Ramaco Resources : Q4 2023 Ramaco Resources, Inc. Earnings Call

Corporate Participants

Randall Atkins Ramaco Resources, Inc. - Founder, Chairman, Chief Executive Officer Chris Blanchard Ramaco Resources, Inc. - Chief Operations Officer

Jason Fannin Ramaco Resources, Inc. - Chief Commercial Officer Jeremy Sussman Ramaco Resources, Inc. - Chief Financial Officer

Conference Call Participants

Nathan Martin The Benchmark Company - Analyst

Nick Chile B. Riley Securities - Analyst

Presentation

Operator

Welcome to the Ramaco Resources Fourth Quarter 2023 Results Conference Call.

[Operator instructions]

I would now like to turn the conference over to Jeremy Sussman, Chief Financial Officer of Ramaco Resources. Please go ahead, sir.

Jeremy R. Sussman - Chief Financial Officer

Thank you. On behalf of Ramaco Resources, I'd like to welcome all of you to our fourth quarter 2023 earnings call. With me this morning is Randy Atkins, our Chairman and CEO; Chris Blanchard, our Chief Operating Officer; and Jason Fannin, our Chief Commercial 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 statement 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 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.

With that said, let me introduce our Chairman and CEO, Randy Atkins.

Randall W. Atkins - Founder, Chairman, and Chief Executive Officer

Thanks Jeremy. Good morning to everyone. As always, thanks both for your interest and for joining the call. We have a lot of positive developments to unpack this morning since we spoke last November.

I discussed then, over the past few years, we have tried to differentiate ourselves by aggressively but prudently growing our production and sales profile. In 2021 through last year, we doubled our production. Our goals over the next few years are to again double our current 3.5 million ton level in met coal. And next, to hopefully add an intriguing and very valuable new line of business with rare earths.

Looking back over the last few years, we invested almost a quarter of a billion in capital for increased production and acquisition. That strategic investment in growth paid off for us in the second half of '23, again, letting us beat consensus for the last two quarters.

I will let Jeremy provide the financial metrics where Q4 was the record quarter for us this year, and we printed $182 million in annual EBITDA and also had record free cash flow, all despite some muted pricing in the overall market.

As we look down the road at our quality slate, we were aiming to essentially double our low-vol,mid-vol levels to about 50% of overall production with another 30% is high-vol A. Today, we are about 40% high-vol A and 30% low-vol,mid-vol. In part, that decision is based on our organic reserve quality mix, but it's also based on what we perceive may be some future crowding in the high-vol A space. Several peers are slated to bring on as much as 6 million tons of new production in that blend over the 2024-26 period. On the other hand, we see low volt production is essentially flat with a fair amount of anticipated depletion from existing low-vol mines.

Moving forward, we expect spreads may start widening between premium low-vol and lower-tierhigh-vol coals and we hope to be able to capture that margin.

Turning to our fourth quarter performance. We managed to do well despite seeing not much strength in pricing over the back half of the year. This year's North American domestic settlements for '24, were down year-over- year about $40 a ton from '23. While U.S. met indices rose in the fourth quarter, they also ended '23 more than

10% below Q1 levels. Our fourth quarter financially was fundamentally due to a sales increase of shipping at a 4 million-ton per annum run rate during the whole second half of '23. That was a bump of about 33% compared to our 3 million-ton per rate in the first half. We were also helped by the completion of the 1 million-ton increase in our processing capacity at our Elk Creek complex.

Moving to this year's sales and marketing, we took a balanced approach to our '24 domestic sales exposure and committed only about 1.5 million tons of coal to North American customers. We thought the offered pricing terms were pretty muted and probably at the bottom of the cycle when tenders were being negotiated last fall. Despite that, our average mixed, fixed domestic sales price of $167 per ton, was the highest '24 pricing figure among our publicly traded peers.

