November 8, 2018 - Ramaco Resources, Inc. (NASDAQ: METC) has reported net income of $6.2 million, or $0.15 per diluted share for the third quarter of 2018, compared with a net income of $10.2 million, or $0.25 per diluted share for the second quarter of 2018. The Company's adjusted earnings before interest, taxes, depreciation, amortization and non-operating expenses ("adjusted EBITDA") was $11.0 million for the third quarter of 2018, as compared with adjusted EBITDA of $14.9 million for the second quarter of 2018.
Randall Atkins, Ramaco Resources' Executive Chairman and Chief Financial Officer remarked, "As reported, we experienced a partial structural failure earlier this week at one 2,000-ton silo at our Elk Creek complex in West Virginia. For some perspective, we have over 350,000 tons of raw coal storage capacity at Elk Creek. The significance of the Elk Creek silo failure is that the silo system served as the conduit for delivery of coal to the preparation plant through various conveying belts and equipment. Given the damage to the silo, we will now plan to build an alternative conveying system to the preparation plant from an existing stockpile area."
Atkins continued, "At this stage of our review we are not able to provide clear guidance relative to the timing that this construction will take or when we will resume normal coal washing and loading. We hope to have this completed during the fourth quarter. I would also point out that all Elk Creek mines are continuing to operate under normal schedules."
"We are of course hopeful that both this interruption will have only near- to intermediate-term impacts at Elk Creek, and that we will resume coal preparation and loading during the fourth quarter. We will be reporting more information on our earnings call on November 8th and more afterward as additional information becomes available."
In terms of our performance for the recent quarter, coming on the back of a strong second quarter, we saw our third quarter results decline by larger than expected amounts, primarily based on geological issues. This included a $3.9 million decrease in EBITDA and a 10% decline in production to roughly 450,000 tons. We experienced geological related productivity issues during the third quarter, primarily related to a large number of section moves and hard cutting conditions in two of our Elk Creek deep mines. These challenges led to an approximately $2.5 million decrease in EBITDA, or over 60% of our quarterly decline. The remainder of the EBITDA decrease related to both fewer operating days due to a planned July 4th miner vacation period and a slight decrease in sales price for export tons sold during the third quarter.
To provide a comparison of our quarterly metrics in summary form (third quarter 2018 compared to second quarter 2018):
Randall Atkins continued, "From a 2019 sales standpoint, we have sold forward, or have sales commitments for 1.5 million tons of coal, of which 1.24 million tons are being sold to domestic customers at an average price of $113 per ton, and an additional 250,000 tons are being sold for export at adjusted index prices. The selling price is an increase of over $34 per ton versus our realized 2018 domestic pricing and also represents what we hope to be substantial cash margins per ton based on anticipated cash mining costs. We believe that 2019 should be the year that we realize more of our overall operation's revenue potential on the back of both strong domestic and international markets."
"We are also very pleased to announce the closing of a $40 million combined equipment line and revolver facility with KeyBank, N.A. of Cleveland, Ohio. The facility has been used to retire roughly $15 million of existing short-term loans and will be used for future operational and working capital requirements. We regard this facility as validation that we have 'graduated' from our former development company status to the ranks of a more seasoned operating coal company," Atkins said.
Michael Bauersachs, Ramaco Resources' President and CEO commented, "While experiencing some temporary challenging conditions at two of our Elk Creek deep mines during the third quarter, we also had some noteworthy positive developments. Our Elk Creek surface mine continues to steadily improve its operating performance. Additionally, our exploration efforts associated with the work around at our Berwind mine continue to indicate positive results and a well-defined development corridor. During October our Berwind production team completed the difficult task of entering an adjacent mine, sealing off old works, and resuming development production in the Pocahontas #3 seam. We expect Berwind to produce approximately 90,000 tons for the year.
"When adding this to our Elk Creek production, the overall Company produced tons for 2018 are expected to be approximately 1.75 million tons, depending on our ability to manage our stockpiles associated with the actual impacts of the silo failure. To the extent this figure will be impacted by the silo incident at Elk Creek and that we are operating under force majeure, we will provide guidance on the new level of proposed production as soon as such information is available," Bauersachs continued.
"As we look at the fourth quarter," Bauersachs concluded, "despite the obvious distractions, we will continue to focus on doing the right things at our operations. We will continue to focus on safety, production, productivity and retention. We are also of course working both internally and externally to find solutions to allow us to resume coal preparation and shipments at Elk Creek as soon as possible."
The Company ended the quarter with approximately $5.5 million of cash on hand and $31.3 million of accounts receivable. Free cash flow generated over the next six months is expected to be used to fund working capital and capital expenditures.
In the third quarter of 2018, the Company recorded income tax expense of $0.1 million based on an expected effective tax rate of approximately 6.2% for 2018. Cash taxes payable for 2018 are expected to be less than $0.4 million.
Capital expenditures totaled approximately $12.4 million during the third quarter of 2018 and $39.9 million year to date. We expect to end the year with increased total 2018 capital expenditures beyond the higher end of our previous guidance of $40 million, due in part to repair and related infrastructure expense at our Elk Creek complex due to the announced silo partial structural failure. The Company intends to provide guidance on the new level of proposed expenditure as such information becomes available.
As of November 7, 2018, the Company has notified all of its Elk Creek coal customers of its declaration of force majeure with respect to the remaining 2018 coal contract obligations due to the aforementioned partial structural failure of one of the silos at the Elk Creek complex. It is not anticipated at this time that any 2019 coal sales will be affected or a declaration of force majeure will be needed with respect to 2019 commitments.
The Company has property damage and business interruption insurance with respect to its preparation plant and loading facilities, which the Company believes is sufficient to cover costs necessary to restore processing capability and provide significant protection from business interruption. The Company has provided notice to its insurance carriers of the damaged silo and management believes that the Company has sufficient business interruption and replacement coverages.
Ramaco Resources is an operator and developer of high-quality, low cost metallurgical coal in southern West Virginia, southwestern Virginia and southwestern Pennsylvania. The Company has five active mines within two mining complexes at this time.