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Ramaco reports 1st profitable quarter, sees strength in metallurgical coal

Ramaco Resources Inc. executives are celebrating their first profitable quarter and projecting strength in metallurgical coal markets at least into 2019 despite operational hiccups in the first quarter.

The Kentucky-based company began initial commercial production of metallurgical coal in the first quarter a year ago and has been developing multiple properties since. Ramaco Executive Chairman Randall Atkins said on a May 16 earnings call the company has doubled revenue to roughly $56 million and swung net income from a loss of $2.6 million to a gain of $5.3 million.

"We hope to continue this momentum into the balance of the year, and indeed we're optimistic we will have a very strong year," Atkins said.

Ramaco CEO Michael Bauersachs said the first quarter is often the "low-water mark" for coal companies with a substantial exposure to weather issues, and he expects Ramaco's operations to improve through the rest of 2018. Coal qualities from the newly developed mines have proved better than expected and pricing is expected to increase as a result in the next round of contracting, he added.

"We have proven our ability to execute on developing new deep mines," Bauersachs said. "Additionally, our sales products are being widely accepted in the marketplace."

The company is one of few coal producers bringing on new production as many have focused on returning capital to shareholders instead. Bauersachs said Ramaco is expected to report production increases in the second and third quarters this year.

Despite seasonal weakness in pricing, Atkins said there have been signs of "structural strength" in international markets for metallurgical coal. He pointed to low metallurgical coal inventories, low steel inventories and domestic steel purchase interest as indicators metallurgical coal producers should benefit from market dynamics in the coming months. He added that merger and acquisition activity domestically and abroad in the metallurgical coal space could be a good sign for prices.

"Some recent M&A activity in Australia gives us the reason to feel some of the smart money continues to expect long-term strength in met pricing," Atkins said, referencing Rio Tinto's recent sale of assets resulting in its exit from the coal business. "You don't place $4 billion of forward high purchase multiple bets buying into the met space unless you're comfortable the market is headed north."

Atkins said Ramaco is studying ways to add more tons to its production profile in the year, including more underground mining. Any new capital expenditures will come out of the company's cash flow instead of debt, he said.

Ramaco's first profitable quarter came despite several operational challenges. The company experienced logistics problems with a railroad service provider and ran into unexpected geological issues at one of its surface coal mines in southern West Virginia. Those issues at the Elk Creek mine, Bauersachs said, were responsible for the entirety of the company's reported cost increase per ton in the quarter.

In addition to poor weather and regulatory delays at Elk Creek, Ramaco also encountered areas that had previously been mined.

"Mostly these were old auger works, which predated present reporting laws," Bauersachs said. "This unmapped mining was not evident in our advanced planning."