Q2 2023 Ramaco Resources Inc Earnings Call
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Welcome to the radical Resources' second quarter 2023 earnings conference call.
At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation.
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I'd now like to turn the call over to Jeremy Sussman, Chief Financial Officer. Please go ahead Sir.
Thank you.
On behalf of <unk> resources I'd like to welcome all of you to our second quarter 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.
These forward looking statements represent <unk> expectations concerning future events.
These statements are subject to risks uncertainties and other factors many of which are outside of <unk> control, which could cause actual results to differ materially from the results discussed in the forward looking statements.
The forward looking statement speaks only as of the date on which it is made.
As required by law <unk> does not undertake any obligation to update or revise any forward looking statements.
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 it can be.
He viewed on our website Amoco resources Dot com.
Lastly, I'd encourage everyone on this call to go onto 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, Jeremy.
Good morning to everyone and thanks for joining the call we have a lot to cover this morning since we last spoke in May.
First during the second quarter, we announced two potentially transformative milestones.
In early May we disclosed that our work mine near shared in Wyoming.
Contained the largest known unconventional the positive rare earth elements in the United States.
In late June our tracking stock, which we call core resources began trading under the ticker symbol met C. B.
Pay its first dividend next month.
As an aside core stands for carbon or 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 in the fixed income side combined with a higher potential return profile from assets like rare Earths.
Core is now trading roughly 65% higher and when issued.
At a roughly 16 times EV to EBITDA multiple and with over a 6% yield.
This compares to met C shares, which don't trade in line with our KOL peers at around two to three times EBITDA.
And overall the issuance of the tracking stock is increased our combined market cap of these two stocks by about 120 million or almost 30%.
It goes without saying that we are gratified with the support investors have shown for the security in the early going.
Can you expand on the R&D front earlier. This week, we reported that our board had approved development mining to start on our books mine project. This fall.
Our initial efforts will be to recover larger quantities of material that we can chemically analyzed to determine the most effective processing separation and recovery techniques.
This first step does not require large levels of spend.
Which we had budgeted at two and a half million over two quarters.
This is significant on many fronts, but most importantly, because this is the first new rare Earth mine in the U S and decades actually starting to mine.
A number of other projects basically all involving our he's found in hard minerals are in various states of prospecting or testing, but we are not aware that any of them been permitted.
Having taken eight years to permit the book mind, we can attest that permitting is no easy steps. 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 million tons of Trs.
We expect this target size may increase as we continue more coring and chemical analysis.
But even at this size it seems to contain many decades of R E supply to satisfy almost all current domestic demand.
Based upon our ongoing work with where in any T. L. We believed that almost 30% of the deposit contains magnetic or ease. These are there 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 two recently banned minerals by China named gallium and germanium.
We are currently doing larger scale testing specifically on those two minerals and will include results in our next update.
As a reminder, today almost all our aes 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 our E assessment separation and recovery technologies.
This includes a well known group in this space called S RK consulting.
Together these groups along with any T. L will enable us to complete an initial economic analysis and pre feasibility study.
We hope to have initial findings to report before year end 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 quarters earnings on page 14, we compared how the public groups have reported so far.
Earnings from all our peers, who clearly reflected this difficult environment.
Well all reported metallurgy coal companies this quarter EBITDA fell on average 42%.
We fell 38%.
Average peer group mine cost increased by 4% the same as <unk>.
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 nonperformance buyer our rail partners.
In the month of June both.
Norfolk, Southern and <unk> failed to deliver over 80000 tons of contracted shipments, which was over 10% of tons sold during the quarter.
This set us back 11 million of EBITDA, which rolls forward when they performed in July .
On the pricing front.
U S High vol. A and this is averaged 25% less in the second quarter compared to the first.
<unk> prices are down another 10% from the second quarter.
The same time U S saw inflation of almost 5% in the second 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 drammock.
I'd point out however that when you see margin compression across the industry <unk> first quartile low mine cost profile combined with our limited arrow exposure, which is in a strong relative position.
On the marketing front, we have now contracted three 1 million tonnes are 95% of art twenty-three forecasted production.
