Ramaco Resources, Inc.

Welcome to the Ramico 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 open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star 0. I would now like to turn the call over to Jeremy Sussman, Chief Financial Officer. Please go ahead, sir.

Thank you. On behalf of Ramico 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 statements. 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 Ramico's expectations concerning future events. These statements are subject to risks, uncertainties, and other factors, many of which are outside of Ramico's control, which could cause actual results to differ materially from the results discussed in the forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and except as required by law, Ramico does not undertake any obligation to update or revise any forward-looking statements, whether 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. This can be viewed on our website, ramicoresources.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 Brook mine near Sheridan, Wyoming, may contain the largest known unconventional deposit of rare earth elements in the United States. In late June, our tracking stock, which we call Core Resources, began trading under the ticker symbol NETCB and will pay its first dividend next month. As an aside, CORE stands for Carbon Ore 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 on the fixed income side combined with a higher potential return profile from assets like rare earths. Core is now trading roughly 65% higher than when issued. at a roughly 16 times EB to EBITDA multiple, and with over a 6% yield. This compares to METC shares, which still trade in line with our coal peers, at around two to three times EB to EBITDA. And overall, the issuance of the tracking stock has 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 this security in the early going. To expand on the REE front, earlier this week, we reported that our board had approved development mining to start on our Brook Mine project this fall. Our initial efforts will be to recover larger quantities of material that we can chemically analyze to determine the most effective processing, separation, and recovery techniques. This first step does not require large levels of spend, which we have budgeted at $2.5 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. in decades, actually starting the mine. A number of other projects, basically all involving REEs found in hard minerals, are in various states of prospecting or testing, but we are not aware that any have been permitted. Having taken eight years to permit the Brook Mine, we can attest that permitting is no easy step. 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 PREOs. 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 REE supply to satisfy almost all current domestic demand. Based upon our ongoing work with Weir and NETL, we believe that almost 30% of the deposit contains magnetic REEs. These are the 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 REEs 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 REE assessment, separation, and recovery technologies. This includes a well-known group in this space called SRK Consulting. Together, these groups, along with NETL, 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 quarter's earnings on page 14, we compared how the public groups have reported so far. Earnings from all our peers have clearly reflected this difficult environment. We all reported metallurgical companies this quarter Ibitda fell on an average 42%. We fell 38%. Average peer group mine cost increased by 4%, the same as Ramico. 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 non-performance by our rail partners. In the month of June, both Norfolk Southern and CSX failed to deliver over 80,000 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 indices averaged 25% less in the second quarter compared to the first. Prices are down another 10 percent from the second quarter. The same time, U.S. saw inflation of almost 5 percent 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 to Ramico. I would point out, however, that when you see margin compression across the industry, Ramico's first quartile low mine cost profile combined with our limited ARO exposure, puts us in a strong relative position. On the marketing front, we have now contracted 3.1 million tons, or 95% of our 23 forecasted production. Of this amount, over 70%, or 2.2 million tons, is fixed price business, and an average net back of $188 per ton. The balance is priced against the floating index. Today we have roughly 400,000 of uncommitted tons remaining to place before year end and 900,000 of committed but unpriced tons. While worldwide benchmark pricing continues in a summer seasonal lull, our strong contracted position somewhat insulates Ramico a bit more than those in our peer group with larger open positions. Looking at the second half of 23, 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 Maven surface and high wall mines continue to grow in line with expectations. In late July, after a shakedown period, The Elk 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 MET production and processing throughput capacity. As a result, we hope to see costs come down, both by being spread across a larger number of produced tons, as well as by taking some affirmative cost control measures, which Chris will comment on. On the Brook REE front, we look forward to starting our development mining in a few months. We are positioning ourselves to try and take advantage of this unique opportunity and look forward to updating everyone as this potentially transformative project unfolds. And with this mind, as time goes by, we hope to position ourselves as both a growing low-cost net 