By shaving back the level of our North American business, we pivoted to an increased export book, which will now be over 2/3 of this year's sales. At the start of December, we had 2 million tons committed sales for '24. In the past two months, that number has almost doubled to 3.9 million tons, which means we are now basically 100% sold out at the low end of our original '24 production guidance.

Fortunately, most of those sales have been in the works for some time, so we were able to move those tons without sacrificing pricing. We now hope to accelerate that sales growth as we move further into '24. As a result of that material increase in committed sales, as you know, we recently raised our '24 sales and production guidance. Depending upon continued market conditions, we hope to end the year with a sales jump of as much as 40% from '23 levels.

To profile our sales to date, interestingly, we have now begun to move significant tons into Asian markets. Two years ago, we didn't really have any Asian business. Now we will end up the year with north of 30% of our sales going to Asian customers. When all is said and done, about 30% of our overall '24 book will be priced off Australian indexes, about 40% off Atlantic indexes and about 30% will be fixed price domestic. Jason will speak on the relativities of our pricing and also give most of our color on markets, but I'll add a few observations.

We now see European markets as somewhat spring loaded. It has been pushed down so hard over the past 1.5 years that we feel when it rebounds and many of the mills reopen, we may see somewhat of a pop in perhaps

some supply dislocations in the Atlantic markets. We have historically done well in Europe and indeed were decently sized sellers even into Ukraine. When that whole situation eventually resolves itself, there could be an interesting turn.

In Asia, as I said, we were nowhere in this market two years ago. We are now a major supplier to Indonesia and other non-China markets. Despite the gloom around China, we see the other Asian markets as relatively healthy. We look forward to making further inroads in the region, particularly with our ability to leverage our increasing low-vol production slate.

Switching to operations. I want to complement our operating team first for a great safety record last year. I also want to note the great work on developing the two deep mine sections at our low-vol Berwind mine. Since September, Berwind has produced an annualized run rate of 600,000 tons. We are now planning to begin the third section in the next few months and hope to be at 1 million-ton run rate by year-end.

Cash mine cost at Berwind have currently been under $90 per ton from both deep sections. If this trend continues, and as we ultimately take the mine to four sections, we expect Berwind to be among the highest margin and lowest and largest production low-vol mine complexes in the country.

Moving on to another low-vol project, last month, we purchased a very reasonably priced $3 million existing coal prep plant, which will be relocated to our Maben complex. We will spend another $8 million this year to move, relocate and upgrade this plan. For cost comparison, had we built a new plant of comparable capacity, the price was estimated at roughly $40 million. This plant should be operational by the fourth quarter of '24. It will meaningfully reduce both the current overall $40 per ton trucking cost as well as our cash mine costs.

The plant will have an ultimate annualized clean coal capacity of 1.3 million tons, far more than our 350,000 ton current surface and highwall production. We will have the opportunity to add a good deal more deep tons to that complex in the years ahead as the market may dictate. Chris will also make some comments on Maben in his remarks.

Looking at our balance sheet, last year we were able to have the amount of debt on our books, and we started 2024 with about $50 million of term and equipment debt. Assuming current conditions continue, we look to retire all of that debt this year. And as I said earlier, we are also rapidly growing. Looking ahead, we are planning today for the notional increase in the amount of both sales and inventory we envision over the coming years.

Accordingly, we just executed a mandate with KeyBank on behalf of our banking syndicate to both increase and extend the size and term of our existing revolver. This facility will then have a base borrowing amount of $200 million with an additional $75 million accordion feature expansion as well as a new five-year term. This is an increase from our existing $125 million facility, and we look to finalize all this in Q2.

Finally, with respect to our Brook mine rare earth project, we are aggressively working to advance the commercialization. We expect to receive the updated independent target exploration report from Weir International within two weeks. When we do, we will publish the report and I will provide an accompanying shareholder letter to explain its findings as well as the project's critical path and direction. We will also expect to host a separate analyst call to discuss its conclusion and respond to any investor questions.

