ANR, Inc. ANNNC, ALHA
February 01, 2017 - 11:30am EST by
dd12
2017 2018
Price: 20.00 EPS 0 0
Shares Out. (in M): 16 P/E 0 0
Market Cap (in $M): 320 P/FCF 0 0
Net Debt (in $M): 125 EBIT 0 0
TEV ($): 445 TEV/EBIT 2.0 3.5

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Description

Thesis

ANR, Inc. represents an excellent risk/reward that vastly underprices its interests in a collection of thermal (steam) and metallurgical (coking) coal assets.

ANR, Inc. is a post-bankruptcy equity, stemming from the old Alpha Natural Resources (former ticker ANR). Alpha Natural filed for bankruptcy in 2015 and emerged on July 26, 2016 - the majority of its "good" assets were combined to form Contura Energy, Inc. (ticker: CNTE), while its "bad" assets were left behind to form ANR, Inc. While CNTE has traded publicly for several months, ANR, Inc. is now just doing so.

In a complex and sluggish series of events, holders of Alpha Natural unsecured claims received common stock in ANR, Inc. (among other things). This stock now represents a roughly 44% equity interest in ANR, Inc. Holders of Alpha Natural first lien paper, and a small portion of Massey secured claims, received preferred shares that represent the remainder of ANR, Inc.'s equity. Notably, the preferred and common shares are treated equally, i.e., the preferred stock is not senior to the common, it merely receives a larger percentage of the company's first $75M of distributions. So the common' stock's ownership percentage slowly slides higher as the combined equity value of ANR, Inc. increases.

To complicate matters, ANR, Inc.'s common stock trades as what has been referred to as a "strip" where the OpCo and the HoldCo are represented by two different stocks, tickers ANNNC and ALHA, respectively. These two stocks combined represent one share of common stock and should be considered "one stock" - I recommend interested parties buy them in tandem.

After a few years of depressed pricing for coking coal, a number of factors have conspired to cause a "super spike" in pricing from a recent low of roughly $90 per ton to recent quotes pushing $300/t. While coking coal prices have since come down from these lofty levels, I expect the new baseline pricing to be well above recent lows as significant supply has come offline permanently.

The numbers

1- ANR, Inc. is expected to have roughly $125M of net debt upon emergence, consisting of roughly $250M of cash, $75M of debt and $300M of ARO liabilities.

2- I conservatively estimate ANR, Inc. will ship 12M tons going forward, split 50/50 between coking coal and steam coal. I assume the company is EBITDA breakeven on the steam coal side, with the main lever being coking coal pricing.

3- For 2017, I assume an annual coking coal price of $175 per ton, which generates EBITDA of roughly $300M for ANR, Inc. For 2018, I assume an annual coking coal price of $130 per ton, which I estimate will generate $150M of EBITDA.

4- Current net debt of $125M flips to net cash of $75M by the end of 2017 as the company generates free cash flow over the course of 2017.

Valuation

At a current strip price of $20 (ANNNC and ALHA shares combined), the common stock market cap is $140M - this represents roughly 44% of ANR, Inc.'s total equity value (again, the % ownership for the common shares goes higher as the total equity value of ANR, Inc. increases). This implies a market cap of $320M for ANR, Inc., and an enterprise value of $245M by year end 2017, which computes to an EV/2018E EBITDA multiple of 1.6x.

Assuming the company can be awarded a 3x EV/EBITDA multiple, which represents a deep discount to comparable market multiples, the shares would be worth $33. Further, I believe my assumptions on the trading multiple, as well as coking coal pricing in 2018 and beyond, are conservative. If that is the case, upside to this $33 price is significant.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1- Many Alpha Natural unsecured note holders are awaiting their ANR, Inc. common stock distributions, which are expected any the coming days. This should increase ANR's trading liquidity and general public awareness

2- Confirmation of my assumptions, all taken from the publicly filed Alpha Natural bankruptcy docket and SEC filings, should occur once ANR, Inc. begins to report earnings and makes other disclosures as a publicly-traded, standalone entity

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    Description

    Thesis

    ANR, Inc. represents an excellent risk/reward that vastly underprices its interests in a collection of thermal (steam) and metallurgical (coking) coal assets.

    ANR, Inc. is a post-bankruptcy equity, stemming from the old Alpha Natural Resources (former ticker ANR). Alpha Natural filed for bankruptcy in 2015 and emerged on July 26, 2016 - the majority of its "good" assets were combined to form Contura Energy, Inc. (ticker: CNTE), while its "bad" assets were left behind to form ANR, Inc. While CNTE has traded publicly for several months, ANR, Inc. is now just doing so.

