U.S. coal producers likely had a tougher fourth quarter of 2019 than many are expecting as overleveraged companies remain stressed in a relatively weak pricing environment, Ramaco Resources Inc. Executive Chairman Randall Atkins said in an interview.
The quarter will likely surprise coal investors to the downside, particularly among coal companies that were trying to sell coal not previously in the books heading into the quarter as prices dropped and bids on the buy-side vanished, the executive of the metallurgical coal producer said. Atkins predicted there would likely be "disappointing results from most of the met coal" companies in the fourth quarter of 2019.
"The consensus seems to be that the first half of the year will still be a little unsettled, and the hope is, of course, both price and demand start to firm up as the year goes along," Atkins said.
Moody's reiterated its negative outlook on the coal sector Jan. 22. The performance of U.S. coal company stocks significantly underperformed the broader market in 2019 as the coal industry continued to see additional bankruptcy reorganizations and other challenges such as climate risk.
Companies with substantial exposure to thermal coal, or even those with exposure to both metallurgical and thermal coal markets, could face difficulties with current debt loads in 2020, Atkins said.
"There are still indeed coal companies that are overlevered. I think you will find that that leverage is not a friend," Atkins said. "I don't see a very quick recovery on thermal. I see a modest recovery on met."
While the domestic market is generally priced and contracted for 2020, there is some potential for recovery in other traditional steel markets, Atkins said. In the medium term, Atkins said Ramaco is comfortable with the metallurgical coal market today, but in the short term, it can face the same challenges of any commodity company.
"The met coal market is not the kind of thing that you can necessarily gauge by your wristwatch," Atkins said. "It's got much more longer-term secular trends. I'm very comfortable with the met space. Honestly, I think if you step back and look at a much longer-term perspective, I think between emerging economies and general growth in the developed world, you will have increasing demands for forms of construction."
Meanwhile, Ramaco is "always looking" for potential acquisitions to grow its portfolio and is beginning to see some opportunities crop up as other producers look to trim their asset base, the chairman added.
"A number of companies that certainly are stressed are starting to try to divest of nonstrategic assets or at least try and test the waters to see what kind of values might be available out there," Atkins said. "They're trying to raise liquidity because these are very tough times for a lot of people. Particularly those people in Appalachia that have a combination of thermal and met coal assets that are, in many cases, high-cost met coal assets."
Many of the initial assets up for sale could find it challenging to find a new home. Atkins said that while there are some exceptions, companies are now generally offering up lower-quality assets first to see if there are any bids before moving on to try selling more prized assets.
"We continue to look at a number of different types of reserve opportunities we hope are accretive to our existing operations," Atkins said, noting that his company is more interested in assets than in taking on another company and its existing debt load.