Coal Earnings Notes (Q1 2024)

Metallurgical coal prices have been a bit soft so far this year. Since coal miners have operating leverage as well as capital expenditure requirements, you would expect that their free cash flows have suffered more than the royalty owners' have. And as we pointed out in January, the royalty owners  - which hold the senior securities in the capital structure of mines - seemed cheaper than the producers.

It is a concern that the miners are expanding met coal production even while the commodity price has been weak and their own shares have been "cheap". Warrior's new Blue Creek mine is expected to produce 5 million tons per year and Peabody's North Goonyella / Centurion mine is supposed to produce 3 million tons per year. To put that in perspective, 8 million tons of new capacity is about equal to what Warrior produces in total now.

It seems like a possible "base case" is that the miners' predictable over-investment in capacity will result in the commodity price trending towards marginal cost. The miners will be able to earn a profit margin during times of strong steel demand, but we are not really seeing anything that would show us that mining has become a good business or that the executives recognize that they are not in a good business.

People are working on electrolysis of iron ore (which would be like aluminum production) as well as hydrogen based reduction for steelmaking. Either of those innovations would disrupt metallurgical coal and what they would mainly require is cheaper electricity. It does not seem prudent to invest capital in new coal mines without establishing long term sales contracts with financially sound entities to sell the output. The miners could idle the expansion projects and have the option to start them at such time that they could guarantee an attractive market for the output.

We follow four coal producers and three royalty owners. The miners are Alpha Met (AMR), Warrior Met (HCC), Arch Resources (ARCH), and Peabody (BTU). The mineral owners are Natural Resource Partners (NRP), Pardee Resources (PDER), and Beaver Coal (BVERS). Some notes on the results:

Alpha Met
The market capitalization of AMR is now $3.7 billion (at $285 per share), down quite a bit from $5.75 billion at the high in February. Results for March 31st (10-Q) show Alpha's current assets less total liabilities (ignoring deferred taxes) were $248 million (about the same as year-end 2023) which puts the enterprise value at $3.45 billion now.

For the first quarter of 2024, AMR's adjusted EBITDA was $190 million (down from $266 million the prior quarter) which puts the EV/EBITDA at 4.5x. AMR sold 4.4 million tons of met coal in Q1, down from 4.6 million in Q4. They got $167/t for met coal versus $184/t the prior quarter, and the cost per ton was down slightly to $116/t versus $119/t.

Cash from operations was $196 million and capital expenditures were $72 million for the quarter (including $8.5 million of contributions to equity affiliates), for $124 million of free cash flow, an annualized yield on the enterprise value of 14%. They paid $3 million of dividends for the quarter and bought back $116 million of stock, for a shareholder yield of 13% (annualized) on the current market capitalization. The share count was down 14.8% year-over-year.

Warrior Met
The market capitalization of HCC is now $3.3 billion (at $63.25 per share), down about 10% from a recent all time high of $70 in late April. Results for March 31st (10-Q) show Warrior's current assets less total liabilities (ignoring deferred taxes) were $422 million which puts the enterprise value at $2.89 billion now.

For the first quarter of 2024, Warrior's adjusted EBITDA was $200 million (up from $164 million the prior quarter) which puts the EV/EBITDA at 3.6x. Warrior sold 2.1 million tons of met coal in Q1, up from 1.9 million tons in Q4. They got $234/t for met coal versus $258/t the prior quarter, and the cost per ton was down slightly to $133/t versus $147/t.

Cash from operations was $104 million and capital expenditures were $102 million for the quarter. There was an adverse change in working capital (mostly paying down trade accounts receivable) that negatively affected cash from operations by $87 million. If you add that back, free cash flow would have been $89 million, which is a 12% yield on the enterprise value.

The company paid $31 million of dividends and did not buy back any stock, making the shareholder yield 3.8% (annualized). It seems like it would be a good idea not to be expanding production, as we have previously observed.

Arch Resources
The market capitalization of ARCH is now $2.8 billion (at $156 per share), down about 15% from the all time high in March. Results for March 31st (10-Q) show Arch's current assets less total liabilities (ignoring deferred taxes) at negative $104 million which puts the enterprise value at $2.9 billion now.

