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A Straight Up Wager on Coal

Looking for a pure play in metallurgical coal? Alabama’s Warrior Met Coal is the only one you’ll find. Question is: How many are willing to bet on coal?

A shiny diamond has yet to emerge from April’s initial public offering by Warrior Met Coal.

After purchasing Birmingham’s Walter Energy out of bankruptcy last year, Warrior Met Coal made its IPO of nearly 16.7 million shares of common stock at $19 per share on April 13 and began trading on the New York Stock Exchange under the ticker symbol HCC.

Shares hovered between $17 and $18 during most of that span, dipping briefly as low as $15.49 on June 21 before rebounding above $18 by mid July.

Based in Brookwood, Warrior Met Coal is the leading dedicated U.S. producer and exporter of high quality metallurgical coal, which is the raw material used in traditional steel production. Despite declarations from President Donald Trump that his administration will be coal-friendly, analysts say it remains a risky financial venture.

“Global coal markets are facing extraordinary challenges and uncertainties,” energy research and consultancy group Wood Mackenzie stated in a report released in May. “Factors such as global overcapacity, weakening demand and falling prices have created cautious investors. These factors have caused delays and cancellations of many mine and infrastructure projects, as well as lower growth rates at others.”

And The Motley Fool notes that electric arc furnaces are less expensive to build and operate than coal-fueled blast furnaces.

So far, such forecasts have not diminished Warrior Met Coal’s production. The company operates two high-volume mines — No. 4 and No. 7 — that it acquired from Walter Energy. According to 2017 first-quarter results, coal production increased 83 percent to 1.6 million short tons, and sales volume rose 32 percent to 1.1 million short tons. The company’s stated goal is to reach annual production of approximately 8 million short tons.

“There is significant growth potential embedded in Warrior’s existing operations,” company CEO Walt Scheller — also CEO of predecessor company Walter Energy — said in May, in a written statement concerning the company’s first quarter results. “We have improved our productivity and advance rates as our workforce continued to skill up, and we will commit our catch-up capital spending to realize nameplate production capacity in our two mines of about 8 million short tons per year.”

Warrior reported first-quarter revenues of $254 million, including $241.1 million in mining revenues, which consisted of met coal sales at an average price of $213.89 per short ton. During this period, the company reported net income of $108.3 million, or $2.06 per share. Adjusted net income was $117.2 million, or $2.22 per share, and adjusted EBITDA for the quarter was $135.5 million.

“We are pleased with our strong performance as a newly listed company,” Scheller said in the May statement. “Over the past year, we have established Warrior as the premier and only pure-play met coal producer in the U.S. Warrior’s value proposition is based on two principal factors: the strength of our met coal assets, and our competitive positioning as a formidable operator in the era of new coal.”

Warrior received a boost in late June when it joined the Russell 2000 Index of small- to mid-capitalization U.S. companies. Russell indexes are considered to be an important component of index funds and serve as benchmarks for investment managers and institutional investors investors.

“Being added to the Russell 2000 less than three months after our IPO is a notable milestone for our company,” Scheller said. “Membership in the index should help increase Warrior’s exposure in the investment community.”

Cary Estes is a freelance contributor to Business Alabama. He is based in Birmingham.

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