Coal & Steel Producer Earnings - Q3 2023 ($BTU $ARCH $AMR $HCC $X)

[Previously: Coal Earnings (Q2 2023), Coal Producer Earnings for Q1 2023, Warrior Met Coal, Peabody Energy.]

Peabody Energy
The market capitalization of Peabody (BTU, 10-Q) is now $3.3 billion versus $2.8 billion when we wrote about them last quarter. (It was $4 billion when we wrote about them in August 2022.) Total liabilities less current assets are now $276 million, and current assets exceed current liabilities plus long term debt by almost a billion dollars.

We would put the enterprise value at $3.6 billion now. For the third quarter of 2023, adjusted EBITDA was $270 million, down from $358 million in the second quarter. That puts the EV/EBITDA at 3.3x using this quarter or 2.7x based on the first nine months of this year.

During the third quarter, Peabody's seaborne thermal coal sold for $71 per ton with a $44 cost per ton; seaborne met coal for $160 per ton with a $110 cost per ton; PRB coal for $14 per ton with an $11 cost per ton; and other U.S. thermal coal for $54 per ton with a $42 cost per ton. Once again, seaborne thermal coal was the most profitable segment in Q3, earning $116 million of adjusted EBITDA, with seaborne met right behind, earning $79 million in adjusted EBITDA. The U.S. thermal coal (PRB & other) together earned $103 million of EBITDA for the quarter.

Peabody's "Available Free Cash Flow" (AFCF) for the first nine months of the year has been $648 million. From the start of 2023 through October 20, 2023, the Company has returned $307.4 million to shareholders, including a fixed dividend of $20.7 million and share repurchases of $286.7 million. The Company has repurchased 13.4 million shares, or 9.3% of shares outstanding.

Notice that the EBITDA/EV yield of Peabody is now pretty similar to Natural Resource Partners, but practically all of NRP's EBITDA is free cash flow and is available for distribution to shareholders, while Peabody has spent about $200 million on capital expenditures so far this year. Also, as a royalty owner, NRP's cost of production is zero, while Peabody's operating costs and expenses are two-thirds of total revenue.

Arch Resources
The market capitalization of Arch Resources (ARCH, 10-Q) is $2.8 billion versus $2.5 billion last quarter. Their total liabilities less current assets are now $164 million, and current assets exceed current liabilities plus long term debt by several hundred million dollars. We would put the enterprise value at $3 billion now. 

For the third quarter of 2023, adjusted EBITDA was $126 million, down from $130 million in the second quarter. That puts the EV/EBITDA at 6x using this quarter's results.

They sold 2.3 million tons of met coal (versus 2.5 million the prior quarter) and 16.8 million tons of thermal coal (versus 16.3 million) this quarter. The price of met coal was slightly higher but the net effect with the lower production quantities was that EBITDA was down slightly.

Arch reported "discretionary cash flow" of $87 million for the quarter, which was the difference between their cash from operations of $131 million and $44 million of capital expenditures. They returned $100 million to shareholders via a dividend of $72 million and $28 million spent repurchasing stock.

AMR
Alpha Metallurgical Resources (AMR) is the largest U.S. met coal producer, representing about one-fifth of total U.S. production. According to their recent investor presentation, between two-thirds and three-quarter's of AMR's met coal is exported, with India accounting for a third of their export sales over the past five years.

The market capitalization of AMR is $3 billion, up from $2.6 billion last quarter. AMR stock has really been on a tear since they are allocating lots of cash to share repurchases. Their current assets less total liabilities (ignoring deferred taxes) are now $289 million, so we would put the enterprise value at $2.7 billion.

For the third quarter of 2023 (release, 10-Q), AMR's adjusted EBITDA was $154 million, down from $259 million in the second quarter. That puts the EV/EBITDA at 4.4x using this quarter or 2.6x based on the first nine months of this year.

They sold 4.1 million tons of met coal in Q3, the same as in Q2. They got $155/t for met coal versus $173/t the previous quarter. Their cost of met coal sales was up slightly to $110 per ton from $106 per ton the prior quarter.

AMR has said that they are going to cease paying a dividend after the fourth quarter and focus their cash on share repurchases:

Following the dividend payment for this quarter, we will consolidate our capital return efforts to focus on share repurchases and expect to continue with that approach as long as buybacks make sense from a market, trading price, and valuation perspective.