    In a complex and sluggish series of events, holders of Alpha Natural unsecured claims received common stock in ANR, Inc. (among other things). This stock now represents a roughly 44% equity interest in ANR, Inc. Holders of Alpha Natural first lien paper, and a small portion of Massey secured claims, received preferred shares that represent the remainder of ANR, Inc.'s equity. Notably, the preferred and common shares are treated equally, i.e., the preferred stock is not senior to the common, it merely receives a larger percentage of the company's first $75M of distributions. So the common' stock's ownership percentage slowly slides higher as the combined equity value of ANR, Inc. increases.

    To complicate matters, ANR, Inc.'s common stock trades as what has been referred to as a "strip" where the OpCo and the HoldCo are represented by two different stocks, tickers ANNNC and ALHA, respectively. These two stocks combined represent one share of common stock and should be considered "one stock" - I recommend interested parties buy them in tandem.

    After a few years of depressed pricing for coking coal, a number of factors have conspired to cause a "super spike" in pricing from a recent low of roughly $90 per ton to recent quotes pushing $300/t. While coking coal prices have since come down from these lofty levels, I expect the new baseline pricing to be well above recent lows as significant supply has come offline permanently.

    The numbers

    1- ANR, Inc. is expected to have roughly $125M of net debt upon emergence, consisting of roughly $250M of cash, $75M of debt and $300M of ARO liabilities.

    2- I conservatively estimate ANR, Inc. will ship 12M tons going forward, split 50/50 between coking coal and steam coal. I assume the company is EBITDA breakeven on the steam coal side, with the main lever being coking coal pricing.

    3- For 2017, I assume an annual coking coal price of $175 per ton, which generates EBITDA of roughly $300M for ANR, Inc. For 2018, I assume an annual coking coal price of $130 per ton, which I estimate will generate $150M of EBITDA.

    4- Current net debt of $125M flips to net cash of $75M by the end of 2017 as the company generates free cash flow over the course of 2017.

    Valuation

    At a current strip price of $20 (ANNNC and ALHA shares combined), the common stock market cap is $140M - this represents roughly 44% of ANR, Inc.'s total equity value (again, the % ownership for the common shares goes higher as the total equity value of ANR, Inc. increases). This implies a market cap of $320M for ANR, Inc., and an enterprise value of $245M by year end 2017, which computes to an EV/2018E EBITDA multiple of 1.6x.

    Assuming the company can be awarded a 3x EV/EBITDA multiple, which represents a deep discount to comparable market multiples, the shares would be worth $33. Further, I believe my assumptions on the trading multiple, as well as coking coal pricing in 2018 and beyond, are conservative. If that is the case, upside to this $33 price is significant.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1- Many Alpha Natural unsecured note holders are awaiting their ANR, Inc. common stock distributions, which are expected any the coming days. This should increase ANR's trading liquidity and general public awareness

    2- Confirmation of my assumptions, all taken from the publicly filed Alpha Natural bankruptcy docket and SEC filings, should occur once ANR, Inc. begins to report earnings and makes other disclosures as a publicly-traded, standalone entity

    Messages


    SubjectRe: Questions
    Entry02/02/2017 04:32 PM
    Memberdd12

    LuckyDog,

    this is a very direct play on met coal, but in particular, met coal not moving all the way back down to 2016 price levels.  one's judgment of where these prices settle will dictate the "fair value" of the assets.  My EBITDA number for 2017 is $300M, which is pretty much set by now, which will turn the company's net cash position positive by year end.

    from there, it's all about what kind of pricing we see in 2018 and beyeond for the six million tons of annual met coal production.  at $100, $125 and $150 per ton, my EBITDA numbers are roughly $50M, $125M, and $225M, respectively.  at $22 per common strip, the EV is projected to be $275M by the end of this year.

    these are estimates and have not been confirmed with any newco ANR, Inc. company-issued information (aside from guiding to 13M tons for 2017, which was done in Novomber).  my estimates are derived from the bankruptcy docket and from old SEC filings.  I would expect more disclosure shortly .  However, in the reorganization plan filed May 25, 2016, the debtors projected $110M of EBITDA for 2018.  it is unclear what they were using as their met coal price assumption, but it is noteworthy that at that time the spot price was in the $70s per ton.

     


    SubjectRe: Questions
    Entry02/03/2017 11:14 AM
    Memberdd12

    judging by the rating, no one cares, but:  Ramaco (METC), which has half the met reserves of ANR and projects it will have 2/3 the annual production of ANR by 2021, just priced its IPO.  the Ent Value for METC at the current quote is roughly $450M, so the market discrepancy between these two names is perplexing.


