Warrior returns more capital to shareholders

In March, Warrior Met Coal (NYSE: HCC ) approved a share buyback program of up to US$70 million of its outstanding common stock after exhausting a previous US$40-million repurchase program launched in May 2018.

The metallurgical coal producer, with two underground mines in Alabama, also declared a special cash dividend in April of US$4.41 per share of its common stock for a total payment of US$230 million, funded from cash-on-hand. The special dividend — paid on May 14 — comes on top of the company’s regular quarterly cash dividend of US5¢ per share, paid to shareholders on May 3.

The share buybacks and dividends follow Warrior’s US$126.4 million in cash flow from operating activities and US$96 million in free cash flow during the first quarter, and US$275.3 million in cash and equivalents at the end of March.

The company’s net income of US$110.4 million, or US$2.14 per diluted share, came from total revenues of US$378.3 million, including US$369.7 million in mining revenues, consisting of met coal sales of 2.1 million tons (1.9 million tonnes) at an average net selling price of US$176.37 per ton. The average net selling price in the first quarter was US$176 per ton, compared with US$195 per ton in the same quarter of 2018.

Miners enter the cage to go underground at the No. 4 met coal mine. Credit: Warrior Met Coal.

It also retired long-term debt of US$132 million, lowering the company’s annual interest expenses by US$10 million.

BMO Capital Markets analyst David Gagliano raised his target price on the stock after the company’s first-quarter results to US$40 per share, up from his previous US$35 per share.

Warrior’s shares are trading at US$26.68 per share within a 52-week range of US$33.49 to US$20.88.

The analyst recently spent two days in investor meetings in London with Warrior’s CEO, Walter Scheller, and chief financial officer, Dale Boyles, and said in a May 22 research note that the company “continues to be one of the most underappreciated stories in U.S. metals and mining.”

“Looking for ideas? Here’s one,” Gagliano wrote. “A stock trading at less than 4 times enterprise value/earnings before interest, tax, depreciation and amortization that has paid out three significant special dividends in less than two years equivalent to ~70% special dividend yield, with nearly a 30% free cash flow yield at spot prices, a clean balance sheet, a high-quality product offering and a credible, conservative management team.”

Warrior’s two mines, No. 4 and No. 7, southwest of Birmingham near Tuscaloosa, are between 427 and 640 metres underground — making them some of the deepest vertical shaft coal mines in North America.

The company expects its Blue Creek project will be fully permitted and shovel ready by early 2020. In Warrior’s first-quarter conference call on May 1, Scheller described the project as “one of the few remaining untapped reserves of premium, high-volume, ‘A’ met coal in the United States.” Initial work has focused on the feasibility of a single longwall operation with annual production of up to 3 million tons (2.7 million tonnes), with a capex of US$550 to US$600 million over five years.

“Our strong balance sheet and significant free cash-flow generation will provide us flexibility if we decide to pursue our Blue Creek development project next year,” Boyle said on the conference call.

The company serves markets in the U.S., Europe, Asia and South America by barge and rail access to the Port of Mobile. Warrior has the capacity to mine 8 million tons (7.3 million tonnes) of coal a year from more than 300 million tons  (272.2 million tonnes) of recoverable reserves. In the first quarter, 53% of sales went to Europe, 21% to South America and 26% to Asia.

A continuous miner loads a shuttle car in Warrior Met Coal’s No. 7 mine in Alabama. Credit: Warrior Met Coal.

For all of 2019, Warrior expects coal production and sales of between 7.1 million and 7.6 million tons (6.4 million tonnes and 6.9 million tonnes), and cash cost of sales free-on-board port of US$89 to US$95 per ton.

“With the expectations of global steel production volumes at or near 2018 levels, coupled with the absence of material changes in the supply of hard coking coal, we believe the demand for our premium products will remain consistent throughout the year,” Scheller told analysts and investors on the conference call.

“We recognize that certain economic indicators — such as the potential slowdown in regional gross domestic product growth rates, as well as a reduction in steel demand in Europe — have the potential to create a softer pricing environment for hard coking coal. However, barring any unforeseen material event, we believe the fundamentals should remain relatively healthy for our markets.”