Ramaco Resources Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 9, 2023

There are 3 speakers on the call.

Operator

Welcome to the Ramaco Resources Second Quarter 2023 Earnings Conference Call. I would now like to turn the call over to Jeremy Sussman, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you. On behalf of Ramaco Resources, I'd like to welcome all of you to our Q2 2023 earnings conference call. With me this morning is Randy Atkins, our Chairman and CEO and Chris Blanchard, our Chief Operating Officer. Before we start, I'd like to share our normal cautionary statement. Certain items discussed on today's call constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These forward looking statements represent Ramaco's expectations concerning future events. These statements are subject to risks, uncertainties and other factors, many of which are outside of Ramaco's control, which could cause actual results to differ materially from results discussed in the forward looking statements. Any forward looking statement speaks only as of the date on which it is made, And except as required by law, Ramaco does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. I'd like to remind you that you can find a reconciliation of the non GAAP financial measures that we plan to discuss today in our press release. This could be viewed on our website, ramicoresources.com.

Speaker 1

Lastly, I'd I'd encourage everyone on this call to go on to our website and download today's investor presentation under the events calendar. With that said, let me introduce our Chairman and CEO, Randy Atkins. Thanks, Jimmy. Good morning to everyone and thanks for joining the call. We have a lot to cover this morning since we last spoke in May.

Speaker 1

First, during the Q2, we announced to potentially transformative milestones. In early May, we disclosed that our Brook mine near Sheridan, Wyoming They contain the largest known unconventional deposit of rare earth elements in the United States. In late June, our tracking stock, which we call Core Resources, began trading under the ticker symbol NetCB and will pay its 1st dividend next month. As an aside, core stands for carbon ore rare earth, which describes some of the unique asset classes included in the stock. We felt that these assets might trade above levels of a typical operating coal company because of a combination of a lower risk profile income side, combined with a higher potential return profile from assets like Ritter Earths.

Speaker 1

Core is now trading roughly 65% higher than when issued at a roughly 16x EV to EBITDA multiple with over a 6% yield. This compares to Met C shares, which still trade in line with our coal peers at around 2x to 3x EBITDA. And overall, the issuance of the tracking stock has increased our combined market cap of these two stocks by about $120,000,000 or almost 30%. It goes without saying that we are gratified with the support investors shown for the security in the early going. To expand on the REE front, earlier this week, We reported that our Board had approved development mining to start on our Brook Mine project this fall.

Speaker 1

Our initial Efforts will be to recover larger quantities of material that we can chemically analyze to determine the most effective processing, separation and recovery techniques. This first step does not require large levels of spend, which we have budgeted at 2,500,000 for 2 quarters. This is significant on many fronts, but most importantly, because this is the first new rare earth mine in the U. S. In decades, actually starting to mine.

Speaker 1

A number of other projects, basically all involving REEs found in hard minerals, or in various states of prospecting or testing, but we are not aware that any have been permitted. Having taken 8 years to permit the book mine, we can attest that permitting is no easy step. It provides us an ability to materially be further down the runway in terms of moving the project into reality. We also noted that our current Where Earth target exploration target is up 50% from our initial estimates in May to over 1,000,000 tons of TREOs. We expect this target size may increase as we continue more coring and chemical analysis.

Speaker 1

But even at this size, it seems to contain many decades of REE supply to satisfy almost all current domestic demand. Based upon our ongoing work with Weir and NETL, we believe that almost 30% of the deposit contains magnetic REEs. These are the particular elements that are critical to both defense electronics as well as the energy transition for wind and solar. From limited samples of coring, we've also found large quantities of the 2 recently banned minerals by China named gallium and germanium. We are currently doing larger scale testing specifically on those 2 minerals and will include results in our next update.

Speaker 1

As a reminder, today almost all RIEs are imported from China. We hope to be the only completely quote made in the USA brand in the industry. Lastly, we have engaged Recently, a number of consulting groups specializing in REE assessment, separation and recovery technologies. This includes a well known group in this space called SRK Consulting. Together, these groups, along with NETL, will enable us to complete an initial economic analysis and pre feasibility study.