For the first quarter of 2024, Arch's adjusted EBITDA was $103 million (down from $180 million the prior quarter) which puts the EV/EBITDA at 7x. Arch sold 2.2 million tons of coal in Q1 (both met and thermal coal), down from 2.3 million tons in Q4. They got $166/t for met coal versus $196/t the prior quarter, and the cost per ton (both met and thermal combined) was up to $94/t from $87/t. Note that the cash margin per ton was thus down one-third just from the prior quarter.

Cash from operations was $128 million and capital expenditures were $45 million for the quarter, resulting in $83 million of free cash flow, an 11% yield on the enterprise value. The company paid $44 million of dividends and bought back $14 million of stock, making the shareholder yield 8.3% (annualized).

Peabody
The market capitalization of BTU is now $2.8 billion (at $22.50 per share). Results for March 31st (10-Q) show Peabody's current assets less total liabilities (ignoring deferred taxes) at negative $263 million which puts the enterprise value at $3.1 billion now.

For the first quarter of 2024, Peabody's adjusted EBITDA was $161 million (down from $345 million the prior quarter) which puts the EV/EBITDA at 4.8x. Peabody's seaborne thermal earned $94 million of EBITDA for the quarter, the seaborne met earned $48 million, Powder River Basin earned $16 million, and other U.S. thermal earned $46.5 million.

Cash from operations was $120 million and capital expenditures were $68 million for the quarter, resulting in $52 million of free cash flow, a 6.7% yield on the enterprise value. The company paid $10 million of dividends and bought back $83 million of stock, which resulted in a 3% share count reduction.

Natural Resource Partners
The market capitalization of NRP is now $1.16 billion (at $90 per unit) and as of March 31st (10-Q) the partnership has $175 million of long term debt and $72 million of convertible preferred stock, for net liabilities of $220 million. The enterprise value is thus $1.39 billion.

NRP generated $72 million of free cash flow in the first quarter of 2024 and $312 million of free cash flow over the trailing twelve months. The first quarter figure, which annualizes to $288 million, is a 20.7% yield on the enterprise value.

After the end of the first quarter, NRP settled the remainder of its warrants and bought back more than half of its convertible preferred units. Our best guess now is that the partnership has an enterprise value of $1.35 million. Assuming an annualized free cash flow of $280 million, that would still be a yield of greater than 20% on the enterprise value. Also, it would mean that estimated remaining net liabilities of $175 million could be paid off in about 2.5 quarters, which would mean the end of this year. The stated intention of management is to begin distributing cash to shareholders once all liabilities are paid off. That would indicate a possible annual distribution of $20, which would be a 22% yield on the current unit price, assuming that current level of free cash flow holds.

Pardee Resources
Pardee is interesting because it owns a huge amount of land in West Virginia, both the surface with timber and also the mineral rights. The current market capitalization (at $250 per share) is $166 million and the company reported $35 million of current assets net of all liabilities at March 31, which gives an enterprise value of $131 million. That is $845 per acre, which seems quite low compared to what timberlands are worth, not to mention the mineral rights and other assets.

Pardee earned $5 million of EBITDA in the first quarter, which was down 17% y/y. The coal royalty per ton was down (because of lower commodity prices received by their lessees), but the lessees' production levels were up. That gives a yield of 15.5% on the enterprise value (annualized).

Beaver Coal
Beaver Coal is a partnership that also owns land in West Virginia (only about one-third as many total acres as Pardee) and unlike Pardee is also getting ground lease income from real estate tenants, in addition to coal royalties and timber sales. At $2,750 per unit, the market capitalization of the Beaver partnership is $68.4 million. Subtracting the $6.6 million of net current assets, the enterprise value is $61.8 million. 

Beaver's coal royalties were $8.9 million in 2023 vs $9.6 million in 2022. Total revenue was $12.9 million vs $14.4 million. Expenses were $2.3 million vs $2.1 million. Operating income was $10.5 million vs $12.1 million. The enterprise value is $1,246 per acre and the OCF yield on the EV (ignoring working capital changes) is 17%. Shares are trading for under 7x net income.

The partnership has had a cash build from $5.2 million (YE 2022) to $6.1 million (YE 2023), which is an increase of $34 per unit. There has been a net current asset build from $5.1 million to $6.6 million, now standing at $266 per unit of current assets net of all liabilities (excluding deferred revenue).

They had $889k of proceeds from sale of property and equipment (also had $511k expenditure for purchase of property and equipment). The financial statements do not say what the sale or purchases were. This will perhaps be explained in the shareholder letter when they mail the annual report.