This amount over 70% or $2 2 million tons is fixed price business at an average netback of $188 per ton.
The balance is priced against the floating index.
They we have roughly 400000 of uncommitted tons remaining to place before year end.
And 900000 of committed but unpriced tonnes.
While worldwide benchmark pricing continues in a summer seasonal lull, our strong contracted position somewhat insulate ceramic go a bit more than those in our peer group with larger open positions.
Yeah.
Looking at the second half of 'twenty three we see some positive company specific catalysts on the horizon.
The first section of the Berwyn mine continues to increase current production.
The second section is set to begin production before the end of the month.
Similarly production from the <unk> surface and Highwall mines continue to grow in line with expectations.
In late July after a shakedown period.
Oh Creek Prep plant reached full processing capacity of 3 million tons up 50% from its former nameplate of 2 million tons.
Finally by the fourth quarter, we should be running at over a 4 million 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 costs.
As mentioned in the back half, we look forward to an increase in both net production and processing throughput capacity.
As a result.
We hope to see costs come down.
Both by being spread across a larger number of produce tons as well as by taking some affirmative cost control measures, which Chris will comment on.
On the Brook R. E front, we look forward to starting our development mining and a few months.
We are positioning ourselves to try and take advantage of this unique opportunity and look forward to updating everyone is this potentially transformative project unfolds.
And with this mine as time goes by we hope to position ourselves as both a growing low cost met coal as well as rare earth producer.
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 run down on our financial metrics and markets.
Randy.
As you noted the second quarter was challenging across the board for the industry as a whole as everyone has no doubt already heard from our peers. In fact, I would point to slide 14 that shows our closest peers saw Q2 EBIT declined by over 40% on average versus Q1, having missed consensus by over $30 million on average.
<unk>.
Our second quarter net income of $8 million, but down $18 million from the first quarter of 2023.
Diluted EPS of <unk> 17 was down 40.
Adjusted EBITDA fell to $30 million versus $48 million in Q1.
Noted in our press release Q2, net income EPS and adjusted EBITDA were negatively affected by $9 million, 19% and $11 million, respectively. Due to rail transportation nonperformance issues, roughly 85000 tons that were contracted to ship during the last weeks of the quarter.
Were pushed to July by <unk>.
Relative to the first quarter metrics, the largest variance was on realized price, which fell 12% to $163 per ton.
Hi, Vale indices averaged 25% less in Q2 compared to Q1.
Currently prices to date, and Q3 are down more than 10% from the Q2 average.
Overall production of 870 676000 tonnes in Q2 was a quarterly record up 5% compared with Q1 due to new mines ramping production.
Total sales volume of 715000 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.
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 million tonnes in Q4.
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 to 900000 tonnes. While we are not in the business of predicting pricing indices remain at current levels for the duration of Q3, we would anticipate realized pricing to fall roughly 12% to 15% from first half level of $174.
Per ton.
Our solid contracted book certainly Insulates us from a portion of the decline in index pricing.
We'd also anticipate anticipate Q3 cash cost to be similar to Q2 level and then declining in Q4 as sales volume increases.
Full year 2023 production guidance is updated to three to three 5 million tonnes from three 1% to $3 6 million tonnes driven by the idling of our Triple S mine due to market conditions.
We'll drop production by roughly 100000 ton given.
Given the limited mine life, the Triple X anticipated production beyond 2023 is relatively unaffected by this action.
2023 sales guidance is updated to three 1% to $3 6 million tonnes from three three to $3 8 million ton still representing an almost 40% increase versus 2022 sales too.
2023 cash costs are now expected to be 102 to $108 per ton up from 97 to $103 per ton.
Largely due to the combination of continued inflationary pressures and higher than anticipated costs during the ramp up phase at our Berlin complex.
Lastly, we now anticipate a lower 2023, capex of $60 million to $70 million versus $65 to $80 million previously.
As Randy noted a major highlight for US this past quarter was that our tracking stock core resources ticker <unk> began trading in late June and has enjoyed a strong market reception.
Our 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 werent able to ship 85000 tonnes due to transportation issues.