Speaker 1

We hope to have initial findings to report before year and will provide some guidance on the economics and timing of developments. Now Turning to our core met coal operations. This past quarter, the whole industry faced a number of combined challenges. We saw continued price declines, overall softer market conditions, Steel prices hitting lows and ongoing inflationary pressures. In our investor presentation On the website and accompanying this quarter's earnings on Page 14, we compared how the public groups have reported so Earnings from all our peers have clearly reflected this difficult environment.

Speaker 1

For all reported metallurgic coal companies this quarter, EBITDA fell on average 42%. We fell 38%. Average peer group mine cost increased by 4%, the same as Ramaco. In general, this was a tough quarter all around. We do not want to make excuses, but I would also note that this quarter we were again plagued by non performance by our rail partners.

Speaker 1

In the month of June, both Norfolk Southern and CSX failed to deliver over 80,000 tons of contracted shipments, which was over 10% of tons sold during the quarter. This set us back $11,000,000 of EBITDA, which rolls forward when they performed in July. On the pricing front, U. S. High Vol A Indices averaged 25% less in the 2nd quarter compared to the Today, prices are down another 10% from the 2nd quarter.

Speaker 1

At the same time, U. S. Saw inflation of almost 5% in the 2nd quarter. While this is down from a year ago, it has continued to put pressure on the supply chain. These pressures are, of course, not specific to Ramaco.

Speaker 1

I would point out, however, that when you see margin compression across the industry, Ramaco's 1st quartilelow mined cost profile, combined with our limited ARO exposure, puts us in a strong relative position. On the marketing front, we have now contracted 3,100,000 tons or 95% of our 'twenty three forecasted production. Of this amount, over 70% or 2,200,000 tons is fixed price business and an average netback of $188 per ton. The balance is priced against the floating index. Today, we have roughly 400,000 of uncommitted tons remaining to place before year end and 900,000 of committed but unpriced tons.

Speaker 1

While worldwide benchmark pricing continues in a summer seasonal lull, Our strong contracted position somewhat insulates Ramaco a bit more than those in our peer group with larger open positions. Looking at the second half of twenty twenty three, we see some positive company specific catalysts on the horizon. And is set to begin production before the end of the month. Similarly, production from the Maven surface and high wall mines continue to grow in line with expectations. In late July, after a shakedown period, The Elk Creek Prep Plant reached full processing capacity of 3,000,000 tons, up 50% from its former nameplate of 2,000,000 tons.

Speaker 1

Finally, by the Q4, we should be running at over a 4,000,000 ton per year annualized production and sales rate. In the coal space, as we all know, we cannot control price, but we can arguably control production growth and company specific As mentioned, in the back half, we look forward to an increase in both met production and processing throughput capacity. As a result, we hope to see costs come down, both by being spread across a larger number of produced tons as well as by taking some affirmative cost control measures, which Chris will comment on. On the Brook REE front. We look forward to starting our development mining in a few months.

Speaker 1

We are positioning ourselves to try and take advantage of this unique opportunity and look forward to updating everyone as this potentially transformative project unfolds. And with this mind, With that, I will turn the floor over to the rest of the team to discuss more details on finances, markets and operations. So Jeremy, please start with a rundown on our financial metrics and markets. Thank you, Randy. As you noted, the second quarter was challenging across the board to the industry as a whole, as everyone has no doubt already heard from our peers.

Speaker 1

In fact, I would point to Slide 14 that shows our closest peers saw Q2 EBITDA decline by over 40% on average versus Q1, having missed consensus by over $30,000,000 on average. Our 2nd quarter net income of $8,000,000 was down $18,000,000 from the Q1 of 20 Diluted EPS of $0.17 was down $0.40 Adjusted EBITDA fell to $30,000,000 versus $48,000,000 in Q1. As noted in our press release, Q2 net income, EPS and adjusted EBITDA were negatively affected by $9,000,000.19 $11,000,000 respectively due to rail transportation non performance issues. Roughly 85,000 tons that were contracted to ship during the last weeks of the quarter were pushed to July by CSX and NS. Relative to first quarter metrics, the largest variance was on realized price, which fell 12% to $163 per ton.

