Ramaco Resources, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Ramaco develops and operates metallurgical coal mines in Appalachia; it began commercial production in January 2017. The filing was signed November 7, 2018.
Financial and operating highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $62.2 million | $14.4 million | $183.4 million | $37.0 million |
| Operating income (loss) | $5.8 million | $(6.3) million | $22.1 million | $(13.2) million |
| Net income (loss) | $6.2 million | $(6.2) million | $21.7 million | $(12.8) million |
| Diluted EPS | $0.15 | $(0.16) | $0.54 | $(0.35) |
| Adjusted EBITDA | $11.0 million | $(5.0) million | $35.2 million | $(9.0) million |
| Operating cash flow | — | $20.5 million | $(12.5) million |
- Margins: Q3 gross profit was approximately $12.8 million, or 20.5% of revenue, compared with a gross loss in Q3 2017. Q3 operating margin was approximately 9.3%; net margin was approximately 10.0%.
- Sales and costs: Q3 sales were approximately 0.6 million tons, including 0.1 million tons of purchased coal; 57% went to domestic markets and 43% to export markets. Produced-coal revenue per ton (FOB mine) was $89.78, and cash cost per ton was $65.42. For the nine-month period, produced-coal revenue and cash cost per ton were $90.74 and $61.93, respectively.
- Cash, liquidity, and debt: Cash was $5.5 million at September 30, 2018; current assets were $48.0 million and current liabilities $45.5 million. Total liabilities were $59.2 million. Notes payable had a $14.8 million carrying value; principal outstanding was $15.0 million across three short-term notes, including $3.0 million owed to related party Ramaco Coal, LLC.
- Cash flow and investment: Investing cash outflow was $34.7 million, including $39.9 million of capital expenditures. Financing cash inflow was $13.8 million, principally from short-term borrowings. Cash declined $0.5 million during the nine months.
Changes versus comparable periods
- Revenue growth reflected sharply higher production and sales volumes, as well as higher realized prices for company-produced coal. Company-produced sales totaled 509,918 tons in Q3 versus 100,992 tons a year earlier.
- The company moved from losses to profits in both the quarter and nine-month period. Produced-coal cash costs improved versus 2017, partly because Ramaco’s own preparation facilities replaced higher third-party processing costs.
- Compared with Q2 2018, Q3 revenue declined $3.1 million (5%) and produced-coal revenue per ton eased to about $90 from $91. Produced-coal cash cost per ton rose to about $65 from $56, reflecting difficult geology at two mines and fewer operating days.
- Accounts receivable increased to $31.3 million from $7.2 million at year-end 2017, consuming working capital. Six customers represented approximately 89% of receivables at September 30.
Outlook, risks, and notable events
- Management expected 2018 capital expenditures to exceed the prior guidance’s high end of $40 million, partly because of repair and related infrastructure needs following a silo failure. Management stated cash, operating cash flow, and borrowing availability were expected to support current plans.
- On November 2, 2018, the company entered a KeyBank facility comprising a $10 million term loan and a revolving line of credit of up to $30 million, including $1 million of letter-of-credit availability, maturing November 2, 2021. The company said it would refinance the short-term notes and provide working capital; the three notes were repaid November 5 with facility proceeds. The facility is secured by specified personal property, not real property.
- On November 5, a raw-coal storage silo at Elk Creek partially failed. The preparation plant was idled pending safety and structural evaluations, and the company had no estimated resumption date or quantified total impact. Ramaco planned an alternative conveying system and reported more than 350,000 tons of raw coal in stockpiles.
- By November 7, the company had issued force majeure notices for remaining 2018 Elk Creek contract obligations. It said 2019 sales were not then expected to be affected, and believed insurance coverage was sufficient, but also disclosed that coverage and losses were still being evaluated. Contract disputes, deferred tons at lower contracted prices, production curtailments, and uninsured costs could materially affect results.
- Management cited strong global steel and metallurgical-coal demand, but noted uncertainty from U.S. steel tariffs and possible foreign retaliation. Other key risks include customer payment timing, transport availability, cost overruns, mine-development delays, coal-market changes, and customer concentration.
- There were no material changes to other reported risk factors, no material off-balance-sheet arrangements, and management concluded disclosure controls were effective. The company adopted the new revenue standard in 2018 with no material financial-statement impact; it expected the new lease standard to result in recognized operating-lease assets and liabilities beginning in 2019.
Important facts for investors to verify
- Current status, repair timeline, cost, and production impact of the Elk Creek silo and plant outage, including any updates to force majeure claims and insurance recovery.
- Actual 2018 capital spending versus the prior $40 million guidance threshold and the funding drawn or remaining under the KeyBank facility.
- Whether customer receivables were collected as expected, given the sharp increase in receivables and concentration among six customers.
- Whether mine-level costs and production normalize after the Q3 geology-related disruptions, and whether reported results remain supported by realized coal pricing.
- Customer contract volumes and pricing, including the filing’s disclosed future performance obligations: about 0.4 million tons for the remainder of 2018 and additional fixed- and index-priced commitments beyond 2018.