Ramaco Resources, Inc. quarterly report, Q2 FY2017

Ramaco Resources, Inc. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017. Ramaco produces and develops metallurgical coal in Appalachia. It began commercial mining in January 2017; the February 2017 reorganization and IPO also affect comparability with prior periods.

Financial performance

Metric	Q2 2017	Six months 2017
Revenue	$11.1 million	$22.6 million
Operating loss	$(3.7) million	$(6.9) million
Net loss	$(3.5) million	$(6.6) million
Operating cash flow	$(0.1) million	$(0.5) million
Investing cash flow	$(9.5) million	$(31.1) million

• Coal sales were $10.5 million in Q2 and $20.4 million year to date; coal processing revenue was $0.6 million and $2.2 million, respectively. Q2 sales included 56,857 tons of company-mined coal and 52,415 tons of third-party coal.
• Coal sales and processing costs totaled $10.5 million in Q2 and $21.3 million for the six months, yielding gross margins of approximately 5.4% and 5.7%, respectively.
• Cash and short-term investments totaled $52.7 million at June 30 ($2.9 million cash and $49.8 million investments). Working capital was approximately $40.0 million. No notes payable remained outstanding; total liabilities included $10.8 million of asset retirement obligations (ARO).
• Capital expenditures were $41.7 million for the six months. Property, plant and equipment rose to $88.3 million from $46.4 million at year-end 2016.

Changes versus the prior comparable periods

• There was no coal revenue or production cost in the 2016 comparison periods; 2017 results reflect the start of commercial operations and therefore are not directly comparable.
• Q2 net loss increased from $0.6 million in 2016 to $3.5 million in 2017, while six-month net loss increased from $4.4 million to $6.6 million. The 2017 six-month result included $2.1 million of equity-based compensation tied to IPO-related accelerated vesting.
• Six-month Adjusted EBITDA improved to a loss of $3.9 million from a loss of $4.4 million in 2016. Adjusted EBITDA is a non-GAAP measure and should not be viewed in isolation.
• The February IPO generated approximately $43.7 million net of offering expenses, and proceeds were used in part to repay the $10.7 million related-party note. Series A preferred units converted into common shares.

Outlook, risks and other matters

• Management expects cash and investments, together with operating cash flow, to fund capital expenditure and operating plans through 2020. It estimates approximately $136 million of spending to fully develop current projects through 2022, including $70.8 million through 2018.
• The Elk Creek preparation plant, loadout and related facilities were under construction; completion was scheduled for the second half of 2017. The remaining amount under the $27.8 million fixed-price contract was $4.6 million.
• Management cites coal-price volatility, steel-industry demand, mine-development delays and cost overruns as risks to cash flow and liquidity. Sales contracts are generally short-term, exposing the company to market-price fluctuations.
• Reclamation bonds outstanding were approximately $12.2 million. The company reported no recognized environmental liabilities and no material off-balance-sheet arrangements. Management reported no pending litigation expected to have a material adverse effect and no material change in previously disclosed risk factors.
• The board has a policy of considering regular and special cash dividends, but amounts depend on liquidity needs; the company also intends to preserve capacity for acquisitions.
• Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether mine development and the Elk Creek facilities met timing and cost expectations, and how much of planned capital spending remains.
• Production volumes, realized selling prices, costs per ton and the sustainability of the relatively narrow reported gross margins.
• Cash burn and liquidity runway against management’s stated development plans, including potential need for additional financing.
• Exposure to volatile metallurgical-coal pricing, short-term sales contracts and steel-market demand.
• Reclamation and other obligations, including ARO estimates and required surety bonds.