Speaker 1

U. S. High vol A indices averaged 25% less in Q2 compared to Q1. Currently, prices to date in Q3 are down more than 10% from the Q2 average. Overall production of 876,000 tons in Q2 was a quarterly record, up 5% compared with Q1 due to new mines ramping production.

Speaker 1

Total sales volume of 715,000 tons was down 6 compared with Q1 due again to the aforementioned transportation issues. Company produced cash mine costs were 4% higher than in Q1. The increase in costs was largely due to continued inflationary pressures as well as the inventory build on the back of rail issues. Specifically, Cash cost per ton sold of $109 came in much higher than cash cost of production of $103 per ton. Looking ahead, we are adjusting our 2023 guidance with an expectation that Q4 will be much stronger than Q3 with sales that will annualize to over 4,000,000 tons in Q4.

Speaker 1

Naturally, that is expected to have a strong positive impact on both lower cost and stronger cash flow as we work down inventory. For Q3, sales are expected to be 700,000 to 900,000 tons. While we are not in the business of predicting pricing, if indices remain at current levels for the duration of Q3, We anticipate realized pricing to fall roughly 12% to 15% from first half levels of $174 per ton. Our solid contracted book certainly insulates us from a portion of the decline in index pricing. We also anticipate Q3 cash costs to be similar to Q2 levels and then declining in Q4 as sales volume increases.

Speaker 1

For full year 2023, production guidance is updated to 3,000,000 to 3,500,000 tons from 3,100,000 to 3,600,000 tons, driven by the idling of our Triple S mine due to market conditions. This will drop production by roughly 100,000 tons. Given the limited mine life of Triple X, anticipated production beyond 2023 is relatively unaffected by this action. 2023 sales guidance is updated to 3,100,000 to 3,600,000 tons from 3,300,000 to 3,800,000 tons, still representing an almost 40% increase versus 2022 sales. 2023 cash costs are now largely due to the combination of continued inflationary pressures and higher than anticipated costs during the ramp up phase at our Berwind Lastly, we now anticipate a lower 2023 CapEx of $60,000,000 to $70,000,000 versus Core Resources, ticker METCB, began trading in late June and has enjoyed a strong market reception.

Speaker 1

The Board recently approved the payment of the initial core dividend in Q3, which is based on Q2 results. Clearly, we were disappointed with the fact that we weren't able to ship 85,000 tons due to transportation issues. If these had shipped this contract and the tolling income that our core resources dividend is based upon would have been materially higher. While this concludes my financial remarks, I'm now going to give a brief sales and marketing update. Despite challenging market conditions in Q2, Jason and his team continued to do an excellent job placing tons into both new and existing customers.

Speaker 1

The majority of near term demand continues to center around Asia, where netback pricing is typically lower than in our in more traditional markets. As you probably know, the annual domestic contracting season is upon us with most of the domestic We are not going to comment on any specifics here. In terms of the overall market, while demand remains relatively tepid, I would remind everyone that Supply also remains quite subdued. Global coal CapEx remains just a fraction of what it has been historically. Given increased financing, permitting and overall ESG challenges, barriers to entry into the coal space have never been higher.

Speaker 1

In addition, we have seen a number of high cost Operations around us either close or cut their workforce materially, resulting in lower production. Interestingly, this is occurring when Australian pricing has generally remained between $200 $2.50 per metric ton over the past few months. We believe the cost curve has become meaningfully steeper in recent years on the back of strong global inflation. Indeed, a number of higher cost and continue to execute on new sales as we grow production. With that said, I would now like to turn the call over to our Chief Operating Officer, Chris Blanchard.

