HCC without terminal ownership could be a long-term issue. There's been a severe lack of capex there in recent years, with accompanying frequent equipment failures and capacity issues. Mcduffie is investing some money into the port to help rectify this, while simultaneously reclaiming a portion that used to be for coal to transition it to container. I think this shows where their priorities are, and that there's a risk that more of the coal terminal is reclaimed and transitioned to container or auto (now a big business in Alabama) in the future.
Mcduffie is a state asset, and while they do work with and price favorably for HCC, this lack of control and reliance on the state for capex and terminal management puts them at a disadvantage compared to the other terminals. There's also not really an easy second option, New Orleans is the secondary port, and transport costs there are much more expensive.
Agree that HCC is still an incredible company, and that Blue Creek will be a world class asset. However, capital allocation differences are stark. HCC does not see value in buybacks (even after the comparative outperformance of their peers that do). The CFO told me to the nodding approval of the CEO that 'we don't do buybacks here, we buy real assets'. Expect them to either buy assets or give back capital in the form of dividends. I know there's been some hope that post Blue Creek they focus on buybacks, but from a cultural perspective from everyone in management I've spoken to, that's not the plan.
Fantastic series. Thank you so much for the high quality content. I have positions in HCC, AMR and ARCH. I think they offer a great opportunity. However, I would love to understand your thoughts regarding exiting the positions. Do you envision exiting (a) in at the next top of the cycle or (b) ride along until they cannibalize their shares outstanding over a longer period of time?
Thanks. The timing of exiting my position in HCC is a function of 1) the met coal market reaching what I would consider upcycle levels, and 2) the ramp-up of the Blue Creek asset. While it's inherently difficult to determine the top of the cycle, as a rough proxy, I would consider exiting when met coal prices are 20-30% above my estimated normalized levels ($260/ton for PLV HCC). However, if you're investing in met coal companies with a track record of returning capital via share buybacks (such as AMR, compared to HCC's focus on dividends), these might potentially be solid positions to hold throughout the cycle.
What a great series of articles! Thanks so much for posting these. Any thoughts on how NRP could fit in to a portfolio and the pros/cons of owning it versus the operating companies you’ve analyzed?
Thanks. I haven't followed NRP closely, though I think it could be an interesting way to play the met coal industry. NRP experiences smoother earnings and less revenue impact during downturns, given that royalty payments are capped on the downside, and its capex is obviously lower. However, since we are likely at downcycle levels, playing through pure-play or largely met coal producers provides more torque to the expected price normalization/inflection.
Thank you for your insightful and comprehensive article on the coal industry. It's one of the best I've come across, and I genuinely appreciate the level of detail and analysis. If anything, the only aspect I feel might enhance it further would be a sensitivity analysis for varying pricing scenarios.
As part of my own valuation, I’ve relied heavily on the information in your article, and I wanted to thank you for providing such valuable insights. Additionally, I have a quick question regarding one of the quotes in your piece:
"Management has recently indicated that Blue Creek costs will likely be around $90 to $95 per short ton when adjusted for inflation since 2021."
I’ve reviewed the available transcripts but couldn’t locate where this was mentioned. Could you share the source or context for this statement?
Thank you again for your excellent work, and I look forward to your response.
Thanks for the kind feedback! Management highlighted that costs will be approximately 30% higher than the 70% initially expected during the Q2'24 conference call. See the exchange below.
Question:
And then maybe just one last question on Blue Creek. It's one I get from investors fairly often. Looking to the slide deck, obviously, some of these numbers are a little stale at this point, but specifically focused on the cash costs and the possibilities around the Blue Creek product?, I know you guys have said that it should eventually to help lower the overall cash cost -- average cash cost for Warrior. Your slide deck is still showing around $70 or so. But maybe can we just get some thoughts on where that number could look like once you guys update some of these economics, especially given some of the inflationary pressures that we've already applied to the CapEx budget?
Dale Boyles
Yes, good question, Nate. Look, we do expect to be updating all those project economics. As we said, the scope changed last year, really had no effect on -- because we had the improvement in transportation costs and everything, so no net impact on the overall economics. I actually think they're going to be better with a higher [ met ] coal pricing assumption. So sometime next year we'll get that information back out, but that's $70 all in before. We've been talking about the inflation in supplies and everything being 30%, 35%. So if you tack that on, you're starting to get to where we think it will probably be. I don't know if that's the exact number, but that's a pretty good idea of where we're probably headed right now.
