Ramaco Resources, Inc.

Welcome to the Ramico Resources Third 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 the best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jeremy Sussman, Chief Financial Officer. Sir, please go ahead.

Thank you. On behalf of Ramico Resources, I'd like to welcome all of you to our third 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 statement. 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 also 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, which can be viewed on our website, www.ramicoresources.com. Lastly, I'd encourage everyone on this call to go onto our website and download today's investor presentation. 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 of positive developments to unpack this morning since we spoke in August. From the time we started Ramico, we have generally been somewhat idiosyncratic within our industry. For over five years before we went public in 2017, we were investing in developing geologically advantaged coal reserves. During most of that time, a majority of the industry was in bankruptcy and certainly not aggressively buying greenfield coal reserves to develop from scratch. Since then, we've continued to invest heavily in a rapid expansion of our business and in production growth. Many of our peers have moved in another direction. They are essentially letting their own reserves deplete without investing in new replacement tonnage. To prove the point, over the last couple of years, we've invested almost a quarter of a billion dollars in growth capital for production and acquisition. For a young company in this space, that is a meaningful number, And I wanted to highlight this background because our third quarter essentially reflects the results of this differentiated growth platform. In simple terms, this quarter, in almost one fell swoop, we went from being a 3 million to a 4 million ton per annum company. And of course, we're not done in terms of production growth. To step back and frame this a little differently, over the past years, we've done or tried to do several things at once. We have invested to grow production, we have paid off debt, and we still have made substantial shareholder distributions. This year, we paid down over $50 million, or over 50%, of our term debt. At the same time, we have grown production by 55%, from 2.2 million tons in 2021 to 3.4 million tons this year. Lastly, we made shareholder contributions equity distributions, capital distributions, a total of $160 million, which include cash dividends and the value of the tracking stock. We have been fortunate that our shareholders have seen the positive results of this. Our stock price rose by 38% this quarter and by 320% over the past three years. We also have had a total shareholder return over that same period of 450%. We are now hopefully getting started down the right track. And turning to Q3, as a result of this quarter's sales surge, we grew EBITDA by over 50% from the second quarter. This was in spite of a decline in margins caused by lower index pricing. Also, based on Q3 earnings, we expect to reduce our overall term debt down to just $50 million by year-end. For reference, Our total debt at this point in 22 was $125 million. Because of both stronger than anticipated third quarter shipments and increased overseas customer demand, we recently increased guidance on our 23 coal shipments. We also continue to enjoy a working capital benefit over the next few quarters as we expect to continue to reduce and sell down existing inventory as we did in the third quarter. Switching gears to operations, I want to compliment the work the operating team has done at developing the two deep mine sections at the Berwyn mine. In the last couple of months, the Berwyn mine produced an annualized run rate of a half million tons per year. Cash costs were roughly $80 per ton from both deep mine sections. If this trend continues, we expect Berwyn to be among the highest margin and lowest low-volume metallurgic largest low-ball meteorologic mountain complexes in the country. Moving to sales and marketing, we took what we thought was a prudent approach to our 24 domestic sales business. We have now committed 1.3 million tons of coal to North American customers next year at an average price of $167 per ton and an additional 200,000 tons for export price against index. To complement our sales group, this appears to be the highest 2024 sales price figure of our public peers. And as a backdrop, when the domestic steel mills came out in early July, we declined the lock-in business at what we felt was then a low price near the bottom of the cycle. We had basically decided instead to pivot to increasing the size of our 24-export business to roughly 70% of anticipated production. And while we march on the path to increasing our production to roughly 7 million tons over the next few years, I would note that we could continue to produce at our current 4 to 4.5 million ton level for the foreseeable future, largely only from maintenance CapEx. I feel we are advantaged to be in this position since the market at this point is very unsettled with a number of worldwide macro factors dominating the headlines, and little clarity in near-term economic direction. On 24 production, we will be providing formal guidance after our December board meeting next month. But next year, we plan to preserve some optionality to either increase or maintain production levels, depending on how we see the markets develop. I'd now like to turn to an update on our Western operations in Wyoming. I am pleased to report that last month, overall mine development commenced at the Rare Earth Brook mine. We have been working to test from only core samples over the past year. We began meaningful mine development a few weeks ago with an initial goal to obtain larger quantities of material for testing. We will now be moving into a phase of extensive sequential testing of the metallurgic and chemical compositions of the multiple areas of materials. This will help us determine the overall nature and extent of the deposit. We've now established that the mine has an extremely large, unconventional rare earth deposit. The figures of its size will no doubt increase as we do more core testing over both larger areas and at deeper depths. NETL, our partner, has told us that this mine may be geologically unique from almost any deposit they have examined. The challenge for us from here is to perform an