Ramaco Resources, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Ramaco is a metallurgical coal operator and developer with mines in West Virginia, Virginia and Pennsylvania. Financial statements are unaudited; amounts below are in millions except per-share and per-ton data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $61.4 | $62.2 | $184.6 | $183.4 |
| Operating income | $6.5 | $5.8 | $27.6 | $22.1 |
| Net income | $5.6 | $6.2 | $23.0 | $21.7 |
| Diluted EPS | $0.14 | $0.15 | $0.56 | $0.54 |
| Adjusted EBITDA | $13.6 | $11.0 | $46.4 | $35.2 |
- Operating margin was approximately 10.5% in Q3 versus 9.3% a year earlier; nine-month operating margin was 14.9% versus 12.0%. Net margin was approximately 9.0% and 10.0% for the respective third quarters, and 12.5% and 11.8% for the nine-month periods.
- Q3 company-produced coal sales were 510,000 tons, unchanged year over year; third-party purchased coal sales fell to 17,000 tons from 90,000. Management cited realized pricing of $110 per ton for company-produced coal; the filing’s FOB-mine revenue-per-ton table reports $111.
- Cash from operations was $25.6 million for the first nine months, versus $20.5 million. Capital expenditures were $34.0 million, and cash declined $1.5 million to $5.5 million.
- At September 30, cash was $5.5 million and working capital was $20.8 million. Reported liquidity was $20.5 million, including $15 million of remaining revolver availability. Debt principal was approximately $16.8 million: $5.8 million term loan and $11.0 million revolver; the term loan amortizes monthly and the facility matures November 2021. The company reported compliance with its covenants.
Changes versus comparable periods
- Q3 revenue declined slightly, while operating income and Adjusted EBITDA increased. Net income declined, largely alongside higher income tax expense ($1.1 million versus $0.1 million); the effective tax rate was 17% versus 1%.
- Nine-month revenue was nearly flat, but operating income, net income and Adjusted EBITDA increased. Lower purchased-coal volumes reduced cost of sales, while company-produced coal revenue rose.
- Company-produced coal cash cost per ton increased to approximately $80 in Q3 from $65, and to $73 for the nine months from $62. Management attributed the increase to the growing contribution from developing Berwind operations, labor and sales-related costs.
- Depreciation and amortization rose to $5.4 million in Q3 and $14.3 million for the nine months, reflecting expanded operations. Selling, general and administrative expense also increased, including higher stock-based compensation.
Outlook, risks and unusual items
- Management said metallurgical coal prices weakened materially in Q3 amid Chinese port restrictions, global economic concerns and U.S.-China trade tensions. It expected limited impact on 2019 results because most remaining sales were fixed-price, and noted prices had rebounded from recent lows.
- For 2020, the company had contracted 1.3 million tons with domestic customers at an average fixed price of $91 per ton, below 2019 levels. Management’s longer-term plan was to exceed 4.0 million clean tons of production within three to four years, dependent on market demand and capital deployment; this is not a near-term earnings forecast.
- The Elk Creek preparation plant returned to full processing capacity in early August after remediation of a 2018 raw-coal silo failure. The insurer disputed coverage; Ramaco sued in August 2019 seeking a declaration that the event was covered. The filing reports insurer motions to dismiss and remove the case to federal court; no amount was accrued for litigation.
- Asset retirement obligations were $13.4 million, supported by $12.8 million of reclamation bonds. Rail and export-terminal take-or-pay commitments were $1.6 million through March 2020. Three customers represented approximately 58% of Q3 revenue and 64% of receivables at quarter-end.
- Management cited possible liquidity pressures from transportation delays, slow customer payments, mine-development delays, equipment cost overruns and adverse coal-market conditions. It expected cash, operating cash flow and revolver availability to support current plans. Cash taxes for 2019 were expected to be less than $0.1 million.
Key facts for investors to verify
- Progress and cost at Berwind and other development projects, including whether production growth is achievable within the stated timeframe.
- 2020 realized pricing and volumes versus the $91-per-ton contracts, and sensitivity to export-market and metallurgical coal price changes.
- Cash conversion and working-capital needs, especially receivables, alongside capital spending and actual revolver availability.
- Resolution and potential recovery from the Elk Creek silo insurance dispute, plus any operational or financial effects.
- Whether unit costs stabilize as Berwind develops and whether customer concentration and take-or-pay commitments change.