Moody's Investors Service upgraded its outlook for Warrior Met Coal Inc. from "stable" to "positive" following a decrease in debt and continued progress, according to a Sept. 30 release.
The metallurgical coal producer has reduced its debt by nearly 30% from September 2018 and has repaid about $130 million in debt this year, according to Moody's.
The firm affirmed Warrior's long-term ratings, such as the B2 corporate family rating and B2 senior secured rating and revised its short-term liquidity rating to SGL-1 from SGL-2, according to the release.
The SGL-1 speculative-grade liquidity rating reflects strong liquidity to support the company over the next 12 to 15 months, Moody's wrote. The firm thinks that the company has about $250 million in available liquidity, including about $119 million in cash, $14 million in short-term investments and about $116 million of availability on its asset-based revolving credit facility.
The B2 corporate family rating "balances the company's excellent margin potential from high quality and low-cost metallurgical coal assets with operational concentration risk and the inherent volatility of the metallurgical coal industry," Moody's said.
The company has long-term contracts to export out of the Port of Mobile in Alabama that position it well, according to the release. Warrior also has limited legacy liabilities compared with other U.S. coal producers and has strong liquidity to support its business.
"While the company has fewer mines compared to rated peers in the United States, Warrior has a good operating history, takes precautionary measures such as buying extra longwall shields, and benchmark-quality coal allows the company to continue to generate good margins in a weak pricing environment," Moody's wrote.
Moody's expects metallurgical coal prices in the upper end of its medium-term sensitivity range of $110/tonne to $170/tonne that will allow the company to sustain its strong credit metrics and cash flow generation through 2020. Though coking coal prices have softened in the last few months and Moody's outlook for the steel industry has weakened looking into 2020, the producer's key credit measures and discretionary cash flow generation were strong in the 12 months ended June 30, according to Moody's.
The rating assumes the company will invest its excess cash into credit-neutral shareholder returns or an expansion project, which could potentially be credit positive.
Warrior is also still deciding whether to break ground on its Blue Creek reserve project, which would add up to 3 million tons of high-vol A coking coal production for an estimated initial cost of between $550 million and $600 million.
Warrior has the potential to receive a higher rating in the near-term if it lays out a timeline and near-term financing plan for the Blue Creek project, expectations for strong metrics and ability to generate cash, and maintains its liquidity. Moody's thinks that the coal producer could generate at least $100 million of EBITDA, reduce its capital spending to about $50 million, and continue to generate cash if it does not take on "meaningful debt" to fund the Blue Creek project and assuming pricing at the low end of Moody's medium-term sensitivity range.
Many U.S. coking coal mines would be "severely margin-challenged" at $110/tonne, the firm wrote.