overall assessment of the optimal extraction, recovery, and separation techniques, which can then be used to estimate the mine's economics. We will be doing this with our consultants at SRK and within APL. We will also be working on some novel technologies in this area with other national labs, and we will continually update our progress on this project as it goes forward. On the carbon products front, I want to highlight two exciting areas we are focused on involving work at our ICAM Research Center in Wyoming. As many of you may have seen, China recently decided to both regulate and restrict the export of graphite used for EV batteries and a host of other electronic applications. Opportunistically, Ramico's multi-year development of a revolutionary electrochemical process for conversion of coal to synthetic graphite has now assumed added strategic importance. Our work on this innovative technology has been done pursuant to our greater partnership with Oak Ridge National Labs. We have also recently filed an application with the DOE to build a continuous pilot plant using this technology for conversion of bituminous coal from Maramco's Berwyn mine into synthetic graphite. Also, we have developed a low-cost process with comprehensive intellectual property rights for the production of activated carbon fiber monoliths to be used for direct air capture and other filtering applications. This quarter, we established in-house melt-blowing capability at the ICANN to produce the monoliths and activate them in larger quantities. We look forward to updating on the commercialization of these activities going forward. And I'd like to finish by reflecting that I believe we were at an inflection point for Ramico. Over the past couple of years, we have spent seven times more toward production growth and capital acquisitions than we have done compared to paying dividends. Importantly, at this point, I would anticipate in 24 that we will be returning substantially more to shareholders in cash dividends alone than we are currently expecting to spend on growth capital for production RMA. And with that, I'd like to turn the floor over to the rest of our team to discuss finances, operations, and markets. So, Jeremy, please start with a rundown of our financial metrics and markets. Thank you, Randy. As you noted, we enjoyed a strong third quarter, especially in light of weaker markets and coal pricing throughout much of the quarter. Specifically, Platt's U.S. East Coast indices fell roughly 5% in Q3 versus Q2. Despite this decline, Q3 net income grew more than 150% versus Q2 to $19.5 million, and adjusted EBITDA grew by more than 50% to $45 million. During the third quarter, adjusted EBITDA benefited by $3 million received from insurance claim proceeds in connection with the Berwyn mine outage in mid-2022 and $8 million received in connection with the Elk Creek silo failure in late 2018. The combined net income impact was $8 million. I would note that Elk Creek insurance proceeds are not reflected in our cash balance as of September 30th. I would also note that the company received a tax refund of $11.8 million in September, which is reflected in our Q3 cash figure. Turning to our key metrics, the largest variance relative to Q2 was on volume. The company shipped 1 million tons of coal, which achieves its previous guidance of reaching a rateable annualized sales run rate of roughly 4 million tons. This figure was up 39% from Q2, as we had been previously shipping at a roughly 3 million ton per annum run rate. The increase to 4 million tons per annum is the culmination of a multi-year investment in taking the Oak Creek plant capacity from 2 to 3 million tons per year, as well as the ramp-up at our Berwyn mine that Randy touched upon. Average realized price in Q3 fell 4% versus Q2 to $157 per ton, in line with the declining coal indices. Production was down 18% versus Q2 to 719,000 tons, and cash cost increased 5% to $114 per ton. This was largely on the back of the two-week paid vacation taken in July at Elk Creek due to high inventory levels, which have since come down substantially. After a disappointing second quarter, we applaud both railroads' efforts in the third quarter, which allowed us to ship at a 4 million ton per annum run rate in meaningfully reduced inventory. We anticipate that this trend will continue. Looking ahead, we are refining a number of areas related to our 2023 guidance. First, we now expect to produce 3.1 to 3.4 million tons, with the midpoint unchanged from prior guidance. We expect to sell 3.25 to 3.5 million tons, which is unchanged from our mid-October update, where we increased 2023 sales expectations on the back of both strong Q3 results and increased overseas demand. I would note that we now have 3.3 million tons contracted, including 2.9 million tons, at an average fixed price of $173 per ton in the balanced price that indexed. We have increased cost guidance to $108 to $112 per ton versus the high end of the previous range of $102 to $108 per ton. The increase is largely due to continued inflationary pressures that the industry is facing, as witnessed by the majority of our peers also increasing cost guidance, in some cases substantially, just in the past month or so. Lastly, we have tightened the range on CapEx, SG&A, and DD&A, which you will see in our guidance tables. The increase in CapEx is largely related to the timing of payments. We would anticipate 2024 CapEx to be down meaningfully versus 2023, and we'll update you all on this front after the 2024 budget is approved by the board. Moving to the balance sheet, the company has liquidity of $98 million as of September 30th, double the $49 million level as of year-end 2022. I would remind everyone that liquidity has doubled despite the substantial year-to-date debt repayments which Randy went through earlier. We would also expect to continue to pay down debt in 2024, and if current prices hold, we would also anticipate being in a net cash position next year. While this concludes my financial remarks, I'm now going to give a brief sales and marketing update. Since Randy and I both touched upon our sales commitments, I'm going to focus more on the market itself. Despite challenging conditions in July and August, the metallurgical coal markets began to substantially improve in September. U.S. high-volay prices are $60 per ton higher today compared to the middle of August. This is despite the fact that European steel demand remained