Ramaco Resources, Inc. (NASDAQ:METC) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Welcome to the Ramaco Resources First Quarter 2023 Earnings Conference Call. At this time, our participants have been placed in a listen-only-mode, and the floor will be open for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to Jeremy Sussman, Chief Financial Officer. Sir, please go ahead.

Jeremy Sussman : Thank you. On behalf of Ramaco Resources, I’d like to welcome all of you to our first quarter 2023 earnings conference call. With me this morning is Randy Atkins, our Chairman and CEO; and Chris Blanchard, our Chief Operating Officer. Before we start, I’d like to share our normal cautionary statement. Certain items discussed on today’s call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Ramaco’s expectations concerning future events. These statements are subject to risks, uncertainties and other factors, many of which are outside of Ramaco’s control, which could cause actual results to differ materially from the results discussed in the forward-looking statements.

Any forward-looking statements speaks only as of the date on which it is made, and except as required by law, Ramaco does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I’d also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss today in our press release, which can be viewed on our website, ramacoresources.com, Lastly, I’d encourage everyone on this call to go on to our website and download today’s investor presentation under the Events Calendar. With that said, let me introduce our Chairman and CEO, Randy Atkins.

Randall Atkins : Thanks, Jeremy. Good morning to everyone, and thanks for joining the call. We have a lot to unpack this morning. First off, we executed well in Q1. Fortunately, we had a strong quarter and ended up a bit ahead of what was expected. Also yesterday, we filed a separate press release and shareholder letter related to the significant news on our railroad deposits in Wyoming. I will discuss the independent confirmation on this discovery may lead to a unique new direction for us. Start, in terms of our quarterly performance, I’m happy to note that with some help from the rails, we managed to ship coal in Q1 with much better results. We told our investors that our goal in ’23 is to execute. Thus far, this year, we are steadily working to reverse the operational setbacks we incurred in ’22.

Last quarter, adjusted EBITDA jumped 50% to $48 million from year-end, and earnings per share jumped 75% to $0.57 per share. In Q1, we also achieved both record production and sales. As a result of our better-than-expected performance, we are increasing our full year production and sales guidance, which Jeremy will talk about in more detail in a moment. In addition, despite continued inflationary and wage pressures, our cash mine costs fell almost $10 per ton from Q4 to Q1. Elk Creek cash costs declined more than 10% sequentially to $90 per ton in Q1, which likely puts out among the lowest cash cost mines in the country. In addition, as second half production ramps at Berwind, our overall company-wide mine costs should decline even further.

I am pleased to note that the first section at the Berwind #1 mine we started earlier than anticipated and has been ramping production since March in line with expectations. Board recently approved pulling forward the start of the second section of Berwind from ’24 into mid-’23, which should add approximately 300,000 tons of additional production on an annualized basis by late this year, and the extra tonnage will continue to reduce mine cash cost. We can also report that our Maben mine recently produced its first tons. In addition, the startup is imminently from our roughly year-long project to increase Elk Creek’s prep plant capacity by 50% from 2 million to 3 million tons on an annualized basis. We will ramp production at Elk commence with that processing capacity.

On the marketing front, we now have 81% of our forecasted 23 production contracted with almost 2 million tons sold at a fixed price of just under $200 per ton. Our sales team continues to aggressively reach out to new markets to increase our global footprint. And since the start of the year, we have sold our first tons to India, Japan and Indonesia. Overall, we now have about 700,000 tons of production at midpoint of guidance, which is not contracted for and will be sold at index pricing. While worldwide benchmark pricing continues to move lower, our strong contracted position somewhat insulates Ramaco a bit more than our peer group. As far as looking down the road for the balance of ’23, we will have a substantial second half increase in production and sales guidance as we ramp up Berwind and the Elk plant.

By Q3, we should be running at a 4 million to 4.5 million ton per year annualized production and sales rate. Chris Blanchard will have more to say on all our operations in a moment as well. I would now like to turn to perhaps today’s major announcement. This week, we received an independent assessment that our Brook Mine may contain one of the largest unconventional rare earth deposits in the United States as well as one of the most significant mines in this country of valuable rare earth elements containing magnetic properties. I’ve laid out a good deal of background on this in my shareholder letter. The bar phrase from the play Hamilton, it is nice to have Washington on your side. The journey which led us to this point started with our research partnership with the Department of Energy’s National Energy Technology Laboratory.

