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Met coal producer Ramaco will keep building mines in US, executives say

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Ramaco Resources Inc. is one of the few companies developing coal mines in the U.S., as competitors have favored sending cash back to shareholders. The company's Berwind project is a metallurgical coal mine on the Virginia-West Virginia border.
Source: Ramaco Resources

One of the few U.S. coal companies actively continuing to build new coal mines turned its first profit in the first quarter and sees an even brighter future ahead.

Ramaco Resources Inc. made its debut with an IPO just a little more than a year ago, taking advantage of what one executive said was a "reasonably short window" of time when investors were showing strong interest in putting capital into coal due to a surge in metallurgical coal pricing. The company, which had less than 30 employees at the time of its IPO, is focusing on further breaking into metallurgical coal markets as a relatively new but growing player in the space.

In its May earnings report, Ramaco reported that it doubled revenue to roughly $56 million and swung net income from a loss of $2.6 million to a gain of $5.3 million compared to the prior quarter. During its earnings call, the company indicated the first quarter was likely to be a low-water mark in an improving 2018.

That sort of growth is rare recently as many coal competitors have vowed to route cash to shareholder value initiatives instead of investing in production volume growth. Ramaco CEO Michael Bauersachs told S&P Global Market Intelligence that his company can go the other direction because it does not have a board demanding cash over coal production.

"We're going to keep putting coal mines in. We've got some [coal reserves] in our profile that is advantaged either quality-wise and/or geologically from a coal thickness standpoint. We think they work in any market," Bauersachs said. "At this point, you're going to see us keep bringing on production."

The company sees itself capturing new markets for metallurgical coal used for steelmaking. Because markets are strong, Ramaco has been able to pick up customers without necessarily displacing other competitors.

However, with many other producers already having mined many of their best reserves, Bauersachs said he sees Ramaco picking up where other producers' mines will naturally decline in production.

Ramaco Executive Chairman and Director Randall Atkins told S&P Global Market Intelligence that global indicators are suggesting strong demand for metallurgical coal markets in the coming months. He added that domestic activities such as the recent merger announcement from Contura Energy Inc. and Alpha Natural Resources Inc. bode well for domestic U.S. metallurgical coal producers.

"I think we've got some pretty decent visibility for the next 12 months," he said. "If you get beyond that in the coal space, you're tempting fate."

Company executives are not very interested in participating in merger and acquisition activity, at least not for the sake of growing Ramaco's footprint. Atkins said any addition to the company would have to remain in metallurgical coal, and the company refuses to take on any assets that would increase debt or come with large asset retirement obligations.

"We're one of the only pristine coal entities out there," Atkins said.

Bauersachs also bristled at getting involved in any deal that "brings baggage along with it" and instead will focus on what the company has proved it does best.

"We've proven we can put deep mines in, and I know we can run surface mines if it weren't for some of the geologic surprises," he said, noting challenges that popped up in the first quarter. "I think we'd rather focus on some of the hard stuff, frankly. It's hard, what we've done, but you can create tremendous value by focusing on developing new coal mines in advantaged geologic locations."

"We probably took a little harder swing at bat to get domestic business, and we probably reached a little bit further down because we have a low cost structure, in terms of some of our bids," Atkins said. "We kind of had that trial by fire, and we're very much looking forward to '19 being a year where all of our coals will have been out on the market."

Ramaco operates five mines in Central Appalachia. Coal sales are split roughly in half between domestic and foreign destinations, Atkins said. The company has seen success in several markets abroad and is exploring further opportunities in South America and Asia.

Most of its shares are held by insiders and large institutional investors, according to S&P Global Market Intelligence data. Atkins said that while Ramaco's stock is not a retail name like some competitors, he expects investors will eventually come around to the company as it executes on its goals.

"I think that will, over time, lower the delta between what we think we're worth and what the market is telling us they're willing to pay for us," Atkins said.

Bauersachs said the company does not get a lot of credit in the marketplace for its clean balance sheet compared to some of its peers.

"I think the market will continue to see, unfortunately, on the steam side, some overleveraged coal companies that are going to end up in the same place some of these other coal companies ended up in, which is Chapter 11 or some sort of real serious kind of distress," he said. "Over time, I think [investors will] appreciate how hard we've worked to avoid the negatives that liabilities bring."