subdued and the U.S. endured almost a two-month-long strike at the major automakers. The good news is that on the supply side, there is muted production globally with major downward production revisions from large players in Australia, the U.S., and Canada. These three countries collectively account for roughly 75% of seaborne metallurgical coal supply. In our opinion, the reason for these continual production disappointments is simple. the majority of coal companies are not reinvesting in a depleting asset base, in large part due to financing and ESG pressures. Global met coal CapEx is a fraction of what it has historically been, despite very strong and growing Asian demand. On that front, India has now surpassed China as the largest importing country of seaborne met coal. This is important for two reasons. First, India has very limited domestic supply of metallurgical coal, and thus is reliant on imports for substantially all of its high-quality met coal. Second, steel demand has been extremely strong this year in India. Specifically, September saw Indian steel production up 18% year over year, bringing the total year-to-date increase to up 12% year over year. India is not the only bright spot. Indonesia is set to bring online roughly 20 million tons of metallurgical coke capacity, which began to ramp up earlier this year, To put this in some context, this figure is larger than the entire United States annual production. Jason and his team have continued to do an excellent job placing tons into both new and existing customers. This is increasingly in Asia, where the majority of near-term demand exists, and specifically to those two markets I just mentioned. The bottom line is that in terms of the overall market, while demand remains relatively tepid in the U.S. and Europe, we are increasingly encouraged by both continued supply constraints and increased Asian demand. In addition, we saw a number of high-cost operations either close or materially cut their workforce when the Australian benchmark price fell into the low to mid $200 per ton range earlier this summer. This tells us that the cost curve has meaningfully steepened in recent years on the back of high global inflation. Amid this supply-demand backdrop, we see a market where we expect prices to remain above historical levels for the foreseeable future. With that said, I would now like to turn the call over to our Chief Operating Officer, Chris Blanchard.

Thank you, Jeremy, and good morning, everyone. Operationally, it's nice to talk about positive steps and milestones, despite all the challenges that are inherent to the industry. Randy and Jeremy both mentioned the Berlin Mine ramp up, and I'll touch on that in more detail. But first, I wanted to start with a comment on Ramico's safety performance. We are extremely proud of our team at the Elk Creek Preparation Plant for having earned a Sentinel Safety Award for the second consecutive year for their performance in 2022. Annually, only six coal operations, and of those, only two preparation plants are recognized across the entire nation. To win as the best large preparation plant in the nation two years in a row is not a fluke. As a company, we salute the daily effort that goes towards safety and compliance from all our employees. Turning to the production and sales step change, during the third quarter, we completed the final pieces of the Elk Creek plant throughput upgrade. As we had previously updated, the plant reached higher feed rates late in the second quarter, but additional frost flotation cells and clean coal storage options did not come online until September. At this time, all contemplated upgrades have been completed, and we are operating at our higher feed rates of roughly 3 million annual clean times, much more consistently. This throughput ramp, coupled with an extended vacation period in July, allowed us to dramatically lower the raw coal stockpile levels at Elk Creek, which had been built due to the delays on the project. We anticipate that run of mine coal inventories will be brought to normal levels during the first quarter of 2024. At the same time, we expect additional production increases at Elk Creek to coincide with the exhaustion of the raw coal surplus in 24. As Jeremy and Randy have both mentioned, we'll discuss more concrete guidance on the 24 metrics later this year. At our MAVEN operation, we have settled into a comfortable production cadence of roughly 250,000 annual tons. That is somewhat above our initial expectations. Now that the initial surface mining spread and the high wall miner have reached their steady state, we are turning to additional areas to permit and mine by these low cost methods. We will also explore more detailed mine planning regarding the future underground operations and potential preparation facilities. Most of the coal from Maven is now being processed and sold through our Berwyn plant. As the mines at Berlin continue to grow, we may look to expand the natum's operations and reduce our logistics costs there accordingly. Finally, turning to the Berlin complex, we are now running two supersections at the Berlin mine in the Pocahontas No. 4 seam. During these first few months, we've been able to meet our budget targets for production for the mine. We believe that current production levels are not only sustainable, but there is some room for continued improvement and produce tons and additional cost reductions as the mine progresses from a leased coal position onto our owned coal. In the near future, we plan to construct additional air shafts at Burland next year. which will enhance ventilation in the mine and allow the startup of a third section if the low vol market dictates that we should do this. Also, as the Berlin mine continues to grow, the wind down of the smaller mines, which we started during 2022, continues. The Triple S surface mine is now idled, and our triad number two mine is completing its last few months of its reserves. Ultimately, the equipment and infrastructure from the triad mine will be used to minimize growth capital associated with the third section at Berlin. We continue to evaluate the rest of the small feeder mines into the Berlin complex and will work to quickly pivot production as conditions and markets drive us. This now concludes management's prepared remarks, and I would like to return the call to the operator for the question and answer portion of the call. Operator, please open the line up for questions.