We came across a bullish thesis on Warrior Met Coal, Inc. (NYSE:HCC) a Substack page called “Undervalued and undercovered” by Hugo Navarro. In this article, we will summarize the bull’s thesis on HCC. HCC shares were trading at $64.74 as of Oct 16th. HCC’s trailing and forward P/E was 8 times and 6 times, respectively, according to Yahoo Finance.
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Warrior Met Coal (NYSE: HCC) is a leading producer and exporter of premium-quality metallurgical coal in the United States. It specializes in coal used exclusively for steelmaking. The company emerged from the bankruptcy of Walter Energy in 2015. It then transformed its core assets into a financially stable entity under the leadership of CEO Walter Scheller. This company has been generating consistent free cash flow–returning $1.4 billion to stockholders since 2017–and maintains a healthy balance sheet with a net cash position of $550 million.
The company operates two active underground mines in Alabama’s Blue Creek coal seam. This coal is comparable to the premium Hard Coking Coal (HCC) mined in Australia. A key growth driver for the company is its Blue Creek Mine expansion. This is expected to increase production capacity by 60% and extend production for another 50 years. The expansion–projected to be fully operational by mid-2026–could boost Warrior’s annual output from 8 million tonnes to 12.8 million tonnes.
It has the potential to reach 17.6 million tonnes if the company decides to build a second wall at Blue Creek.
Warrior Met Coal’s client base is geographically diverse, with a strong presence in Europe, Asia, and South America. The company can deliver coal to Europe in just two weeks–compared to the five weeks it takes for Australian producers–giving them a clear logistical edge in that market. Looking ahead, the company expects Asia to become its primary market, with India and Southeast Asia driving most of the growth in demand for metallurgical coal.
The global coal market–particularly for metallurgical coal, as in this case–remains robust despite environmental policies and ESG initiatives pushing for the eventual phase-out of fossil fuels. However, China’s economic slowdown has recently impacted steel consumption and production. leading to increased steel exports and putting downward pressure on global steel prices. This, in turn, has affected met coal prices in the near term.
In valuing Warrior Met Coal, the focus is on 2027 when the Blue Creek mine is expected to be fully operational. The company’s revenue projection for 2027 assumes selling 90% of their total production capacity, amounting to 11.52 million tons annually. The cost structure includes a cash cost of $120 per ton of coal produced, expected capital expenditures of approximately $200 million for 2027, and projected growth in SG&A expenses and depreciation & amortization.
Finding opportunities that can deliver a 30% IRR over a decade is rare. Plus, the company’s robust balance sheet ensures that even in a scenario where no profits are generated for the next two years, there is minimal risk of the Blue Creek project being delayed or compromised.
Unlike many of its peers, Warrior Met Coal is positioned as a long-term play on coal prices. While other companies may be more reliant on short-term fluctuations for buybacks and dividends, Warrior’s strategic focus allows it to weather near-term volatility better—particularly as coal prices are expected to remain under $200 in the short term due to external factors like China’s economic situation. Moreover, Warrior’s position as a low-cost producer further insulates it from economic downturns.
Warrior Met Coal thus has two potential paths for growth beyond 2027: they could invest in a second longwall for the Blue Creek mine, or they could follow a strategy similar to AMR and implement an aggressive share buyback program. Either option provides further potential upside for shareholders.
The main risk to this investment lies in long-term coal prices falling below $180. However, this seems unlikely given current market conditions, with Australian premium low volatility coke futures already pricing above $200 for 2025. The high-quality coal Warrior produces typically trades at only a slight discount to this. We believe this signals strong pricing stability in the long run.
Warrior Met Coal, Inc. is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held HCC at the end of the second quarter, which was 32 in the previous quarter. While we acknowledge the risk and potential of HCC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HCC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.