I have one question that I can't shake out of my mind. HCC exports almost all of its coal, relative to the other met coal producers which have a large domestic customer base. So HCC is heavily dependent on friendly export markets. If Trump imposes tariffs on goods coming in to the US, other countries are likely to reciprocate by imposing tariffs on US exports. How might this impact HCC relative to the other players?
Thanks for the comment. I’d first point out that while HCC has the largest share of exports vs imports, U.S. peers ARCH, AMR, and METC are similarly reliant on export markets, with c. 60-70% of their revenues coming from exports. Regarding the risk of reciprocal tariffs on U.S. exports, this is indeed a concern, as U.S. producers might need to discount prices and/or reduce production to remain competitive. However, this is where HCC's position as the lowest-cost and highest-quality metallurgical coal producer becomes a key advantage. The company has significantly more flexibility for price cuts compared to its U.S.-based peers, which is why I’d expect HCC to perform well even in this scenario.
Great Analysis and thank you so much for sharing. I am also bullish in this sector and have invested in both coal and gas through Consol Energy (CEIX), Alpha Metallurgical Resources (AMR), Expand Energy (EXE) and Sitio Royalties (STR). At the end of the day they are all trading very cheap at a likely low earnings with massive tailwinds on future demand.
Thanks for the great articles! While researching HCC, I discovered that there was an almost two-year-long strike at their Alabama mines. The workers faced low pay from the previous owner, and when HCC took over, the contract wasn't renewed. According to a June 2023 article, workers eventually returned to work without securing a pay raise agreement with management. It's unclear what happened afterward—perhaps management improved wages. If not, the risk of another strike may still be present.
HCC without terminal ownership could be a long-term issue. There's been a severe lack of capex there in recent years, with accompanying frequent equipment failures and capacity issues. Mcduffie is investing some money into the port to help rectify this, while simultaneously reclaiming a portion that used to be for coal to transition it to container. I think this shows where their priorities are, and that there's a risk that more of the coal terminal is reclaimed and transitioned to container or auto (now a big business in Alabama) in the future.
Mcduffie is a state asset, and while they do work with and price favorably for HCC, this lack of control and reliance on the state for capex and terminal management puts them at a disadvantage compared to the other terminals. There's also not really an easy second option, New Orleans is the secondary port, and transport costs there are much more expensive.
Agree that HCC is still an incredible company, and that Blue Creek will be a world class asset. However, capital allocation differences are stark. HCC does not see value in buybacks (even after the comparative outperformance of their peers that do). The CFO told me to the nodding approval of the CEO that 'we don't do buybacks here, we buy real assets'. Expect them to either buy assets or give back capital in the form of dividends. I know there's been some hope that post Blue Creek they focus on buybacks, but from a cultural perspective from everyone in management I've spoken to, that's not the plan.
Thanks for the great article. Really enjoyed the series!
Thank you for the incredibly informative articles!
Fantastic series. Thank you so much for the high quality content. I have positions in HCC, AMR and ARCH. I think they offer a great opportunity. However, I would love to understand your thoughts regarding exiting the positions. Do you envision exiting (a) in at the next top of the cycle or (b) ride along until they cannibalize their shares outstanding over a longer period of time?
Thanks. The timing of exiting my position in HCC is a function of 1) the met coal market reaching what I would consider upcycle levels, and 2) the ramp-up of the Blue Creek asset. While it's inherently difficult to determine the top of the cycle, as a rough proxy, I would consider exiting when met coal prices are 20-30% above my estimated normalized levels ($260/ton for PLV HCC). However, if you're investing in met coal companies with a track record of returning capital via share buybacks (such as AMR, compared to HCC's focus on dividends), these might potentially be solid positions to hold throughout the cycle.
This entire series has been an absolute treat. Many thanks!
What a great series of articles! Thanks so much for posting these. Any thoughts on how NRP could fit in to a portfolio and the pros/cons of owning it versus the operating companies you’ve analyzed?