    SubjectRe: Google Is Broken
    Entry02/04/2017 02:06 AM
    Memberdd12

    Bowd,

    everything about this situation is overly-complicated.  In hindsight I wish I had laid all of this out in the original write-up.  Looking back, I skipped over / simplified too many steps in my haste to get "the answer" in writing.

    First, the common stock (the securities I have discussed) versus the 2 classes of preferred stock (distributed to First Lien holders) -- the economic interests of the preferred stock and the common stock are dictated by their cash distribution schedule.  ANR, Inc.'s cash flow distribution is as follows:

    1)  Preferred Class A Equity (Alpha Natural First Lien):  65% of distributions up to $75M, and 50% over $75M.  these shares were trading privately, and I have not heard of any prints in a few weeks.

    2)  Preferred Class B Equity (Massey Secured Claims):  3% of distributions.  not trading.

    3)  Common Equity (Alpha Natural General Unsecured Claims):  32% of distributions up to $75M, and 47% over $75M.  trading sparsely outside of a few blocks.

    these three classes of stock represent 100% of the equity in Anr, Inc.  As the cumulative distributions grow, the Common Equity gets a higher percentage versus the Preferred Equity.  to simplify things, i have used a flat percentage to define each class' equity:  53% ownership to the Preferred A, 3% to the Preferred B, and 44% to the Common.

    to complicate matters, each class of stock gets ownership in the OpCo and the Holdco, which receive 79% and 21% of distributions, respectively.  so in the case of the Common Stock, it is referred to as a "strip" which is split 79% Opco (ticker: ANNNC, $18.50) and 21% HoldCo (ticker: ALHA, $4.90).  the two share classes within the Common Equity add to one share of Common Stock, priced at $23.40 as of Friday's close; they reflect the 79/21% split efficiently at that close.  Sidebar:  I view this positively as the market appears to be sorting out this bird's nest.

    as for the "obligations that must be satisfied before any distributions are made ..." -- this is a very real liability and I have included it in the Enterprise Value.

    Upon emergence on 7/26/16, ANR had ARO Liabilities of $293M, Debt of $150M and cash/restricted cash of $295M.  so net debt + ARO Liabilities = $148M.  While the plan called for continued suppressed met coal pricing for the 2016 stub period and through 2017, the opposite has happened.  The plan projected net debt + ARO Liabilities to increase from $148M at emergence to $195M.  Given the "super spike" in met coal pricing this past Fall, I have projected that net debt + ARO will have ended 2016 at $125M.  Thus at some point in the near future I project that ANR, Inc. will have an "operating" cash balance sufficient to run the business, in addition to having the ARO Libialities that are payable over a number of years fully reserved for in a Restricted Cash basket.

    While I do not know what level of non-restricted cash is required to handle working capital swings, I expect the company to have a net cash balance (cash in excess of debt and ARO Liabilities, by about $75M) by the end of 2017 and fully expect cash distributions to be made as soon as possible.  It has always appeared to me that these mines were left out of the formation of Contura so that a separate entity would be saddled with these ARO Liabilities, left for dead essentially ... set them up for solvency, and if they ever get around to making meaningful cash distributions then great.  if not, let's not hold back Contura from achieving a reasonable equity valuation.  Much has changed since this plan, on which I am only speculating, was hatched.

    Given the above balance sheet; my projections for EBITDA in 2017 and beyond; and the Plan's capital expenditure requirements, I think it is reasonable to expect that this company will be "run for cash" and not be in expansion / acquisition mode.  I would not expect a multiple equal to that of other coal companies for many understandable reasons, namely its reliance upon met coal not decling back to its lows of 2016.  but I think that trading at 2x my 2018 EBITDA estimate (using year end 2017 projected balance sheet) and the prospect for substantial cash distributions is an attractive combination.


    SubjectCoal IPOs
    Entry02/04/2017 06:09 PM
    Membershoobity

    Pretty timely article from the journal this weekend. Not sure what this says about the market and where coal is but generally we take this as a chance to be cautious.

    Loved the write-up dd12 thank you.

    https://www.wsj.com/articles/coal-miners-begin-selling-shares-to-the-public-again-after-period-of-tumult-14861232040


    SubjectRe: Coal IPOs
    Entry02/05/2017 10:27 AM
    Memberdd12

    thanks, shoobity.  i agree that caution is prudent here, valuation dependent of course.


    SubjectRe: Re: Re: Google Is Broken
    Entry02/05/2017 03:31 PM
    Memberdd12

    LD, it's a good point and you are not missing anything.

    1)  I have accounted for $15M of annual pension contributions in my free cash flow forecast, so any cash distribution available to the equity has it built in - cash available for distribution is the underpinning of the thesis on ANR, Inc.