He's had shipped this contracting a tolling incomes at our core resources dividend is based upon what have been materially higher.
While this concludes my financial remarks, I'm now going to give a brief sales and marketing update.
Quite challenging market conditions in Q2, Jason and his team continued to do an excellent job, placing tons into both new and existing customers.
The majority of near term demand continues to center around Asia, where netback pricing is typically lower than in our more traditional markets.
As you probably know the annual domestic contracting season is upon us with most of the domestic steel mills out for tender for calendar 2024 contracts.
Given that we are in the midst of these negotiations 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 call Capex remains just a fraction of what it has been historically.
Given increased financing permitting and overall ESG challenges.
<unk> to entry into the coal space have never been higher.
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 Australia and pricing has generally remained between 202 hundred $50 per metric ton over the past few months.
Believe the cost curve has become meaningfully steeper in recent years on the back of strong global inflation.
Indeed, a number of higher cost operations are currently underwater even at today's prices.
Amid this supply demand backdrop, we will look to 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.
Thank you Jeremy.
As both Jeremy and Randy have noted.
Two of our largest milestones in our multi year growth progression largely ended in the second quarter and will be completed 100% this quarter.
As we discussed on our last call the idled Berlin mine restarted development mining last quarter.
First section has progressed according to our projections and slopes down into the Pocahontas number foreseen in early July .
Final slope work is ongoing and will be completed during August and this mine will move out of the development mode.
At that time, the section will reach the heart of the reserve area and.
And we will also be moving onto our FICO position to further reduce our costs there.
We have also begun the redeployment of manpower and equipment to start the second production Berlin section, which will also be ramped up during the third quarter.
This section will start in full on our sourcing and will not have any development mining just typical production ramp up period.
Supporting the Berwyn mine, we also completed two exhaust ventilation shafts during the second quarter.
We completed all of the fan upgrades, which we believe eliminates any future risks of lightening related admissions similar to the one off accident, which occurred last July .
As the Berwyn mine continues to ramp its production.
We will look for opportunities to take advantage of its geologic and logistical advantages.
This may involve further rationalizing higher cost production and moving manpower and equipment to the Berlin mine as additional mining areas become developed and available.
Turning to Elk Creek, the upgrade to the preparation plant is largely complete in June .
While we were finishing some of the last bullet item.
On the on the upgrade the full capacity feed rate has been reached and the plant balanced.
It ran through its ramp up and conditioning stages during June and early July .
While the plant upgrade ended up being delayed by over two months due to equipment delivery delays during the month of July we managed to hit our full processing budget on a raw tons per day basis, as well as total loss tonnes from demand.
Going forward, we expect this mine production and processing capabilities at Elk Creek will be more evenly matched net we will begin to work through the inventories of raw coal on the 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 this shifts due to stockpile levels at <unk>.
Should also eliminate substantial trucking and re handling costs associated with inventory in the raw coal, which we did during the first half of 2023.
Lastly, the mavens surface and Highwall mine began production last quarter and is now fully staffed and fully ramped.
We have seen favorable mining conditions, thus far and production has exceeded our original projections. The coal quality has also been as good as anticipated.
With the three largest growth projects of 23, largely in our rearview mirror, we are pivoting to growing the production of our existing mines, and optimizing and reducing our mining costs.
We're working hand in hand, with our rail and transportation partners to increase and streamline coal deliveries.
Long side the ramp up at these complexes.
We expect to be producing at approximately a four to $4 5 million clean ton per year production rate as we enter 2024.
And look to position ourselves is amongst the lowest cost pure play metallurgical producers.
This now concludes management's prepared remarks, and now I'd like to return the call to the operator for the Q&A portion of the call.
Operator.
Thank you the floor is now opened for questions.
At this time, if you have a question or comment. Please press star one on your telephone keypad. If at any point. Your question is answered you may remove yourself from the queue by pressing star too.
Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you.
And our first question comes from Lucas pipes with B Riley.
Thank you very much operator, good morning, everyone.
My first question is on on pricing at the current market environment, Jeremy If I. If I heard you right you mentioned that pricing would be down 12% to 15% from.