Thanks. I haven't followed NRP closely, though I think it could be an interesting way to play the met coal industry. NRP experiences smoother earnings and less revenue impact during downturns, given that royalty payments are capped on the downside, and its capex is obviously lower. However, since we are likely at downcycle levels, playing through pure-play or largely met coal producers provides more torque to the expected price normalization/inflection.
Thanks so much for your four part monumental work!! Never seen so much valuable info and analysis in one single place, congratulations
Thank you for your insightful and comprehensive article on the coal industry. It's one of the best I've come across, and I genuinely appreciate the level of detail and analysis. If anything, the only aspect I feel might enhance it further would be a sensitivity analysis for varying pricing scenarios.
As part of my own valuation, I’ve relied heavily on the information in your article, and I wanted to thank you for providing such valuable insights. Additionally, I have a quick question regarding one of the quotes in your piece:
"Management has recently indicated that Blue Creek costs will likely be around $90 to $95 per short ton when adjusted for inflation since 2021."
I’ve reviewed the available transcripts but couldn’t locate where this was mentioned. Could you share the source or context for this statement?
Thank you again for your excellent work, and I look forward to your response.
Thanks for the kind feedback! Management highlighted that costs will be approximately 30% higher than the 70% initially expected during the Q2'24 conference call. See the exchange below.
Question:
And then maybe just one last question on Blue Creek. It's one I get from investors fairly often. Looking to the slide deck, obviously, some of these numbers are a little stale at this point, but specifically focused on the cash costs and the possibilities around the Blue Creek product?, I know you guys have said that it should eventually to help lower the overall cash cost -- average cash cost for Warrior. Your slide deck is still showing around $70 or so. But maybe can we just get some thoughts on where that number could look like once you guys update some of these economics, especially given some of the inflationary pressures that we've already applied to the CapEx budget?
Dale Boyles
Yes, good question, Nate. Look, we do expect to be updating all those project economics. As we said, the scope changed last year, really had no effect on -- because we had the improvement in transportation costs and everything, so no net impact on the overall economics. I actually think they're going to be better with a higher [ met ] coal pricing assumption. So sometime next year we'll get that information back out, but that's $70 all in before. We've been talking about the inflation in supplies and everything being 30%, 35%. So if you tack that on, you're starting to get to where we think it will probably be. I don't know if that's the exact number, but that's a pretty good idea of where we're probably headed right now.
Awesome write up. Thanks
I have one question that I can't shake out of my mind. HCC exports almost all of its coal, relative to the other met coal producers which have a large domestic customer base. So HCC is heavily dependent on friendly export markets. If Trump imposes tariffs on goods coming in to the US, other countries are likely to reciprocate by imposing tariffs on US exports. How might this impact HCC relative to the other players?
Thanks for the comment. I’d first point out that while HCC has the largest share of exports vs imports, U.S. peers ARCH, AMR, and METC are similarly reliant on export markets, with c. 60-70% of their revenues coming from exports. Regarding the risk of reciprocal tariffs on U.S. exports, this is indeed a concern, as U.S. producers might need to discount prices and/or reduce production to remain competitive. However, this is where HCC's position as the lowest-cost and highest-quality metallurgical coal producer becomes a key advantage. The company has significantly more flexibility for price cuts compared to its U.S.-based peers, which is why I’d expect HCC to perform well even in this scenario.
Brilliant series on the met coal industry!
This series is a must read for anyone thinking about investing in coal.
Great Analysis and thank you so much for sharing. I am also bullish in this sector and have invested in both coal and gas through Consol Energy (CEIX), Alpha Metallurgical Resources (AMR), Expand Energy (EXE) and Sitio Royalties (STR). At the end of the day they are all trading very cheap at a likely low earnings with massive tailwinds on future demand.
Fantastic exploration!
Fair enough. I see more reward in Colonial Coal CAD tsx.
Thanks for the great articles! While researching HCC, I discovered that there was an almost two-year-long strike at their Alabama mines. The workers faced low pay from the previous owner, and when HCC took over, the contract wasn't renewed. According to a June 2023 article, workers eventually returned to work without securing a pay raise agreement with management. It's unclear what happened afterward—perhaps management improved wages. If not, the risk of another strike may still be present.
https://uniontrack.com/blog/warrior-met-coal-strike
How does the recent Trump coal executive order impact how you view your investment into the met coal industry?
Thanks!