Earnings Notes (Q4 2023)

Freeport-McMoRan Inc. (FCX)
For Q4 2023, Freeport reported operating cash flow of $1.32 billion and capital expenditures of $1.36 billion, giving a free cash flow for the quarter of negative $42 million. Their quarterly copper production of 1.1 billion pounds was up 2% y/y, at an average realized price of $3.81 per pound. Their guidance for 2024 free cash flow is $1.2 billion (at $3.75 copper), which would be only a 2% yield on the current enterprise value of $57 billion.

FCX’s consolidated operating cash flows are estimated to approximate $5.8 billion (including $0.1 billion of working capital and other sources) for the year 2024, based on current sales volume and cost estimates, and assuming average prices of $3.75 per pound of copper, $2,000 per ounce of gold and $19.00 per pound of molybdenum. The impact of price changes on operating cash flows for the year 2024 would approximate $400 million for each $0.10 per pound change in the average price of copper, $180 million for each $100 per ounce change in the average price of gold and $120 million for each $2 per pound change in the average price of molybdenum.

Capital expenditures are expected to approximate $4.6 billion for the year 2024 (including $2.3 billion for major mining projects and $1.0 billion for the Indonesia smelter projects). Projected capital expenditures for major mining projects include $1.1 billion for planned projects primarily associated with underground mine development in the Grasberg minerals district and potential expansion projects in North America, and $1.2 billion for discretionary growth projects.

FCX’s financial policy is aligned with its strategic objectives of maintaining a strong balance sheet, providing cash returns to shareholders and advancing opportunities for future growth. The policy includes a base dividend and a performance-based payout framework, whereby up to 50% of available cash flows generated after planned capital spending and distributions to noncontrolling interests would be allocated to shareholder returns and the balance to debt reduction and investments in value enhancing growth projects, subject to FCX maintaining its net debt at a level not to exceed the net debt target of $3.0 billion to $4.0 billion (excluding net project debt for the Indonesia smelter projects).

They are quite leveraged to the copper price as you can see: $400 million additional operating cash flow for each ten cent increment in copper price. Yet even $4.75 copper would only give an additional $4 billion of operating cash flow which would be kind of lackluster on the $58 billion EV. They are crazy to be spending money on growth! They should demand contracts in hand for $6/lb before they spend a penny more on capex.

Barrick Gold Corp (GOLD)
For Q4 2023, Barrick reported cash from operations of $1 billion and capital expenditures of $861 million, giving a free cash flow for the quarter of only $136 million on an enterprise value of $25 billion. Gold production was up 1% y/y in Q4. Their cash cost was $982 per oz and their "all-in sustaining cost" was $1,364/oz. 

Like other commodity producers and miners, they are plowing it into capex: They produced 4.05 million ounces of gold in 2023, down from 4.1 million in 2022 and closer to 5 million in 2020. Cash cost has risen from $700/oz in 2020 to $960/oz last year. Operating cash flow for 2020-2023 (four years) totaled $17 billion but they spent $11 billion on capex. So only $6 billion of cumulative free cash flow ($1.5 billion per year) and production is in decline!

Remember that to recover an ounce of gold they have to process 28 tons of ore, and for every ton of ore, they have to also move 6 tons of waste.

Comstock Resources Inc (CRK)
Comstock produces almost 100% natural gas and sells it for the pittance of $2.50/mcf. They reported negative free cash flow for Q4 and FY 2023 yet they grew production 6% y/y. Although they may get some religion about lighting cash on fire now that natural gas is even lower:

"In response to weak natural gas prices, Comstock plans to suspend its quarterly dividend until natural gas prices improve. In addition, the Company plans to reduce the number of operating drilling rigs it is running from seven to five. Two of the five drilling rigs will continue to be deployed in the Company's Western Haynesville play. As a result, Comstock plans to spend approximately $750 million to $850 million in 2024 on its development and exploration projects to drill 46 (35.9 net) operated horizontal wells and to turn 44 (38.2 net) operated wells to sales in 2024. Comstock expects to spend $125 million to $150 million on its Western Haynesville midstream system, which will be funded by its midstream partnership."

Comstock has $3.4 billion of net liabilities and a $2 billion market cap. It is conceivable that the equity here goes to zero.

