| 2017 | 2018 | ||||||
| Price: | 11.89 | EPS | 0.55 | 1.25 | |||
| Shares Out. (in M): | 40 | P/E | 22.2 | 9.7 | |||
| Market Cap (in $M): | 480 | P/FCF | N/A | 19.6 | |||
| Net Debt (in $M): | -80 | EBIT | 32 | 73 | |||
| TEV (in $M): | 400 | TEV/EBIT | 12.6 | 6.6 | |||
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Investment Thesis
Ramaco Resources, Inc. (METC) is a developer of high-quality, low-cost metallurgical coal in central and southern West Virginia and southwestern Pennsylvania. On 02/02/17 the Company went public, selling 6mm shares (3.8mm primary, 2.2mm secondary) at $13.50/share at the mid-39.6point of the $12-15 offering range. The Company received net proceeds of ~$43.7mm, of which it used $10.7mm to pay in full a four-year spromissory note held by Ramaco, LLC, an entity controlled by METC’s existing owners. With the remainder of the proceeds as well as existing cash and projected cash flow from operations, METC has fully financed the development of its asset portfolio through 2020. At its current price, METC appears to be an attractive long opportunity given its projected FCF yield (13% in 2020, based on the financials presented below) even if metallurgical coal prices fall to $120/MT, a 30% decline from current prices of $170/MT. Further, the stock should be driven upward near-term by two potential calysts: (i) the initiation of investment bank sell-side research coverage and (ii) the announcement by the Company of it's development plan for its Knox Creek asset which would be additive to the financials presented below.
Company Description
METC achieved initial commercial production of metallurgical coal in December 2016. The Company has a near-term development portfolio of four long-lived projects: Elk Creek, Berwind, RAM Mine and Knox Creek.
· Elk Creek – Elk Creek is located in southern West Virginia and coal production began in 4Q16. Management projects Elk Creek will produce 2.6mm tons of metallurgical coal annually by 2020 from both surface and underground operations.
· Berwind – Berwind is located on the border of West Virginia and Virginia. Management projects coal production will commence in 2017 and will increase to 900k tons of metallurgical coal annually by 2020 from underground operations.
· RAM Mine – RAM Mine is located in southwestern Pennsylvania. Management projects coal production will commence in 2019 and will increase to 540k tons of metallurgical coal annually by 2020 from underground operations.
· Knox Creek – Knox Creek is located in southwestern Virginia. Management projects coal production will commence in 2017, however the mine plan and production forecast are still being finalized by management. Any tons produced from this asset will be additive to the financial projections below.
Investment Merits
· Long-Lived Reserves – METC currently holds a reserve base of 237mm tons of high-, mid- and low-volatile metallurgical coal supporting an identified mind plan across the Company’s portfolio well in excess of 20 years.
· Low-Cost Production – METC’s reserves have advantageous geologic characteristics which should enable the Company to have a cash cost of production substantially below most US domestic coal producers. Specifically, (i) METC’s deep mines have relatively thick coal seams, (ii) the Company’s surface mines have a low effective mining ratio and (iii) the majority of METC’s coal seams are accessible near, or above, drainage, thereby reducing up-front development costs.
· Fully-Financed Development Portfolio – With the proceeds from the IPO, METC will have fully financed the development of its asset portfolio. Accordingly, the Company will not have to access either the debt or equity capital markets in order to fund its growth through at least 2020.
· Effectively Debt-Free and Liability-Free Balance Sheet – Post IPO, METC will have a balance sheet with effectively no debt, ~$80mm in cash, and minimal liabilities, such as environmental and reclamation obligations. This strong balance sheet, combined with the Company’s projected low-cost production vs. other producers, should enable METC to not only thrive in higher metallurgical coal price environments but easily survive through lower coal price periods. Overall, the specter of bankruptcy is very limited in the case of METC, something extremely unusual and unique in the coal industry.
