September 6, 2023 - Black Bear Value Partners, an investment management firm, published its second quarter 2023 investor letter, a copy of which can be downloaded here. Black Bear Value Fund returned +4.4%, net, in June and +14.0%, net, YTD, compared to the HFRI Value Index, which returned +3.3% in June and is +5.9% YTD. During the same period, the S&P 500 returned +6.6% and +16.9%, respectively. In addition, please check the fund’s top five holdings to know its best picks in 2023.
Black Bear Value Partners highlighted stocks like Warrior Met Coal, Inc. (NYSE:HCC) in the Q2 2023 investor letter. Headquartered in Brookwood, Alabama, Warrior Met Coal, Inc. (NYSE:HCC) produces and exports metallurgical coal. On September 1, 2023, Warrior Met Coal, Inc. (NYSE:HCC) stock closed at $41.22 per share. One-month return of Warrior Met Coal, Inc. (NYSE:HCC) was 0.76%, and its shares gained 29.30% of their value over the last 52 weeks. Warrior Met Coal, Inc. (NYSE:HCC) has a market capitalization of $2.144 billion.
Black Bear Value Partners made the following comment about Warrior Met Coal, Inc. (NYSE:HCC) in its Q2 2023 investor letter:
"Warrior Met Coal, Inc. (NYSE:HCC) produces met coal which is used for steelmaking. They are a largely export driven producer (97%) with a large cost advantage as they can ship to Europe and South America in ~2 weeks versus Australian competition of ~5 weeks.
Some rough math on HCC (quarter-end price of $39 and market cap of ~$2BB and $0 net debt)
They have a current project coming online in 3 years with an estimated value of $1BB or $19 per share per management.
I use a more modest discount rate and operating cash flow as the future is tough to know and get to $300-$500MM or $6-$9 per share.
Excess cash of $5 per share
The existing business requires $100MM in capex and generates midcycle operating cash flow of $500MM.... resulting in ~$8 in FCF per share. Some believe this number is closer to $800-$900MM per year.
Let’s presume non-heroic FCF yield of 15-20% on $500MM = $40-$53 per share
New project of $6/$9 + Excess Cash of $5 + Operating business $40/$53 per share = $51-$67 per share vs. current price of $39.
Note the above is a very rough calculation and shows the wide margin of safety baked in the price. We may decide the operating business is worth more than a 15-20% yield…. but for now, we do not have to make any big leaps with respect to valuation.
The Company has not been active in the share repurchase market to preserve their NOL’s (avoid triggering a change in control). As the NOL’s are used up in the coming 12 months they should be able to aggressively repurchase stock and significantly increase the intrinsic value per share."