Cash from operations was $157 million and capital expenditures were $55 million for the quarter. They paid $7 million of dividends and bought back $102 million of stock during the quarter, for a shareholder yield of 14.5% (annualized) on the current market capitalization.

Warrior
The market capitalization of Warrior Met Coal (HCC) is $2.6 billion, up 24% from when we wrote about them last quarter. Their net current assets (ignoring deferred income taxes) are $705 million, so the enterprise value is $1.88 billion.

For the third quarter of 2023 (release, 10-Q), Warrior's adjusted EBITDA was $146 million, up from $130 million in the second quarter. That puts the EV/EBITDA at 3.2x using this quarter or 2.6x using the last nine months' results (annualized).

They sold 2.3 million tons versus 1.8 million in the second quarter. The average price fell from $208/t to $185/t but the cash cost declined from $129/t to $114/t. Cash from operations was $139 million and they spent $112 million on capital expenditures. Very little free cash flow or shareholder returns right now because they are spending it on their Blue Creek project [pdf].

It is a mystery why they are expanding capacity when the met coal price is already showing. Why not just return cash to shareholders? They could also invest in Natural Resource Partners units! In fact, it is kind of comical to be spending money expanding production instead of buying NRP or their own stock.

Maybe Blue Creek will turn out to be a smart investment, if the coal price holds up for the next decade, but the market is already saying (through the royalty owners' and producers' valuations) that it does not believe that the met coal price will hold up for even a couple years.

U.S. Steel
The market capitalization of U.S. Steel (X) is $7.6 billion, up from $5.5 billion when we wrote about them last quarter. The reason for the substantial increase is that in August, U.S. Steel received an unsolicited bid of $35 per share (cash and stock) from competitor Cleveland-Cliffs Inc. Their total liabilities (excluding deferred income taxes) less current assets are $1.2 billion, so we would put the enterprise value at $8.8 billion. 

For the third quarter of 2023 (release, 10-Q), adjusted EBITDA was $578 million, udown from $804 million in the prior quarter. That puts the EV/EBITDA at 3.8x using this quarter or 3.6x using the last nine months' results (annualized). 

For the current year-to-date, the company has generated cash from operations of $1.7 billion but has spent $1.9 billion on capital expenditures. They have borrowed $172 million, repurchased $175 million of stock, and drawn down cash by $280 million.

As we mentioned last quarter, it does not seem great to spend more than 100% of cash from operations on capital expenditures when your company is valued at less than 4x EBITDA and your market capitalization is two-thirds of book value. Those are strong signals from the market not to be investing in capacity.

One interesting commonality to notice is that whether you look at U.S. Steel or Enterprise Products Partners, they are telling us - claiming - that the current investment cycles are not going to last forever. This is from the U.S. steel conference call:

We've been climbing a mountain of strategic CapEx. And now that we're coming down the other side of the mountain, we're not surprised so many see it won't be long before these new world-class assets generate strong free cash flow.

Another interesting comment was about the "tailwinds for American steel":

I mentioned the 3 global megatrends that will provide tailwinds for American steel and our business in the months and years to come. One is accelerating deglobalization. In a world impacted by conflicts like those in the Middle East and Ukraine and emerging from a global pandemic that stretched supply chains to the limit, we are witnessing a stark reversal after decades of globalization. The upshot enabled by legislation like the Bipartisan Infrastructure Law, the CHIPS Act and the Inflation Reduction Act, what we like to call the Manufacturing Renaissance Act. The United States is experienced once in a generation onshoring boom. The deglobalization boom means U.S. Steel's nearly 123-year history of producing steel that is mined, melted and made in the U.S.A. is paying significant dividends, with more to come and significant room for continued growth in North American steel demand. Fundamental to the deglobalization trend is the U.S.A.'s achievement of energy independence. Between our strong segment in tubular steel and our line pipe products coming out of North America and flat-rolled, we are seeing and we will continue to see a robust order book supporting America's energy markets. Another megatrend is decarbonization. There is a strong global commitment to reducing greenhouse gas emissions. With our electrical steels that are empowering the transition to EVs plus our exposure to sustainable steelmaking at Big River, U.S. Steel is well positioned to harness the decarbonization trend.

We are skeptical of big capital expenditures at companies with depressed valuations, but that is our outsider, generalist view. Perhaps our friends at Enterprise Products, Warrior, and U.S. Steel look around and see that no one else is making significant investments in coal, steel, and pipeline capacity. Maybe these investments are a cinch?