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 rundown on our financial metrics and markets. Thank you, Randy. As you noted, the second quarter was challenging across the board to 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 EBITDA decline by over 40% on average versus Q1, having missed consensus by over $30 million on average. Our second quarter net income of $8 million was down 18 million from the first quarter of 2023. Diluted EPS of 17 cents was down 40 cents. Adjusted EBITDA fell to 30 million versus 48 million in Q1. As noted in our press release, Q2 net income, EPS, and adjusted EBITDA were negatively affected by $9 million, 19 cents, and $11 million, respectively, due to rail transportation non-performance issues. Roughly 85,000 tons that were contracted to ship during the last weeks of the quarter were pushed to July by CSX and NS. Relative to first quarter metrics, the largest variance was on realized price, which fell 12% to $163 per ton. U.S. high value indices averaged 25% less in Q2 compared to Q1. Currently, prices to date in Q3 are down more than 10% from the Q2 average. Overall production of 876,000 tons in Q2 was a quarterly record of 5% compared with Q1 due to new mines ramping production. Total sales volume of 715,000 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 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 tons in Q4. Naturally, that is expected to have a strong positive impact on both lower costs and stronger cash flow as we work down inventory. For Q3, sales are expected to be 700,000 to 900,000 tons. While we are not in the business of predicting pricing, if indices remain at current levels for the duration of Q3, we'd anticipate realized pricing to fall roughly 12% to 15% from first half levels of $174 per ton. Our solid contracted book certainly insulates us from a portion of the decline in index pricing. We'd also anticipate Q3 cash costs to be similar to Q2 levels and then declining in Q4 as sales volume increases. For full year 2023, production guidance is updated to 3 to 3.5 million tons from 3.1 to 3.6 million tons, driven by the idling of our Triple S mine due to market conditions. This will drop production by roughly 100,000 tons. Given the limited mine life of XXX, anticipated production beyond 2023 is relatively unaffected by this action. 2023 sales guidance is updated to 3.1 to 3.6 million tons, from 3.3 to 3.8 million tons, still representing an almost 40% increase versus 2022 sales. 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 Berwyn complex. Lastly, we now anticipate a lower 2023 CapEx of $60 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 METCB, began trading in late June and has enjoyed a strong market reception. The 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 weren't able to ship 85,000 tons due to transportation issues. If these had shipped as contracting, the tolling income that our core resources dividend is based upon would have been materially higher. While this concludes my financial remarks, I'm now going to give a brief sales and marketing update. Despite 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 net back 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 coal capex remains just a fraction of what it has been historically. Given increased financing, permitting, and overall ESG challenges, barriers 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 Australian pricing has generally remained between $200 and $250 per metric ton over the past few months. We 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 Idle Berlin mine restarted development mining last quarter. The first section has progressed according to our projections and sloped down into the Pocahontas No. 4 scene in early July. Final slope work is ongoing and will be completed during August, and this mine will move out of development mode. At that time, the section will have reached the heart of the reserve area, and we will also be moving on to our fee coal 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 the full Pocahontas floor seam and will not have any development mining, just the typical production ramp-up period. Supporting the Berlin 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 lightning-related emissions similar to the one-off accident which occurred last July. As the Berlin 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. Returning to Elk Creek, the upgrade to the preparation plant was largely complete in June. While we were finishing some of the last solid items 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 During the month of July, we managed to hit our full processing budget on a raw tons per day basis as well as total raw tons for the month. Going forward, we expect that mine production and processing capabilities at Elk Creek will be more evenly matched and that 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 mis-shifts due to stockpile levels. It should also eliminate substantial trucking and rehandling costs associated with inventorying the raw coal, which we did during the first half of 2023. Lastly, the Maven 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 mine costs. We're working hand in hand with our rail and transportation partners to increase and streamline coal deliveries, alongside the ramp up at these complexes. We expect to be producing at approximately a four to four and a half million clean ton per year production rate as we enter 2024, and look to position ourselves as amongst the lowest cost mature clay metallurgical producers. This now concludes management's prepared remarks, and I would like to return the call to the operator for the Q&A portion of the call. Operator?

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. 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 Reilly.