First half levels.
If current prices hold.
For the remainder of the year.
And I guess I could back into it.
But wasn't able to do it so so quickly here on the call but.
Kind of what what does this assume four netback prices on on kind of unpriced tons for the remainder of the year. Thank you very much. Thanks.
Thanks Lucas.
First just a slight correction so that that would be the Q3 net back I'd say, there's a couple of things going on 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 first and foremost that assumes that thats, where a good chunk of the.
Spot tons go 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.
First is that versus Q3, so I'd say those are sort of the nuances in there, but I would point out that obviously.
Even at a low double digit percentage decline in realized price in Q3 is certainly better than what the index currently what I would point to if we were selling everything against the index I would also say that does point to certainly having a relatively strong contracted position.
Okay.
That's helpful.
Jimmy can you remind us kind of what the.
Net back price would be on average in today's environment.
So look I mean.
If you're talking flat to the index I mean lets call it for a high vol a.
That's about a 200 dollar a ton.
Index.
If youre getting kind of flat to the index.
100 Fortyish.
On new business.
Again, youre going to have to take some degree of the freight differential into Asia, so kind of depending upon where freight rates are.
You can certainly put that on top of any.
Are you back it out I should say from any index right.
Got it. Thank you so much for that detail.
Okay.
My second question is about the rare earth opportunity.
Two questions. There. The first is in terms of the initial assessment and economic analysis. When would you expect that to be complete it good to see that you hired contractors on that front and the $2 $5 million that you're allocating towards the mine startup.
I assume that's going towards equipment, but maybe that's wrong and if it is equipment is that mobile equipment plant.
Property plant and equipment.
Just a little bit of color on on with a $2 $5 million would go to to get a little a little bit of a sense.
Development cadence. Thank you sure so I think.
Answer your first part of your question.
The economics.
Of this project are basically largely.
Derived from the processing separation techniques.
As you know, we're earth as measured in parts per million.
At least in distance coal.
So.
We have to determine what exactly is going to be the appropriate processing technique that will happen.
On a sequential basis as we basically analyze larger amounts of material.
You'll get a pretty good sense of that particularly as it relates to sort of the chemical qualities.
Some of the material, whether its ionic or not.
She has a large determination on the processing.
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I would say within you know what we.
We gave ourselves probably less than a six month period to get some some good initial results, but I would say.
I would expect probably more like a nine month period before we would get really definitive results and as far as the mining is concerned 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 contractors with Chris go ahead right. So thank.
Thank you, Randy and Lucas that $2 5 million.
Start being spent probably in early October and run through.
The first quarter of next year, but it's largely on development capex, putting in the sediment control the roads.
Two the permitted area for the initial pit and will also include the excavation of a small area in the.
Initial permitted areas for the testing and larger bulk samples that Randy has referenced.
Okay. Okay, that's really helpful.
Hey, I really appreciate all the color and detail best of luck and thanks, Thanks, very much I'll turn it over.
Thank you Luca.
And our next question comes from Nathan Martin with the benchmark company.
Thanks, operator, good morning, guys. Thanks for taking my questions.
We will start with.
You guys mentioned your idols, you took less line due to market conditions. There. We've seen some other met coal mine idling of analysis I think Jeremy you referred to in your prepared remarks, but it.
And as soon as kind of stay at these levels as you pointed out they've been kind of moving in the opposite direction from from Asian indices at least here to start the quarter.
I think we could see more idle links.
Again, assuming most of these are related to inflationary pressures, we've seen I'll call. So would also be great to get your thoughts on where you think the price of that marginal ton is today.
Yes, it's a great question, Nate so I mean clearly.
With a 200 dollar high vol, a b average.
The fact that Youre seeing.
Idling or lay off.
And whatnot tells you that the cost curve has moved materially higher.
So yes, I mean I think the answer is we're already seeing.
Yes, certainly some mines.
You know either idled or 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 2023 contract book that rolls off obviously at the end of this year and well.
See what 24 pricing looks like but.
Again, I would say in the absence of some of those.
Stronger contracts, you'll certainly see some mines that have been around some.
Some time.