Several years ago, we provided an ETL samples of our Brook Mine coal as part of a national assessment they were performing to identify major areas of deposits in the U.S. of critical and strategic rare elements. They came back to us about a year later, candidly surprised that they had found exceptionally high concentration levels of magnetic RIEs in our deposits, indeed levels in line with some of the highest recorded concentrations found in China. That clearly got our attention. Over the past 2 years, we have embarked on an extensive core drilling and chemical analysis to determine the extent of the deposits. The technical detail on the geological and chemical analysis is contained in the exploration target report from where international independent reserve engineers.

That report is now on our website. It is important to recognize that what we have discovered in our reporting on today encompasses less than 1/3 of the ultimate area of the Brook Mine. That area is permitted, and we could fast track initial production on the site by later this year, subject to further assessment. We will also do additional future work to determine the scale and dimension of the entire deposit contained across the whole property. That then begs the question where we go from here. First, working with NETL and others, we will continue further geological assessment, drilling and chemical analysis on the entire property so we can understand the overall scope of the deposit. We will also study the best manner to process what is largely a clay type deposit into an REE concentrate.

The good news is that given the softer nature of the plays, it will be less costly and more environmentally friendly to process and typical REEs found in harder conventional mineral structures. We also intend to study some novel mining techniques, which we might deploy to capture more of the clay and perhaps less on the call. Overall, the mining approach will basically be straightforward old-fashioned surface mining. And of course, as we proceed with our diligence, we will study the economics around the entire proposition. When I said this was a unique find, I meant it as this is really the only unconventional REE play in the United States at this time. And much of what we will be doing certainly on processing will be a matter of first impression.

As I said in my shareholder letter, we will look at this development with the same financial discipline that we have deployed in all our met coal business. This will not be a bet-the-farm approach, although eventually, it might lead to Ramaco developing a very valuable farm. Our idea is to take this a step-by-step on most modular approach to make sure we are proceeding correctly in what is a fast-moving new area of critical minerals. We intend to fund this project from internal cash flow and apply the same conservatism and discipline that we have through our other development projects. And unlike many discussed critical mineral projects, this one is currently already permitted, shovel ready and in a position to begin mining by later this year, should we so choose.

We also hope to be materially helped by our partnership with the DOE’s National Labs. They have unique visibility into the overall REE space as well as access to new techniques and science that will benefit the whole process. In summary, we will, of course, update our shareholders on a regular basis as we move forward. But in closing, this important mineral discovery opens a door for Ramaco to transform into a very different type of company going forward. We would no longer solely be a met coal, but we could also become an important producer of REE critical minerals and their constituent products, especially magnetics. I would also note from an investment standpoint that there are currently not many operating REE producers in the U.S., and they tend to be valued very differently than coal companies.

We hope as this unfolds, this could turn out to be a very positive experience for Ramaco and for its investors, as they say, a brave new world. And with that, I would like to turn the floor over to the rest of the team to discuss more detail on finance, operations and markets. So Jeremy, please start with a rundown on our financial metrics in the overall market.

Jeremy Sussman : Thank you, Randy. As you noted, it is nice to have a quarter that beat expectations and saw a meaningful sequential earnings growth. Our first quarter net income was up 75% from the fourth quarter of 2022 on better production, sales, pricing and cost metrics across the board. Overall production of 834,000 tons in Q1 was up 20% compared with Q4 as new mines ramped up production. Total sales volume of 757,000 tons was up 12% from the fourth quarter. We saw a meaningful improvement in rail service in the first quarter, and we applaud the efforts of our railroad partners. Company produced cash mine costs were $105 per ton, which was 8% better than Q4. As Randy mentioned, cash cost to Elk Creek were $90 per ton, down $11 per ton sequentially.

We expect to continue to operate near this level at Elk Creek throughout the year. At the same time, we anticipate overall cash costs to fall meaningfully to fall throughout the year as both Berwind and Maben ramp up production, and we achieved better economies of scale as a whole. Realized pricing was $185 per ton in Q1, up $3 per ton from the fourth quarter. Pricing was negatively impacted by $6 per ton due to our final API2 index linked cargo that was shipped in early January. Now turning to our outlook, I would like to touch on a few of the key areas in our guidance tables. First, we are maintaining our full year 2023 guidance across the board with the exception of production and sales, we are raising both of these metrics by 100,000 tons on the back of a strong first quarter.