Also, I would be remiss not to note that on the back of our solid met coal execution this year, and the announcement of our REE discovery, we were delighted that our shareholders enjoyed some very impressive results over the past year. In 2023, our market cap increased by over $500 million. Today, including the value of our METCB shares, we have a combined market cap of roughly $1 billion. This compares to our market value of just over $100 million a few short years ago. Indeed, to start the year, we enjoyed the highest total shareholder return, which includes share price and dividends, of any company in the coal and mining space.

We had a one-year return of roughly 200% and over 1,000% return for the three-year period dating back to 2020. We are deeply appreciative of our investors' support from both long time as well as new shareholders, and we are working hard to continue to reward that support.

In summary, this year promises some very positive results for Ramaco. And with that, I will turn the floor over to the rest of our team to discuss finances, operations and markets. So, Jeremy, please start us off with a rundown on financial metrics.

Jeremy R. Sussman - Chief Financial Officer

Thank you, Randy. As you noted, financially, we enjoyed a strong fourth quarter in 2023, which was easily our strongest quarter of the year. While U.S. metallurgical coal indices did rise in the fourth quarter compared to the prior two quarters, the indices were still more than 10% below Q1 levels.

Our strong Q4 was frankly due to both solid execution of our growth strategy and tight cost control. Specifically, in each of Q3 and Q4, we shipped a 4 million-ton per annum run rate compared to a 3 million-ton per annum run rate in the first half. In Q4, our margins expanded more than 50% versus Q3. Realized pricing was up 10% to $173 per ton on stronger indices.

More importantly, cash cost per ton fell $7 sequentially and on both a stronger absolute and relative contribution from our main Berwind mine, as Randy noted. In terms of financial metrics, adjusted EBITDA was $58 million in Q4 and up almost 30% from Q3. Fourth quarter net income of $30 million was up more than 50% sequentially.

Now, I want to make one point on net income and earnings per share. First, for comparative purposes, had we calculated EPS as we had in the past, I would note that Q4 fully diluted EPS would have been $0.68. That said, since we issued the tracking stock in mid-2023, GAAP accounting rules have frankly complicated our EPS calculations.

2024 will be our first full year with having a dual fare class structure. I would note that the Class B dividend amount each quarter will affect the Class A EPS calculation alone. Adjusted EBITDA, net income and all other key items will not be affected.

Based on our current outlook, I would expect quarterly 2024 Class A EPS to come in anywhere from 70% to 90% of how EPS would be calculated on a normal single fair class estimate. For some guidance, the higher net income is, the greater the percentage of EPS assigned to the Class A shares will likely be. As a reminder, the Class A stock has just under 44 million shares outstanding.

We are expecting first quarter shipments of 800,000 to 950,000 tons which is well below the run rate we anticipate for the full year. However, we anticipate building inventory in Q1 ahead of some larger term deals into Asia, which begin in Q2 and also ahead of the Great Lakes, which open in late March.

With that said, we anticipate both production and shipments to increase throughout the year with a meaningful uptick in the second half. Specifically, this second half increase will come from the addition of the more than 400,000-ton per annum Ram 3 surface and highwall mine at Elk Creek and the 300,000-ton per annum third section at the Berwind mine.

Mine costs are also projected to decline each quarter throughout the year as volumes increase sequentially. For the full year, we are reiterating all key prior 2024 operational guidance, which you can find in our tables. I'll note that at the midpoint of guidance, we anticipate both production and sales up roughly 30% versus 2023 and a slight decline in cash costs and a roughly 30% decline in CapEx.

Moving to the balance sheet, in Q4, we repaid the final $10 million of debt related to the 2022 Ramaco Coal acquisition. We ended 2023 with just $48 million of term debt outstanding, excluding the revolver, and $42 million of cash.

Lastly, we finished 2023 with record year-end liquidity of $91 million compared to $49 million at year-end 2022. As Randy both said and provided specifics, we have just this week reached a preliminary agreement with KeyBank to increase and extend the terms of our revolver. We expect this to be finalized in Q2.