    2)  I have not heard of EV/EBITDA multiples quoted on the Street to include ARO or pension liabilities, thus they are not comparable to the multiples we currently see.  in the case of ARO here, it was an obvious include given its size and the 50% cash flow sweep.  pension liability here is also abnormally large relative to EV, so i can see the argument being made to include it - I chose not to, and I can imagine comparable companies would have the same issue, albeit smaller or even much smaller

    3)  My projections for 2017 and 2018 EBITDA are $300M and $150M, respectively.  at $23.40, including the pension liability would increase the projected EV at year-end 2017 to $475M ... thus the 2018E EBITDA multiple would go to 3.2x from my statement of it being 2x


    Subjectsource docs
    Entry02/06/2017 01:11 PM
    Membergman

    DD12, interesting idea and helpful additional commentary below.  Could you possibly point me to the 2-5 most relevant documents in the bankruptcy docket to get up to speed/verify some of your assumptions?  Thanks.


    SubjectRe: source docs
    Entry02/06/2017 04:39 PM
    Memberdd12

    gman, the most important source is from the court docket:  http://www.kccllc.net/alpharestructuring/document/1533896160525000000000025

    also, their website has a presentation and a production guidance press release


    SubjectUpdate
    Entry03/25/2017 04:14 PM
    Memberdd12

    I have to preface this by saying that the process of sorting out ANR, Inc. and its assets / financials from the Alpha Natural bankruptcy has been difficult.  Since the emergence, Contura Energy has been reporting financial information and has moved on from the picture.  What is left is ANR, Inc., which remains murky, as the reporting via the bankruptcy docket and the company website has been opaque.

    However some new clues have emerged, and while I will am not able to answer many of the questions that have arisen, there are some things at least worth noting:

    1)  I came across a filing form the docket I had previously missed:  http://www.kccllc.net/alpharestructuring/document/1533896170130000000000004

    As of December 31, ANR had $646M of cash on the balance sheet.  According to this filing, there are $42M of cash disbursements remaining under the plan - this implies that ANR is entitled to a cash balance of $594M, net of expected disbursements.  Much of this cash is restricted to collateralize ARO of $293M and an LC facility of $125M.  But this cash balance is much higher than my expected figure of at least $250M as was dictated by the plan.

    It is up to the reader in their judgement on how to treat ANR's net debt figure.  A conservative stance would be to net the ARO, the LC facility, and the long-term post-retirement liabilities against this cash balance - this exercise leaves the company with a "net debt" figure of $16M at 21/31/16, which is significantly lower than my original assumption.  Using current prices for the preferred and common strips, plus the 10% MIP, the current market cap is $356M and the EV is $372M.

    2)  Their thermal coal operations, which I estimate to be 7M tons of production per year, should benefit from the significant move in CAPP pricing since emergence.

    3)  The guts of the story, their met coal operations, remain cloudy in terms of expected pricing relative to the global benchmark.  I expect at least 50% of their production to be sold into the international markets over time, via Contura's logisitics business - the price per ton received by Contura in the 4Q was $153 per ton.  I am led to believe that ANR represents a meaningful portion of that volume.

    Also notable is that industry sources have suggested that their Marfork mine, which is estimated to generate half of their met production at 3M tons annually, is a desirable asset.  My biggest concern is that ANR was stuck with the very worst assets from Alpha Natural.  I now have a high degree of comfort now that at the very least, the Marfork mine is extremely competitive in today's marketplace.  As for the rest of their production, I cannot be sure - I do know they are "in the money" at current met pricing, but I cannot be sure where the fulcrum point for those mines will be as met pricing inevitably trickles lower over time.

    4)  Mgmt recently released a letter to shareholders, along with a new PP presentation.  The most important takeaway here is Mgmt will receive a new class of stock that is entitled to 10% of the company's cash distributions, which has increased the mkt cap calculation of course.  The aribiter of economic value for these various classes of stock is their seating in the Cash Distribution Waterfall.  The presentation reinforces the driving force behind the company's strategy, which is to tighten up the operations and achieve value via cash distributions, which I now believe will be coming more quickly than I had previously thought.

    I would be disappointed if the company did not collapse this convoluted share stucture.  I can only guess this was done for various reasons during the bankrupcty process.

    5)  The company will be filing its annual report at the end of April, followed by its Q1 results shortly thereafter.  They will remain a "private" company and will make these releases on a controlled-access portal - also disappointing.  Apparently this will be a business run for cash, as their treatment is almost as though it's a private credit.  I am a bit bothered that they will not make their filings public initially, as has Contura.  I can only hope a move toward public reporting is forthcoming.


    SubjectEdit -- Update
    Entry03/25/2017 06:32 PM
    Memberdd12

    The cash balance is $636M, not $646M, in point 1)

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