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By Andrzej Rostek January 15, 2024 - Although I focus primarily on dividend (growth) investing, I regularly cover other investment opportunities, including companies in sectors of significant economic importance. After all, macroeconomic development is a big part of my research. One of my favorite sectors is energy, which includes coal. In this first coal-focused article of the year, I want to shine a light on a company I've never covered before. that company is Alpha Metallurgical Resources (NYSE:AMR)One of the best performers of the last few years. After investors suffered massive money losses between 2018 and mid-2020, the stock rose from around $2.50 to currently around $370! Over the past twelve months, due to favorable industry conditions and the company's massive buybacks, AMR shares have returned 150%, which I expect will support the stock price for many years. With all this in mind, let's get into the details! An Export-Focused Coking Coal Giant Alpha Metallurgical Resources made a significant corporate change, changing its name from Contura Energy to better align with its strategic focus on metallurgical coal production. This change, effective February 1, 2021, came with the ticker symbol switch from “CTRA” to “AMR” on the New York Stock Exchange. The new and improved Alpha Metallurgical Resources is best known as a Tennessee-based mining company with an operational footprint in Virginia and West Virginia. The company is primarily focused on supplying high quality metallurgical coal products to the global steel industry. It is worth noting that metallurgical coal, also called coking coal, is different from thermal or steam coal in terms of carbon content and price (it is more expensive). AMR's operating portfolio includes highly productive and cost-competitive coal mines in the Central Appalachian Coal Basin. These operations have allowed the company to become the largest producer of coking coal in the US, producing approximately one-fifth of total production by 2022. In 2022, the most recent year for which it has reported all quarterly data, the company produced 16.1 million tonnes. It contained 337 million tons of reserves and resources, totaling 527 million tons. Furthermore, its diversified assets, including 65% ownership of a DTA (Dominion Terminal Associates) export terminal capable of loading up to 6,500 tonnes per annum, allow it to be heavily export-focused. About 70% of the company's shipments go overseas, which comes with both pricing and demand advantages as emerging markets are growing rapidly. According to the company, one-third of its export sales over the past five years have gone to India, one of the fastest growing emerging markets, especially due to its huge population. Between now and 2050, Indian steel production is expected to grow by 4.4% to 380 million tonnes per year. Meanwhile, global steel demand is expected to exceed 1.8 million metric tons in 2024. The fact we are dealing with is that AMR is a company that can grow the per share value of its business. Coking coal futures simply track the price of a commodity. In the next part of this article, we will discuss the company's strong financial performance and its focus on buybacks, which has been extremely aggressive and the main reason for the massive stock price rally. Buyback-Fuel Return In its most recent quarter, Q3 2023, the company reported adjusted EBITDA of $154 million, a decline from the second quarter's result of $258 million. This included sales of 4.2 million tonnes, generating $4.1 million from the metallurgical segment, and 100,000 tonnes from other categories. The weather segment saw a quarter-on-quarter decline in realisations, with average realizations at $154.73 per tonne in the third quarter compared to $172.51 in the second quarter. The decline in realizations was more pronounced in the thermal portion of the weather segment, falling from $115.50 per tonne in the second quarter to $92.22 per tonne in the third quarter, reflecting lower market prices for thermal coal. Additionally, realizations in the “Others” category declined to $68.32 per tonne in the third quarter compared to $99.66 per tonne in the second quarter due to a declining pricing environment for thermal coal. Although these headwinds were expected due to poor global economic growth, the company made progress, including improving its balance sheet. As of September 30, total liquidity was $390.1 million, taking into account $102 million in share repurchases during the quarter. The Company successfully completed the refinancing of its asset-based revolving credit facility, securing more favorable terms and a longer tenor than the previous facility. This was reflected in the new facility, which allowed the company to borrow cash or obtain letters of credit on a revolving basis up to $155 million. Since 2022, the company has more cash than gross debt on its balance sheet, opening the door to aggressive buybacks. Since January 2022, AMR has bought back 28% of its shares, making it one of the most aggressive buybacks in the market across all sectors and industries. In terms of capital returns to shareholders, the company also declared a quarterly cash dividend of $0.50 per share during the third quarter. This means a yield of 0.55%. That yield will soon be 0.00%. Following the fourth quarter payment, the dividend program will end and the focus will instead be on a share repurchase program. Share repurchases in the third quarter were approximately 545,000 shares at a cost of $102 million. Since the inception of the program, the Company has spent approximately $940 million to acquire approximately 6.1 million shares at a weighted average price of $153.90 per share. AMR believes it is far more beneficial to shareholders if it buys back stock. Looking to 2024, during its 3Q23 earnings call, the company provided guidance, estimating shipments of between 15.5 and 16.5 million tons of metallurgical coal as well as 900,000 to 1.3 million tons of contingent thermal coal. Additionally, the company increased its share repurchase program authorization by $300 million to a total of $1.5 billion, allowing approximately $560 million in additional repurchases. Furthermore, as we saw in the TradingView chart earlier in this article, despite economic pressures, geopolitical conflicts and uncertainties in the global outlook, metallurgical coal prices strengthened on expectations of tight supply conditions and increased demand for steel. My view is that, as long as economic growth remains subdued, we will see a long-term sideways trend in coking coal futures. However, as the ISM Manufacturing Index moves lower, we may see a significant uptick in prices, which will boost company shipments and prices, which could push the stock price even higher. Analysts have included a bearish outlook.
This is quite normal, as analysts are unwilling to bet on a prolonged recession for coal. Therefore, they place the decline in futures in a straight line. AMR currently trades at a blended price-to-operating cash flow ratio of 7.3x. If coking coal futures remain strong then this could be a sustainable number. Although I would prefer to wait for a correction in AMR shares, I believe the stock has the potential to grow even higher over the long term. However, please be careful. AMR is extremely unstable and may not be right for you. If you decide that AMR is right for you, keep your positions extremely small and preferably wait for the first correction. i will give stock a Purchase Rating to reflect its long-term growth potential. Take Away In a highly cyclical and volatile industry, Alpha Metallurgical Resources stands out as a resilient company with remarkable growth in the face of industry challenges. The company's strategic shift toward metallurgical coal production has paid off, making it America's leading coking coal producer. Meanwhile, AMR's strong operating portfolio coupled with its export-centric approach positions it favorably amid rising global steel demand, especially in emerging markets like India. Its focus on buybacks is a good way to support long-term per-share value. Although I am cautious about potential economic headwinds, the overall, long-term outlook warrants Purchase Rating. |
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