Ramaco Resources, Inc. — Q3 2020 Form 10-Q
Business and period: Operator and developer of metallurgical coal mines in Appalachia. This unaudited report covers the three and nine months ended September 30, 2020; comparisons are with the same periods of 2019. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $39.5 | $61.4 | $117.8 | $184.6 |
| Operating income (loss) | $(7.6) | $6.5 | $(10.7) | $27.6 |
| Net income (loss) | $(4.8) | $5.6 | $(0.2) | $23.0 |
| Adjusted EBITDA (non-GAAP) | $0.6 | $13.6 | $19.9 | $46.4 |
| Operating cash flow | Not separately presented | Not separately presented | $0.9 | $26.4 |
- Margins: Q3 gross margin, calculated as revenue less cost of sales, was approximately 9.6%, versus 26.7% a year earlier. Operating margin was approximately (19.2)%, versus 10.5%. Nine-month operating margin was approximately (9.1)%, versus 14.9%.
- Coal sales: Q3 volume was 430,000 tons, down 18%; realized revenue per ton (FOB mine, non-GAAP) was $78, down 30% from $112. Nine-month volume was 1.208 million tons, down 21%; realized revenue per ton was $87, down from $111.
- Costs: Q3 cash cost per ton (FOB mine, non-GAAP) was $69, compared with $81. Nine-month cash cost per ton was $70, compared with $75. Q3 SG&A increased to $6.0 million from $4.5 million; the company cited sales-team expansion and higher legal fees.
- Cash and liquidity at September 30: Cash and equivalents were $6.4 million; restricted cash of $1.5 million was held for potential workers’ compensation claims. Revolver availability was $14.3 million. Current assets were $54.7 million and current liabilities $27.1 million. Inventory rose to $23.3 million from $15.3 million at year-end 2019.
- Cash flow and capital spending: Nine-month operating cash flow was $0.9 million, including a $9.6 million net working-capital outflow, primarily related to inventory. Capital expenditures were $20.5 million. Cash and restricted cash totaled $7.8 million at period-end.
- Debt: Balance-sheet current and long-term debt totaled approximately $25.9 million. Disclosed balances included $14.3 million outstanding on the revolver, $7.5 million on the term loan, and $4.1 million on equipment financing. The company reported compliance with debt covenants. It had borrowed $8.4 million under the PPP; management expected forgiveness.
Material changes and management commentary
- Revenue declined 36% in both Q3 and the first nine months, reflecting lower realized pricing and volumes amid weakened global metallurgical-coal demand and COVID-19 disruption. The company made no third-party coal purchases for resale in 2020, versus purchases in 2019.
- Two customers invoked material-adverse-change or force-majeure provisions, with delayed or curtailed purchases expected to affect up to 10% of 2020 contracted sales volumes—about 200,000 tons. Nearly 90,000 tons expected to go to North American customers were sold into the lower-priced spot market in Q3.
- To manage the downturn, Ramaco furloughed employees at Elk Creek in April and July, partially closed the Berwind development complex affecting about 44 jobs, and reduced or deferred non-essential capital spending. Management said further furloughs, salary reductions, staffing cuts, or mine idling could follow.
- For the remainder of 2020, the filing reported contracted obligations of approximately 0.6 million tons at fixed prices averaging $88 per ton and 0.2 million tons at index-based prices. Of the fixed-price volume, 0.2 million tons at $91 per ton might not ship in 2020.
- Management believed cash on hand, operating cash flow, and available credit would meet its capital and operating plans, while noting uncertainty from COVID-19. Its longer-term plan was to develop properties and grow production to more than 4–4.5 million clean tons, subject to market conditions, permitting, and capital deployment; this is a plan, not near-term guidance.
Risks, contingencies, and unusual items
- PPP accounting: The company treated the $8.4 million PPP proceeds as an in-substance grant and recognized PPP-related income in other income. The filing does not state a consistent nine-month recognition amount: the note says $7.3 million, while MD&A says $8.4 million. Forgiveness remained anticipated, not confirmed.
- Other income was $11.5 million for the first nine months, versus $1.1 million in 2019, significantly affecting the year-to-date result. The filing attributes part of the increase to PPP-related income.
- Customer concentration was substantial: four customers represented approximately 78% of Q3 revenue; three customers represented 54% of nine-month revenue and 66% of accounts receivable at September 30.
- Take-or-pay transportation commitments expiring March 31, 2021 totaled $2.4 million; $0.5 million of expense was recognized in the first nine months for an unused export-terminal arrangement. Reclamation requirements of $14.9 million were supported by surety bonds.
- A lawsuit seeks insurance coverage for the 2018 partial silo failure at Elk Creek. The filing said trial was scheduled to begin December 8, 2020; the company had accrued no amounts for litigation matters. The plant’s full processing capacity was restored in mid-2019.
- Key risks include further pandemic-related demand or price weakness, customer contract disputes or cancellations, transportation and supplier disruptions, mine-development delays or cost overruns, permitting and regulatory matters, and liquidity needs. Management said future pandemic effects could be more significant but could not be quantified.
Most important facts for investors to verify
- Whether the two customers’ force-majeure or material-adverse-change notices lead to further lost or deferred volumes, and the realized prices for redirected spot sales.
- The amount and timing of PPP forgiveness, and the discrepancy in the filing’s stated PPP-related income recognized for the nine-month period.
- Cash generation, inventory conversion, remaining credit availability, debt repayment requirements, and covenant headroom if coal markets remain weak.
- Whether contracted year-end volumes ship as scheduled, including the 0.2 million tons identified as potentially unshipped.
- The outcome of the Elk Creek insurance litigation and any resulting recovery or costs.