Financials
| 2017E | 2018E | 2019E | 2020E | 2021E | |||||||
| Production (000s tons) | |||||||||||
| Elk Creeek | 925 | 2,577 | 2,627 | 2,614 | 2,813 | ||||||
| Berwind | 161 | 194 | 679 | 923 | 902 | ||||||
| Ram | 0 | 0 | 132 | 538 | 538 | ||||||
| Other | 0 | 0 | 0 | 0 | 0 | ||||||
| Total | 1,086 | 2,771 | 3,438 | 4,075 | 4,253 | ||||||
| Price Deck | |||||||||||
| Metallurgical Coal ($/MT) - Australia Export Spot | $ 170.00 | $ 130.00 | $ 120.00 | $ 120.00 | $ 120.00 | ||||||
| Metallurgical Coal ($/ton) - Australia Export Spot | $ 154.55 | $ 118.18 | $ 109.09 | $ 109.09 | $ 109.09 | ||||||
| Assumed Discount to Benchmark | 15.0% | 15.0% | 15.0% | 15.0% | 15.0% | ||||||
| Price ($/ton) - Pre-Shipping | $ 131.36 | $ 100.45 | $ 92.73 | $ 92.73 | $ 92.73 | ||||||
| Shipping Cost ($/ton) | $ 10.00 | $ 10.00 | $ 10.00 | $ 10.00 | $ 10.00 | ||||||
| Realized Price ($/ton) | $ 121.36 | $ 90.45 | $ 82.73 | $ 82.73 | $ 82.73 | ||||||
| Revenues | |||||||||||
| Total Revenues | $ 131.8 | $ 250.6 | $ 284.4 | $ 337.1 | $ 351.8 | ||||||
| Unit Cash Cost of Production ($/ton) | |||||||||||
| Elk Creeek | $ 53.00 | $ 47.00 | $ 49.00 | $ 50.00 | $ 53.00 | ||||||
| Berwind | $ 93.00 | $ 86.00 | $ 62.00 | $ 67.00 | $ 71.00 | ||||||
| Ram | $ 44.00 | $ 44.00 | $ 44.00 | $ 44.00 | $ 44.00 | ||||||
| Other | $ 85.00 | $ 85.00 | $ 85.00 | $ 85.00 | $ 85.00 | ||||||
| Cash Cost of Production | |||||||||||
| Elk Creeek | 49.0 | 121.1 | 128.7 | 130.7 | 149.1 | ||||||
| Berwind | 15.0 | 16.7 | 42.1 | 61.8 | 64.0 | ||||||
| Ram | 0.0 | 0.0 | 5.8 | 23.7 | 23.7 | ||||||
| Other | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||
| Total Cash Cost of Production | 64.0 | 137.8 | 176.6 | 216.2 | 236.8 | ||||||
| Unit Cost ($/ton) | $ 58.93 | $ 49.73 | $ 51.38 | $ 53.06 | $ 55.68 | ||||||
| Cash Gross Margin | |||||||||||
| Total Cash Gross Margin | 67.8 | 112.8 | 107.8 | 120.9 | 115.0 | ||||||
| Per Unit ($/ton) | $ 62.4 | $ 40.7 | $ 31.4 | $ 29.7 | $ 27.0 | ||||||
| Margin, % | 51.4% | 45.0% | 37.9% | 35.9% | 32.7% | ||||||
| Other Cash Operating Costs | |||||||||||
| Cash Operating Costs | 15.0 | 15.0 | 15.0 | 15.0 | 15.0 | ||||||
| Per Unit ($/ton) | $ 13.81 | $ 5.41 | $ 4.36 | $ 3.68 | $ 3.53 | ||||||
| EBITDA | |||||||||||
| Total EBITDA | 52.8 | 97.8 | 92.8 | 105.9 | 100.0 | ||||||
| Per Unit ($/ton) | $ 48.62 | $ 35.31 | $ 26.99 | $ 25.99 | $ 23.52 | ||||||
| Margin, % | 40.1% | 39.0% | 32.6% | 31.4% | 28.4% | ||||||
| Depreciation and Amortization | 21.0 | 25.0 | 49.0 | 50.0 | 50.0 | ||||||
| Operating Income | 31.8 | 72.8 | 43.8 | 55.9 | 50.0 | ||||||
| Margin, % | 2.9% | 2.6% | 1.3% | 1.4% | 1.2% | ||||||
| Interest Expense | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||
| Pre-Tax Income | 31.8 | 72.8 | 43.8 | 55.9 | 50.0 | ||||||
| Income Tax Expense / (Benefit) | 10.2 | 23.3 | 14.0 | 17.9 | 16.0 | ||||||
| Rate, % | 32.0% | 32.0% | 32.0% | 32.0% | 32.0% | ||||||
| Net Income | $ 21.6 | $ 49.5 | $ 29.8 | $ 38.0 | $ 34.0 | ||||||
| Margin, % | 2.0% | 1.8% | 0.9% | 0.9% | 0.8% | ||||||
| EPS - Diluted | $ 0.55 | $ 1.25 | $ 0.75 | $ 0.96 | $ 0.86 | ||||||
| Pro Forma Shares Out - Diluted | 39.6 | 39.6 | 39.6 | 39.6 | 39.6 | ||||||
| Free Cash Flow | |||||||||||
| EBITDA | $ 52.8 | $ 97.8 | $ 92.8 | $ 105.9 | $ 100.0 | ||||||
| Capital Expenditures | (63.0) | (50.0) | (61.0) | (26.0) | (21.3) | ||||||
| Working Capital and Other | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||
| Cash Interest Expense | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||
| Cash Taxes | (10.2) | (23.3) | (14.0) | (17.9) | (16.0) | ||||||
| Free Cash Flow | ($ 20.4) | $ 24.5 | $ 17.8 | $ 62.0 | $ 62.8 | ||||||
| FCF Yield, % | 5.1% | 3.7% | 12.9% | 13.0% | |||||||
Valuation
Based on the attached model and the associated metallurgical coal price deck, METC is attractively priced at a 13% FCF yield in 2020 at a projected metallurgical coal price of $120/MT. Of note, the FCF in 2018 and 2019 is understandably low given the Company is spending capex on the development of its mines. However, once these are developed, maintenance capex is projected to be ~$5/ton of coal produced and thus FCF in 2020 is significantly higher and should remain high going forward. Further, these projections assume an already significant 30% decline in metallurgical coal prices to $120/MT from $170/MT currently. If metallurgical coal prices decline ~12% to $150/MT, still a conservative estimate, the FCF yield for METC would be above 20% in 2020. This presents very attractive optionality on metallurgical coal prices.
There are two potential catalysts to drive the stock upward in the near-term:
1. The initiation of investment bank sell-side research coverage.
2. The announcement by the Company of it's development plan for its Knox Creek asset which would be additive to the financials presented.
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