We now anticipate production of 3.1 million to 3.6 million tons and sales of 3.3 million to 3.8 million tons. Second, while we are maintaining our book tax rate of 20% to 25%, I would point out that our cash tax rate is likely to be around just 5% to 10%. Third, as it relates to the second quarter, sales are expected to increase modestly versus first quarter levels of 757,000 tons. In addition, U.S. metallurgical coal spot pricing is currently down roughly 25% from first quarter averages. Thus, if indices remain at current levels for the duration of Q2, we anticipate our Q2 average realized pricing would fall about 9% to 11% from first quarter levels of $185 a ton. While this concludes my financial remarks, I’m now going to give our sales and marketing update with Jason currently traveling in Asia.

As Randy noted, our sales team continues to make solid inroads into parts of the world where steel production and demand for high-quality metallurgical coal is structurally growing. On the back of our new Asian business, we now have 2.7 million tons or 81% of our forecasted production committed. We will continue to layer in new export business throughout the year as we continue to ramp up production. In terms of the overall market, we are seeing both signs of strength and some signs of weakness out there. So let’s start with positives. First, U.S. and Chinese steel production are close to year-to-date highs. As it relates to the U.S., it is good to see both steel capacity utilization and pricing moving in the same direction. Indeed, U.S. hot rolled prices are around $11.60 per ton, up more than 75% from their recent lows, while steel capacity utilization is at a 9-month high above 76%.

Second, Chinese credit growth has been increasing throughout the year with total lending hitting an all-time high in the first quarter. Strong Chinese credit growth is often a leading indicator to an increase in overall economic activity, which of course, would be positive for metallurgical coal. Third, despite strong industry-wide margins, global coal CapEx remains just a fraction of what it has been historically, given increased financing, permitting and overall ESG challenges, barriers to entry into the coal space have never been higher. Now on to the negative side. Since last quarter, there have been both increased economic concerns in the western world and in China. In the Western world, inflation and bank failures have, of course, dominated the headlines.

None of this economic backdrop is providing any near-term uplift in the market. Expanding on China a bit, PMI unexpectedly fell into contraction territory in April, declining to 49.2% from 51.9% in March. While steel production remains strong, the combination of steel, iron ore and met coal prices in China are currently near year-to-date lows on lackluster demand. Given current weak steel margins, there is increasing talk of steel production cuts in China, which could reduce near-term met coal demand. In addition, some of the supply disruptions we saw earlier this year have cleared up, especially in Australia. As a result, we are seeing more met coal offered for sale, which has had a negative impact on prices recently. However, looking ahead, we would generally agree with the shape of the forward met coal curve, which suggests a 15% to 20% rebound in pricing heading into next year.

We would expect steel mills to lead stock once met coal prices begin to stabilize as we believe inventories are generally pretty low. Furthermore, we hope that strong Chinese credit growth will turn into increased housing and infrastructure activity, which should lead to better downstream demand later this year. In the meantime, we will look to continue to execute on new sales and control those factors which we indeed have control of such as production and costs. With that said, I would now like to turn the call over to our Chief Operating Officer, Chris Blanchard. Chris.

Chris Blanchard : Thank you, Jeremy. As Randy alluded, in the first quarter, we passed a number of operational milestones with additional steps in our production ramp and the expansion of our prep plant at Elk Creek ongoing. Both of these will start hitting in the second quarter and continue accelerating through the balance of the year. Most importantly, though, the new growth mines and sections that we added in 2022 at Elk Creek completed the ramp-up periods and have all reached steady state levels of coal production. Economies of scale, stabilization of the workforce and training our new employees all led to higher productivity levels and helped drive our costs into the $90 per ton range at Elk Creek. Even while the pressures haven’t yet subsided on wage increases in competition, higher sales-related costs and the inflationary pressures on fuel, steel, chemicals and other consumable products.

