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Ramaco chairman points out 'manic-depressive' met coal market on Q3'19 call

Ramaco Resources Inc.'s executive chairman said the global economic outlook, which drives the steel and, in turn, metallurgical coal markets, is opaque at best.

Chairman Randall Atkins said on a Nov. 6 earnings call that the company's August prediction that a more turbulent coking coal market was on the horizon was unfortunately accurate.

"The met coal markets always seem to go through some form of perennial manic-depressive kind of cycle. We are seeing the depressing side of that experience at the moment," the chairman said, later adding, "Because we've got a very low-cost profile, we can make money even in this market. So, it's really a question of assessing really where the underlying demand is."

The coal producer locked in nearly all of its 2019 sales at higher pricing in 2018, when prices were stronger. It has since essentially sold out through year-end, with 2019 sales expected to total slightly less than 2 million tons, Atkins said. The company decided to reduce the amount of higher-quality blends it places domestically, saving the more valuable blends to sell into "what we believe will be a stronger market condition later in 2020." While the company placed about 80% of its production into the domestic market in 2018, it expects a midpoint closer to about 60% in 2020.

In 2020, the company can either be more disciplined in its output, producing about 1.8 million tons on the downside, or up it closer to 2.3 million tons.

"We realized by late this summer that the 2020 domestic sale process would be dramatically more challenging than 2019 in terms of both basic customer demand and also pricing into our lower benchmark environment," Atkins said. "We're also keeping a good deal of production optionality on the table, which will enable us to either dial up or down dependent upon where we see the market settling in 2020."

Ramaco President and CEO Michael Bauersachs said the coal producer had little exposure to the significant decline in coking coal pricing this year. It does expect a small decline in fourth-quarter sales due to some deferrals from one of its customers.

The domestic contracting season was negatively impacted by reduced coal purchases year over year as well as a shift in high-quality coals normally sold internationally entering the domestic market, Bauersachs said. This change resulted in high-quality coals being injected into coal blends, which at times altered Ramaco's positioning to fit customers' needs. The company has committed more lower-quality coals in 2020 as a result.

"There is no doubt as an industry we've entered a more challenging marketplace for 2020," the CEO said. "Ramaco was structured to be able to deal with the soft sort of market conditions and fluctuations we are currently facing. While downturns are unfortunate, it should always be expected, and Ramaco remains well-positioned for continued profitability due to [the] current low pricing environment."

The company is in a good position to take advantage of potential opportunities pertaining to infrastructure-based additions and synergistic coal properties and "views the current downturn as an opportunity to pursue acquisitions in capital deployment," Bauersachs said

The producer plans to focus on geology when evaluating opportunities, with a large aversion to liabilities, Bauersachs said. This likely will not result in a large merger or acquisition in the near term, but potentially more leases, infrastructure investments and opportunities at nearby properties that would work well with its low-cost operations.

Ramaco continues to mine through the Berwind mine's Pocahontas No. 3 seam, a thin seam that has proven challenging at times, COO Christopher Blanchard said. But core drilling has found a thicker No. 4 seam that, on average, is nearly double the No. 3 seam. As mining continues south and west, the coal's quality is projected to improve closer to mid-vol levels.

"We've had significant interest in this coal from both domestic and international buyers and are confident we'll be well-received by the market," Blanchard said.

In Central Appalachia, some producers have larger stockpiles and are cutting back on production shifts amid the difficult market, Atkins said.

"You're generally seeing the reality of people that have higher costs and higher debt structures being faced with situations where, in many cases, they can't sell their coal to meet costs, and so you're seeing shut-ins," Atkins said. "You're seeing some dispositions taking place. Once again, not with any smugness at all, but we do feel that we've designed ourselves to be able to withstand these kind of turbulent times and perhaps hopefully thrive in them. That's basically where we are."

Ramaco's third-quarter net income totaled $5.5 million, or 14 cents per fully diluted share, compared with net income of $6.2 million, or 15 cents per diluted share, in the third quarter of 2018.