Ramaco Resources, Inc. — Q2 2018 Form 10-Q
Business context and period: Quarterly report for the three and six months ended June 30, 2018. Ramaco develops and operates metallurgical coal mines in Appalachia. Commercial production began in January 2017; the company continued ramping production and sales and completed its preparation plant and rail loadout facility in February 2018.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $65.3 million | $11.1 million | $121.2 million | $22.6 million |
| Operating income (loss) | $10.6 million | $(3.7) million | $16.3 million | $(6.9) million |
| Net income (loss) | $10.2 million | $(3.5) million | $15.5 million | $(6.6) million |
| Adjusted EBITDA (non-GAAP) | $14.9 million | $(3.2) million | $24.2 million | $(4.0) million |
| Operating cash flow | Not separately provided for the quarter | $8.1 million | $(0.5) million |
- Q2 GAAP gross margin was approximately 26.7%, compared with approximately negative 6.3% in Q2 2017; Q2 operating margin was approximately 16.3%. First-half gross margin was approximately 24.0%, versus approximately break-even in the prior-year period.
- Q2 coal sales were 615,147 tons: 492,603 tons produced by Ramaco and 122,544 tons purchased. Produced-coal revenue per ton, FOB mine, was $91.21; produced-coal cash cost per ton was $55.58. These are non-GAAP measures.
- Cash and cash equivalents were $5.9 million at June 30, 2018, with no short-term investments remaining. Working capital was approximately $3.8 million; current liabilities were $44.5 million against current assets of $48.3 million.
- Property, plant and equipment, net, totaled $136.6 million. Total assets were $188.2 million and stockholders’ equity was $130.1 million.
- Notes payable had a $15.0 million aggregate principal balance at June 30: $12.0 million owed to an equipment lender and $3.0 million to related party Ramaco Coal, LLC. Balance-sheet carrying value of current notes, net of issuance costs, was $14.8 million. The equipment notes bear interest at the greater of 8.5% or 30-day LIBOR plus 6.9%; the related-party note bears 10% interest.
Material changes versus the prior period
- Revenue increased substantially as production and sales volumes expanded: company-produced tons sold rose to 492,603 in Q2 from 56,857 a year earlier. Q2 revenue was also 17% above Q1 2018, according to management.
- Management attributed improved produced-coal unit costs to better weather, a fully operational preparation plant, surface-mine cost improvements, and a full quarter of production from the No. 2 Gas mine. Q2 produced-coal cash cost fell to about $56 per ton from about $84 in Q2 2017; first-half cost was about $60 per ton versus about $76.
- Depreciation and amortization rose to $3.0 million in Q2 from $0.3 million, reflecting expanded operations. Q2 SG&A increased to $3.7 million from $2.5 million as the organization grew.
- Operating cash flow turned positive, but accounts receivable increased by $21.1 million during the first half. Financing included $16.0 million of new borrowings, partly offset by repayments and financing costs.
Outlook, risks and contingencies
- Management expected full-year 2018 capital expenditures of approximately $36–$40 million; first-half expenditures were $27.5 million. It estimated a further $59 million would be needed through 2022 to develop current projects and believed cash, operating cash flow and existing borrowing capacity would fund plans through 2020.
- The company anticipated cash taxes below $0.4 million for 2018, citing depreciation, depletion and use of net operating loss carryforwards.
- Management cited strong global steel production and metallurgical coal demand, particularly in Europe and Asia. It said the effects of U.S. steel tariffs and possible retaliatory tariffs on coal demand and pricing were uncertain.
- Liquidity risks include delayed customer payments, rail or other transportation disruptions, development delays, equipment cost overruns, and adverse metallurgical coal markets. The company expected to pursue a comprehensive asset-based credit facility before the equipment notes’ December 31, 2018 maturity. The related-party note was due August 15, 2018, with an extension under discussion; the filing does not establish that the extension was completed.
- Customer concentration was significant: six customers represented approximately 79% of Q2 revenue and 75% of first-half revenue; those customers accounted for about 71% of accounts receivable at quarter-end. Take-or-pay transportation and export-terminal commitments totaled $1.9 million through March 31, 2019.
- Asset retirement obligations totaled $12.7 million, supported by $12.6 million of reclamation surety bonds. Management reported no material pending litigation, no material change in previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Subsequent collections of the sharply higher accounts receivable balance and customer payment performance.
- Repayment or extensions of the short-term equipment and related-party notes, and availability and terms of the anticipated asset-based credit facility.
- Whether production, unit costs, and the $36–$40 million full-year capital spending plan track management’s expectations.
- Customer concentration, contracted tonnage and pricing exposure, and the impact of steel tariffs, coal prices, and transportation availability.
- Execution of mine development plans, remaining project funding needs, and reclamation obligations and bonding coverage.