Relating to the Elk Creek plant upgrade itself, this project is entering its final weeks. The final deliveries of critical equipment were made earlier this week and the last stages of installation will take place over the next 2 weekends. We anticipate a tie-in late this month. We expect that the new circuitry will increase the overall plant feed rate from 700 tons per hour to 1,050 raw tons per hour. This 50% increase equates to an annualized run rate increase from approximately 2 million to 3 million clean tons per year at our expected recovery levels. Later this summer, we expect to break ground on the final stage of the Elk Creek plant enhancements, which will expand our clean coal storage area to allow further segregation or coals and better blending opportunities to meet more customer needs.

Importantly, except in normal maintenance and advancement capital at our mines at Elk Creek, we do not expect to expand any additional project or growth CapEx to serve the plant expansion through the remainder of 2023. Turning to the low ball and mid ball mines at our Berwind and Knox Creek operations, we’ve taken several positive steps forward. First and foremost, on March 7, we brought our Berwind mine backing the production after approximately 9 months spent recovering and rehabilitating from the July explosion. During the intervening months, we made a few substantial ventilation and safety enhancements to the mine. The chief amongst these is installing upgraded dual mine fans in parallel with a backup diesel generator on site so that we can ensure no buildup of any components in the future, whether electricity is interrupted to the mine or not.

This will also allow us to perform our routine fan maintenance without idling the mine or interrupting normal ventilation. Production at Berwind has begun in line with our expectations. We expect the final development mining to be completed on our #1 section by mid-summer, allowing us the option of mining into the thick owned coal that we acquired with the Amonate assets during the third quarter of 2023. Feed position, coupled with the elimination of all tracking and the run of mine production built directly to the Berwind prep plant should dramatically lower the combined cash costs from historical development cash cost levels we have experienced. We are also moving forward with the addition of the second mining unit at the Berwind mine during the third quarter following the completion of the mine’s second share.

Ventilation excavation should be completed in mid-summer with production commencing from the second section shortly thereafter. This expansion puts Berwind mine back on the production ramp that we had previously projected prior to 2022 ignition events. As the bulk of the growth in Ramaco’s medium-term production and is at the Berwind complex, one of our biggest areas of focus is now on the recruiting, training, the building the workforce at Berwind and Knox Creek areas in what remains a very competitive labor market. Lastly, we are pleased that our Maben operation has reached its first production earlier this month. Surface production has commenced, and our first call has been shipped from the mine and processed at the Berwind plant. In our initial bits, the quality of the coal and the mining conditions have been excellent.

The Highwall Miner will start mining its initial panel in the next several days, and we expect the mine to be ramped up to its full productivity by the end of June. [indiscernible] coal from the Maben mine have excellent metallurgical properties as a standalone product or to improve the blends with other low volatile coals. We are continuing our exploration and the examination of this property and have already started permitting several additional mining areas that have not been included in the reserves for the profit. Engineering and planning work will continue for the potential future development of this complex with additional surface mines and underground mining. Summarizing the operations, nearly all the development work, capital projects and advanced hiring that was done in 2022 set the table for a strong first quarter of 2023 and the continued ramp of production as we moved through the last 3 quarters of this year.

We expect to exit 23 running in excess of 4 million ton per year — clean ton per year run rate with the flexibility to grow and expand our coal portfolio is best makes sense with the needs of our customers and as the market dictates. This now concludes management’s prepared remarks. I will now turn the call over to the operator for the question-and-answer session of the call. Operator?

Q&A Session

Operator: Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Lucas Pipes with B. Riley Securities. Please go ahead.

Operator: We’ll take our next question from Nathan Martin with The Benchmark Company. Please go ahead. Your line is open.

Operator: Thank you. We’ll take our next question from Curt Woodworth with Credit Suisse. Please go ahead. Your line is open.

Operator: This will conclude the Q&A portion of today’s call. I would now like to turn the floor over to Randall Atkins for additional or closing remarks.

Randall Atkins : Thank you. Well, I again appreciate everybody being on the call this morning. These are interesting times, both on a macro basis and certainly for Ramaco, and we will look forward to keeping everyone abreast of our activities and certainly for the call for next quarter. I hope everyone has a nice weekend. And bet well on the Derby. Take care.

Operator: Thank you. This concludes today’s Ramaco Resources First Quarter 2023 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.