Speaker 1

Thank you, Jeremy. As both Jeremy and Randy have noted, 2 of our largest milestones in our multiyear Growth progression largely ended in the 2nd quarter and will be completed 100% this quarter. As we discussed on our last call, The idled Berwind mine restarted development mining last quarter. The first section has progressed according to our projections and sloped down into the Pocahontas number 4 seam in early July. Final slope work is ongoing and will be completed during August and this At that time, the section will reach the heart of the reserve area, and we will also be moving on to our fee coal position to further reduce our costs there.

Speaker 1

We have also begun the redeployment of manpower and equipment to start the 2nd production Berwind section, which will also be ramped up during the Q3. This section will start in the full Pocahontas 4 seam and will not have any development mining, just the typical production ramp up period. Supporting the Berwind mine, we also completed 2 exhaust ventilation shafts during the Q2. We completed all of the fan upgrades, which we believe eliminates any future risks of lightning related emissions similar to the one off accident which occurred last July. As the Berwind mine continues to ramp its production, we will look for opportunities to take advantage of its geologic and logistical This may involve further rationalizing higher cost production and moving manpower and equipment to the Berlin mine as additional mining areas become and available.

Speaker 1

Turning to Elk Creek. The upgrade to the preparation plant was largely complete in June. At full capacity feed rate has been reached and the plant balanced. It ran through its ramp up and conditioning stages during June early July. While the plant upgrade ended up being delayed by over 2 months due to equipment delivery delays, during month of July, we managed to hit our full processing budget on a raw tons per day basis as well as total raw tons for the month.

Speaker 1

Going forward, we expect that mine production and processing Capabilities at Elk Creek will be more evenly matched and that we will begin to work through the inventories of raw coal on property and monetize them. Equally important from a cost perspective, the Elk Creek mines continue to produce well and the upgraded plant throughput will eliminate downtime and missed shifts due to stockpile levels. It should also eliminate substantial trucking and re handling costs associated with inventory in the of coal, which we did during the first half of twenty twenty three. Lastly, the Maven surface and Highwall mine began production last and is now fully staffed and fully ramped. We have seen favorable mining conditions thus far and production has exceeded our original projections.

Speaker 1

The coal quality has also been as good as anticipated. With the 3 largest growth 23 largely in our rearview mirror, we are pivoting to growing the production of our existing mines and optimizing and reducing our mine costs. We're working hand in hand with our rail and transportation partners to increase and streamline coal deliveries alongside the ramp up at these complexes. We expect to be producing at approximately a 4,000,000 to 4,500,000 clean ton per year production rate as we enter 2024 and look to position ourselves as amongst the lowest cost pure play metallurgical producers. This now concludes management's prepared remarks.

Speaker 1

Now I'd like to return the call to the operator for the Q and A portion of the call. Operator?

Operator

Thank you. The floor is now open for questions. And our first question comes from Lucas Pipes with B. Riley.

Speaker 2

Thank you very much, operator. Good morning, everyone. My first question is on pricing and the current market environment. Jeremy, if I heard you right, you mentioned that Pricing would be down 12% to 15% from first half levels if current prices hold for kind of the remainder of the year. And I guess I could back into it, but wasn't able to do it so quickly here on the call.

Speaker 2

But kind of what does this assume for netback prices on kind of unpriced tons for the remainder of the year. Thank you very much.

Speaker 1

Thanks, Lucas. So first, just slight correction is that would be the Q3 netback. I'd say there's a couple of things going on there. As we mentioned in our prepared remarks, Demand right now is certainly strongest in Asia compared to elsewhere. And so I'd say, 1st and foremost, that assumes that that's where a good chunk of the spot tons go.

Speaker 1

Secondly, in terms of our Contracted position, we've got a very nice contracted book. I'd say it's a little bit more weighted both in terms of volume and certainly price on the high side towards Q4 versus Q3. So I'd say those are sort of the nuances in there. But I would point out that obviously, Even a low double digit percentage decline in realized price in Q3 is certainly better than what the index Currently would point to if we were selling everything against the index. So I'd also say that that's going to certainly having a relatively strong contracted position.

Speaker 2

That's helpful. And Jeremy, can you remind us kind of what the Net back price would be on average in today's environment?

