Ramaco Resources, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures are unaudited. Ramaco is a developing metallurgical-coal producer operating in Appalachia, with 252 million clean tons of reported reserves. It produced 548,000 clean tons and sold approximately 608,000 tons in 2017, including 236,000 tons purchased from third parties. Elk Creek’s preparation plant and rail loadout were activated in October 2017. The company completed its IPO in February 2017.
Financial performance and position
- Revenue: $61.0 million in 2017, versus $5.2 million in 2016. Coal sales were $58.8 million and third-party coal processing contributed $2.2 million.
- Profitability: Operating loss was $15.9 million and net loss was $15.4 million, versus losses of $7.5 million in 2016. Net loss per share was $0.41. Adjusted EBITDA, a non-GAAP measure, was negative $9.3 million versus negative $6.7 million. Operating and net margins were approximately negative 26% and negative 25%, respectively.
- Costs: Cash cost per ton sold, FOB mine, averaged approximately $82: $73 for company-produced coal and $97 for purchased coal. Management said production costs declined from about $84 per ton in the first three quarters to about $58 in the fourth quarter. Startup, trucking, and third-party processing costs weighed on results.
- Fourth quarter: Revenue was $24.0 million, operating loss $2.7 million, net loss $2.6 million, and loss per share $0.07. Fourth-quarter 2016 revenue was $3.8 million and net loss was $1.5 million.
- Cash flow and investment: Operating cash use was $8.8 million; investing cash use was $19.8 million; financing provided $29.3 million. Capital expenditures were $75.0 million. Year-end cash was $5.9 million.
- Liquidity and debt: Cash and investments totaled $11.1 million at year-end. Current assets were $29.5 million and current liabilities $22.4 million, a current ratio of approximately 1.31. No borrowed-money debt remained at December 31, 2017. In February 2018, the company borrowed $6 million under a six-month facility at 8.5% or 30-day LIBOR plus 6.9%, whichever is greater.
- Other obligations: Asset retirement obligations were $12.3 million; disclosed contractual obligations totaled $49.9 million, including $36.1 million in minimum royalties. Reclamation bonds outstanding were approximately $12.5 million.
Material changes versus the prior comparable period
- Revenue increased substantially as commercial production began in January 2017 and Elk Creek production ramped up. 2016 revenue had mainly come from purchased coal sales and third-party processing.
- Despite the revenue increase, the net loss and adjusted EBITDA loss widened, reflecting mine development and startup costs, higher depreciation, and increased public-company and corporate costs. The company ceased third-party coal processing in April 2017.
- Capital spending rose to $75.0 million from $16.7 million in 2016, while cash and investments fell from $60.4 million at 2016 year-end to $11.1 million at 2017 year-end. IPO proceeds funded development and repayment of related-party debt.
- Four customers represented approximately 77% of 2017 revenue and 71% of year-end accounts receivable, compared with two customers representing approximately 93% of 2016 revenue.
Outlook, commentary, risks, and unusual items
- Management outlook: The company forecast 2018 production of 2.0–2.2 million clean tons and third-party coal purchases of 400,000–750,000 tons. As of February 2018, it reported 1.9 million tons of 2018 sales commitments, approximately 71% of estimated sales volume; committed prices included domestic fixed-price volumes averaging $76 per ton and export volumes averaging $107 per ton. Management targeted production above 4.0 million clean tons within four years.
- Development and funding: Planned capital spending was $20–25 million in 2018, with approximately $86 million expected through 2022 to develop current projects. Management believed cash, investments, and projected operating cash flow would fund plans through 2020. It expected to transition to profitability and positive operating cash flow in 2018; this is a forecast, not an achieved result.
- Key risks: Metallurgical-coal prices are volatile and sales contracts are generally short-term. Development delays, cost overruns, permitting, mine safety, environmental obligations, transportation constraints, and dependence on a concentrated customer base could affect production and liquidity. RAM Mine’s permit application faced objections in Pennsylvania; the filing noted that delay or denial could impede development. Most properties are leased from affiliates, creating potential related-party conflicts.
- Market and unusual items: Management described strong but volatile 2017 seaborne coal prices. It said the potential effect of U.S. steel and aluminum tariffs enacted in March 2018 was uncertain. The 2017 net loss included $2.8 million of equity-based compensation; the 2016 comparison included approximately $3.1 million of costs for an abandoned offering. The Tax Cuts and Jobs Act produced no net 2017 tax benefit because of a valuation allowance.
- Contingencies and reporting: Management reported no pending litigation expected to have a material adverse effect and no accrued environmental liabilities. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether 2018 production, sales commitments, cost reductions, and the path to profitability and positive cash flow were achieved.
- Current liquidity after the February 2018 borrowing, including repayment terms and the facility’s collateral and interest cost.
- Actual capital requirements and schedule for Elk Creek, Berwind, Knox Creek, and the still-permitting RAM Mine.
- Customer concentration, receivable collection, realized coal prices, and the proportion of sales priced at fixed versus indexed terms.
- Changes in mine permits, reclamation and surety requirements, asset-retirement estimates, and affiliate lease or royalty obligations.