicking the tires on the platform of looking at certain assets to get more aggressive with them.