Speaker 1

So look, I mean, if you're talking flat to the index, I mean, let's call it for a high vol AB, that's about a $200 ton index. If you're getting kind of flat to the index, that's 140 ish on new business, again, you're going to take some degree of freight differential into Asia. So kind of depending upon where freight rates are, you certainly put that on top of You're backing out, I should say, from any index, right?

Speaker 2

Got it. Thank you so much for that detail. In terms of the initial assessment and economic analysis, when would you expect that to be completed? Good to see that you hired contractors on that front. And the $2,500,000 that you're allocating towards the mine startup, what sort of equipment I assume that's going towards equipment, but maybe that's wrong.

Speaker 2

And if it is equipment, is that mobile equipment, plant, property, plant and equipment, just a little bit of color on where the $2,500,000 would go to get a little bit of a sense of to the development cadence. Thank you, George.

Speaker 1

Sure. So I think to answer your first part of your question, the Economics of this project are basically largely derived from the process in separation techniques. As you know, rare earth is measured in parts per million, at least in the sense of coal. So, we have to determine what exactly is going to be the appropriate processing technique. That will happen on a sort of sequential basis as we basically analyze larger amounts of material.

Speaker 1

We'll get a pretty good sense of that, As it relates to sort of the chemical qualities of some of the material, whether it's ionic or not, which The large determination on the processing approaches. I would say within We give ourselves probably less than a 6 month period to get some good initial results, but I would say I would We expect probably more like a 9 month period before we would get really definitive results. And as far as the mining is I'm going to let Chris speak to that, but really most of the spend is not on equipment per se because we may start on some of that with Chris, go ahead. Right. So thank you, Randy.

Speaker 1

And Lucas, the $2,500,000 will start being spent probably in early October and run through into the Q1 of next year, but it's largely on development CapEx, putting in the settlement control of the roads to the permitted area for the initial pit. It will also include the excavation of small area in the initial permitted areas for the testing and larger bulk samples that Randy has referenced.

Speaker 2

Okay. Okay. That's really helpful. Hey, I really appreciate all the color and detail. Best of luck And thanks very much.

Speaker 2

I'll turn it over.

Speaker 1

Thank you, William.

Operator

And our next question comes from Nathan Martin with The Benchmark Company.

Speaker 2

Thanks, operator. Good morning, guys. Thanks for taking my questions. Maybe I'll start with you guys mentioned the Idols, the Triple S Due to market conditions there, we've seen some other met coal mine idlings announced, which I think, Jeremy, you referred to in your prepared remarks. But If U.

Speaker 2

S. Indices kind of stay at these levels, as you pointed out, they've been kind of moving in the opposite direction from Asian indices, at least here to start the quarter. Do you think we could see more idlings? Again, assuming most of these are related to inflationary pressures we've seen on costs. So would also be great to get your thoughts on where you think The price of that marginal ton is today.

Speaker 2

Yes.

Speaker 1

It's a great question, Nate. So I mean, clearly, with the $200 high vol AB average. The fact that we're seeing Idling or layoffs and whatnot tells you that the cost curve has moved materially higher. So I think the answer is we're already seeing certainly some mines either get idled or see their workforce reduced and I think that will continue. I mean, keep in mind, a number of probably high cost operations are being propped up by a strong twenty 'twenty three contract book that rolls off obviously at the end of this year and we'll see what 'twenty four pricing looks like.

Speaker 1

But Again, I'd say in the absence of some of those stronger contracts, you'll certainly see some mines that have been around sometime probably idle. I'd also remind you that from our perspective, every one of the mines that we have You know, it was not in place before 2017. So obviously, having a newer fleet of mine certainly puts And that puts us in a very, very good relative position, as Randy pointed out, on the overall cost curve. So at least from our perspective, I view Triple S as a one off. And actually, we put in place largely as a precursor to our Berwind operation.

Speaker 1

We actually did that after the Berwind mine went down, if I recall. So that essentially, we will be moving Manpower and equipment from Triple S into the Berwind sections.