Probably idle I'd also remind you that you know from our perspective every one of the mines that we have.
It was not in place before 2017, so obviously, having a newer fleet of mind certainly as it puts us in a very very good relative position as Randy pointed out on the.
On the overall cost curve, so at least from our perspective.
Triple S is that as a one off.
And actually Triple S was put in place largely as a precursor to our berwyn operation.
We actually did that after the Berwyn mine went down if I recall, so that essentially we would be moving manpower and equipment from triple S into the berwyn sections.
Yeah.
Very helpful guys I appreciate that and then maybe related to your costs specifically.
Compared to the $109 you guys reported where do you think cost per ton would have been in the second quarter have you been able to ship those roughly 85000 tons that slip to July one.
$3 per ton cost of production I think you mentioned.
And you also said you expected to cost to be roughly flat quarter over quarter should we be using that cost of sales of $109 as the base or the cost of production of one or three just to be clear there.
No. It's a good question Nate So I mean, we shipped 715000 tonnes, obviously, we produce.
About 150000, more so I'd say have we ship the 85000 tons.
Our cash cost of sales would have been pretty darn close to that that one of the three number maybe not exactly but within a $1 two of that.
Of that figure and as it relates to Q3 I would use that.
109.
Cost of sales keep in mind.
And you've got a couple of things going on obviously, you've got that the vacation week.
Which increased cost, but its both Chris and Randy referenced Berland is clearly.
First section will be finished in development mode.
Later on this month, the second section will begin to us too.
Two to ramp so really by the time you hit Q4 I mean.
We expect borrowing at least the two main sections to be to.
To be running.
On a normal operating basis. So by the end of the year I would expect our cost to be sort of at or below 100 Bucks a ton.
Probably the exit rate I would use into.
Into next year.
Cool.
Very helpful. Jeremy appreciate it got it and.
Maybe just one more on the on the tons that slipped.
5000 should I assume those were all export and then maybe could you kind of share the domestic export split in the quarter and maybe what that looks like in <unk> <unk>.
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.
Our sort of domestic export split.
Yes.
This quarter was probably our heaviest domestic quarter call. It about 50 50.
And recall Q1 was in that kind of a third domestic two thirds export ranch.
Obviously, there is still some spot sales to be had in the second half of the year and certainly I would assume that the majority.
The majority of those don't go export.
With that assumption.
Domestic will probably be in that.
40% range in the third quarter.
And then as we exit the year above 1 million tons shipped in the fourth quarter.
Domestic will be down to about a third of our shipments with certainly the majority go I'm not going export.
Great. Thank you for that and then finally, maybe.
And you guys lowered your capex guidance for full year, 'twenty, three down to $60 million to $70 million.
It looks like you've already spent $48 million in the first half. So obviously that would imply a meaningful falloff in the second half. So just would be great to get your thoughts on cadence of Capex.
So from a high level and I'll turn it to Chris So from a high level, obviously, youre correct that implies a $15 million to $20 million.
In the back half of the.
Of the year.
Policy versus almost $50 million in the first half we spent really over the last 18 months a lot of money getting the <unk> plant from two to 3 million tonnes, and the Berwyn mine and development to where basically.
There's two sections in the mine and by the end of the third quarter. Those two sections will be producing at a sort of a normalized.
Run rate, so I would say, we've always sort of had a much heavier cadence first half versus second half, but Chris you want to expand a little bit on on the updated guidance.
So most of it is 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 Berwyn mine the Berlin plant in the Elk Creek plant projects behind US and we had one project that's a little bit delay due to permits at Elk Creek on our clean coal piles.
That's that's really what's driving the lower capex for the rest of this year.
I appreciate that Chris I'll leave it there guys. Thanks, Thanks for the thoughts Tom Best of luck in the second half.
Thank you.
Thank you that does conclude the Q&A portion of today's call I would now like to turn the call back over to Randall Atkins for closing remarks.
Okay.
Again like to thank everybody for joining us here today, and we'll look forward to catching up with everybody in the fall.
Sure.
Okay.
Thank you that does conclude today's teleconference. You may all now disconnect.
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