I would now like to turn the call over to our Chief Operating Officer, Chris Blanchard.

Chris Blanchard - Chief Operating Officer

Thank you, Jeremy, and thank you to everyone who joined us this morning. I want to first start by reiterating how pleased and proud we are of the safety performance and environmental stewardship that we achieved in the field in 2023. We had overall our lowest incident rate in our history last year, and we are focused on improving and enhancing that performance as we move forward.

Looking back on 2023 operationally, it was a tale of two halves. The first half was constrained at both of our big complexes. We had delays in the preparation plant upgrade at Elk Creek and Berwind was completing its development mining to reach the thick Pocahontas store teams following the ignition event of 2022.

The second half, however, saw us increase preparation capacity at Elk Creek and begin the monetization of our inventory, which had built up. We also reached the long talked about main reserve at the Berwind mine and staff the mine and quickly reached and exceeded projected production levels. We also started our surface mine at Maben, which has run better than expected.

The sales and marketing team has done an incredible job selling our inventory. Now as we turn into 2024, our operations will ramp up to meet these new elevated sales levels and work to double the size of our production over the next several years, as Randy has described. That work is underway at all three of our main complexes now.

At Elk Creek, after a couple of years with flat production, we've moved forward with the Ram number 3 project. This will bring on 300,000 to 400,000 annualized additional production from a second surface mine and its accompanying highwall miner operations. This mine had been previously planned in both 2022 and 2023, but due to market conditions, the plant capacities and availabilities, it was postponed.

Already in '24, we have broken ground and now expect our first surface tons in July with the Ram number 3 highwall miner following with production beginning in October. The Ram 3 cost structure should match or beat the existing surface mine at Elk Creek, both increasing our overall volumes and also lowering the average Elk Creek cash costs.

At Berwind, as we discussed, both super sections are now in normal operation and since Q3 have been hitting targeted production. Our number one section has reached the area where a series of air shafts and a new portal and elevator will be built. Once completed, this ventilation increase will allow the startup of our number three section. With three sections operating later this year, we expect to be producing at nearly 1 million clean ton per year rate from the Berwind mine itself.

With the investments Ramaco has made over the past several years at Berwind in the preparation plant in belt lines from the mine to the plant, and of course, in the purchase of the coal reserves, Berwind is finally poised to be among the lowest cost and largest premium low-vol complexes in the United States for many years.

Finally, at Maben, we are taking steps to grow that operation into a full stand-alone complex with the purchase and the relocation of the preparation plant to the Maben site. Work has begun on demolition of the existing plant and the first deliveries of components have begun this week. We anticipate the rebuild of the plant to begin in the summer and the plant to be commissioned late this year.

The size of the plant, as purchased, will allow us to wash all current surface and highwall miner coal at Maben as well as any initial underground sections that are contemplated in the future. As Maben grows, the modular plant design will allow us to quickly add upgrade circuits to the plant.

Depending on market conditions, we believe the Maben complex, if totally greenlighted, could eventually produce between 1.2 million to 1.5 million annual clean tons. However, in the near term, getting the initial preparation plant in operation will drive down our transportation costs and save us nearly $40 per clean ton on the raw coal haul bill that we currently bear. Having the clean coal at Maben also opens this premium coal for shipment on both of the railroads as well as the river served customers.

It is an exciting time for Ramaco operations. In the next couple of years will be eventful as we grow out our existing complexes and continue to look for other opportunistic ways to enhance shareholder value. As we grow, however, our primary focus will remain on safety performance, environmental stewardship and maintaining strict cost control at all of our existing and new operations.

Now for a more detailed discussion of the markets and the sales book, I would like to turn the call over to our Chief Commercial Officer, Jason Fannin.

Jason Fannin - Chief Commercial Officer

Thanks, Chris, and good morning everyone. I will share what we are seeing in the markets and our current and forward sales outlook. Global coking coal markets remain well supported, mainly due to lower supply because