Speaker 2

Very helpful, guys. Appreciate that. And then maybe related to your costs, specifically, compared to the $109 you guys Where do you think cost per ton would have been in the second quarter had you been able to ship those roughly 85,000 tons that slipped through July? Is that the $103 per ton cost of production, I think you mentioned. And you also said you expected 3Q cost to be roughly flat quarter over quarter.

Speaker 2

Should we be using that cost of sales of $109 as a base or the cost of production of $103,000,000 just to be clear there?

Speaker 1

No, it's a good question, Nate. So I mean, we shipped 715,000 tons and obviously, we produced about 150,000 tons more. So I'd say, had we shipped the 85,000 tons, Our cash cost of sales would have been pretty darn close to that $103,000,000 number, maybe not exactly, but within $1 or 2 of that figure. And as it relates to Q3, I would use the $109,000,000 cost of sales. Keep in mind, You've got a couple of things going on.

Speaker 1

Obviously, you've got the vacation week, which increased But as both Chris and Randy referenced, Berwind is clearly the first section will be finished in development mode Later on this month, the second section will begin to ramp. So really, by the time you hit Q4, I mean, We expect Berwinds, we expect the 2 main sections to be running sort of on a normal operating basis. So by the end of the year, I would Our cost to be sort of at or below $100 a ton and that's probably the exit rate I would use into next year, all else

Speaker 2

Very helpful, Jeremy. Appreciate that. And maybe just one more on the tons that slipped. The 85,000 should I assume those were all export and then maybe could you kind of share the domestic export split in the quarter and then maybe what that looks like in 3Q, 4Q.

Speaker 1

Sure. Yes, I mean, it was a combination of domestic and export probably leaning a little bit more on the export side. When I think about our sort of domestic export split, This quarter was probably our heaviest domestic quarter, call it about fifty-fifty. And recall, Q1 was in that A third domestic, 2 thirds export range. Obviously, there's still some spot sales to be had in the second half of the year.

Speaker 1

And certainly, I would assume that Majority of those go export. With that assumption, domestic will probably be in that, call it, let's say, 40% range in the 3rd quarter. And then as we exit the year above 1,000,000 tons shipped in the Q4, domestic We'll be down to about a third of our shipments with certainly the majority going export.

Speaker 2

Great. Thank you for that. And then finally, maybe you guys lowered your CapEx guidance for full year 'twenty three down to $60,000,000 to 70,000,000 It looks like you've already spent $48,000,000 in the first half. So obviously, that would imply a meaningful fall off in the second half. So just would be great to get your thoughts there on cadence and CapEx.

Speaker 1

So from a high level and I'll turn it to Chris. So from a high level, Nate, obviously, you're correct. It implies $15,000,000 to 20,000,000 in the back half of the year, obviously versus almost $50,000,000 in the first half. Yes, we've spent really over the last 18 months a lot of money getting the Elk plant from 2000000 to 3000000 tons and the Berwind mine in development to where Basically, there's 2 sections in the mine and by the end of the Q3, those two sections will be producing at a sort of a normalized run rate. So I'd say we've always sort of had a much heavier cadence first half versus second half.

Speaker 1

Chris, you want to expand a little bit on the updated guidance? Yes. So most of it is just the completion of major projects and then for the delay or deferment of some other spending on mines like Triple S that are higher cost profile. But with the Berwind mine, the Berwind plant and the Elk Creek plant projects behind us, and we have one project that's a little bit delayed due to at Elk Creek on our clean coal piles. That's really what's driving the lower CapEx for the rest of

Speaker 2

this year. Appreciate that, Chris. I'll leave it there, guys. Thanks for the thoughts and the time and best of luck in the second

Speaker 1

half. Thank

Operator

you. That does conclude the Q and A portion of today's call. I would now like to turn the call back over to Randall Thanks for closing remarks.

Speaker 1

I'd again like to thank everybody for joining us here today, and we'll look forward to catching up with everybody in the fall. Take

Operator

Thank you. That does conclude today's teleconference. You may all now disconnect.

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Ramaco Resources Q2 2023
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