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Alpha Metallurgical Resources
Alpha Metallurgical Resources (AMR) achieved its best output in over 5 years in Q1, producing 4.4 million tons. Met coal sales remained flat at 3.7 million tons due to an inventory build-up, partly from delays at the DTA terminal in March. AMR’s 2023 sales guidance remains unchanged, with a total of 16.7-18.4 million tons, including 15-16 million tons of met coal. Domestic met contracts have been fixed at a price of $193.26 per ton for a total of 4.7 million tons, while most 2023 export met sales have been committed with indexed prices. Maintenance capital expenditures account for the majority of the capex, with $61 million allocated for two replacement coal mines and two prep plant upgrades.
Earnings Highlights:
- Q1 adjusted EBITDA was $354 million, up from $248 million in the fourth quarter. Net Income up 23% QoQ to $270.9 million.
- Sales of 3.9 million tons, with 3.7 million tons from the met segment. Sales prices increased QoQ for the met segment with an average realization of $208.93, compared to $186.29 in Q4.
- Cash costs decreased to $110.56/ton, down from $112.97/ ton Q4 on higher production, despite higher price associated costs. CAPEX was $74.2 million, up from $61 million.
- Cash provided by operating activities decreased QoQ to $177.4 million due to working capital releases.
- Total liquidity of $315.6 million as of the end of March, net of $145 million in share repurchases during the quarter.
- The tax rate guidance for the year was adjusted to 12% to 17% down from the previous range of 15% to 20%.
- The Board declared a quarterly cash dividend of $0.50 per share, an increase from the prior quarter’s $0.44 per share, payable on July 5th.
- AMR repurchased 870,000 shares at a cost of $136 million in Q1, and has spent approximately $715 million to acquire 4.8 million shares of common stock at an average price of $148.74 per share since the beginning of the share repurchase program.
My thoughts on Alpha:
Alpha has been one of my favorites since the beginning of this cycle. This was largely due to a change in management regime two to three years ago and a refocusing effort on pushing down costs. The new management team led a broad effort which included getting rid of contract miner operations, closing higher cost mines, consolidating operations and generally concentrating on good engineering again. Throughout the upturn, we didn’t really get to see a lot of the benefit from this effort since profit margins exploded anyway on higher coal prices. Although Alpha has the benefit of scale and the flexibility inherent in continuous miner (CM) operations, they may feel the inflationary cost pressures much more than the longwall focused producers.
I specifically worry about labor costs as wage inflation in blue collar professions is on the rise, and for good reason – nobody wants to work in a coal mine. Therefore, when Alpha wants to increase production here or there they either have to pay overtime to a CM operator or hire more workers, which is very expensive. When comparing it to longwall operations, where each man-hour worked results in a greater overall coal output, the disparity in benefits is almost unfair. This is one of the primary reasons longwall mines are cheaper than room and pillar mines.
Going forward, I’m very curious to see how Alpha handles their costs. I don’t see many levers to pull in order to push down cost pressures if/when we see another inflationary impulse. Although I agree with Alpha’s management in that it is “criminally undervalued,” I don’t think the market favors Alpha due to where it sits on the cost curve, relative to Warrior and Arch. I mostly disagree with the market on this matter as I actually see benefits to CM operations, such as scale, operating flexibility, better blending opportunities, among others. But where Alpha really shines is in their capital return program. A few months ago I estimated that Apha would be able to buyback approximately 4% of common shares outstanding per quarter, and that continues today.
I’ll be visiting Alpha next week and perhaps even taking a helicopter tour of their facilities – if I’m not too scared! – and I’m sure I’ll have a lot more to say about the company and management when I get back.
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