PrairieSky Royalty Ltd. (PREKF)
PSK reported revenue for 2023 of $380 million, generated $283 million of funds from operations (74% margin). They spend 13% of revenue on income tax, 9% on G&A expense, 3.4% on finance expense (interest), and about 1% each on production taxes and on exploration and evaluation. The $283 million of funds from operations is a 7% shareholder yield on the $4 billion market capitalization. (Based on Q4 would be an 8% yield.)

Horizon Kinetics wrote about PSK in the annual letter for their Inflation Beneficiaries (INFL) ETF:

"With today’s temporarily depressed energy prices, PrairieSky should be able to generate C$1.50 in FFO/share, which equates to a 7.5% yield. This could be viewed as a “base case” minimum return—assuming no improvement in energy prices, production volumes, or Canadian price differentials. Assuming modest improvement here, namely with pricing and volumes, it is reasonable to expect more than C$2.00/share of FFO, or a 10% yield. If prices rebound more fully, and volume grows even moderately, FFO could exceed C$2.50 share, nearly a 12% yield."

One big hope for PSK would be more export of natural gas from Canada. Their share of natural gas production for the quarter was 5.4 million Mcf of gas which was sold for only $2.19 per Mcf.

Intercontinental Exchange Inc. (ICE)
For the full-year 2023, ICE earned $3.05 billion of free cash flow on $8 billion of total revenue (less transaction-based expenses) for a royalty-like 38% free cash flow margin. The current market capitalization is $78 billion the enterprise value is around $100 billion, so at a 3% free cash flow yield, it is not cheap. Something else to note was FCF was flat from 2022 to 2023. Their M&A goals: "deepen moats, gain intellectual property, increase customer wallet-share".

Peabody Energy Corp (BTU)
The market capitalization of Peabody is now $3.35 billion versus $3.3 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 $335 million, so we would put the enterprise value at $3.7 billion now. For the fourth quarter of 2023, Peabody's adjusted EBITDA was $345 million, up from $270 million in the third quarter. Adjusted EBITDA for the full year 2023 was $1.4 billion which is about equal to the Q4 annualized figure. That puts the EV/EBITDA at 2.7x. Operating cash flow for the quarter was $282 million and $1,036 million for the year. Capital expenditures were $158 million for the quarter and $348 million for the year. So the free cash flow yield on enterprise value is 13% based on the most recent quarter or 19% for the full year.

Thoughts from Coal Trader: "If executed successfully, the Centurion and Shoal Creek organic investments should deliver extremely high IRR's and return significant free cash flow to Peabody in the coming years. Peabody’s team also found a way to further enhance the Centurion investment by acquiring the adjacent Wards Well deposit. These investments will pivot the company more towards the met market where the long term fundamentals are far more favorable compared to thermal. The long term prospects of the company have significantly improved with Centurion being the flagship of their portfolio in the years ahead. The average realizations of the met segment will improve significantly with the addition of Shoal Creek and eventually Centurion. This is probably something that will be overlooked by many analysts, but I believe the 'relativities' in the metallurgical coal market are something the sector if going to have to contend with for far longer than most believe. That is to say, the price spreads between high-quality coking coals relative to lower-quality coking coals may be here to stay..."

Seems cheap and everything, but would rather own coal royalties at current valuations.

Natural Resource Partners, L.P. (NRP)
No year-end results yet, but NRP put out an 8-K in January about a warrant settlement:

On January 29, 2024 (the "exercise date"), holders of Natural Resource Partners L.P.'s (the "Partnership's") warrants to purchase common units ("warrants") exercised 462,165 warrants with a strike price of $34.00. On January 31, 2024, the Partnership settled the warrants on a net basis with $10 million in cash and 198,767 common units. The 15-day VWAP ending on the business day prior to the exercise date was $97.62. Of the originally issued 4.0 million warrants, 1.08 million warrants with an exercise price of $34.00 remain outstanding.

As of the September 30, 2023 quarterly results, NRP had 2,190,000 warrants outstanding. An October purchase (8-K) brought them down to 1.54 million warrants. We had been wondering what they did with their Q4 cash - we won't know for sure for another few weeks until they report earnings, although they did aggressively tackle the warrants. Wonder if they were redeeming the preferred (12% liability) during the fourth quarter?

Exxon Mobil Corp (XOM)
XOM reported cash from operations of $13.7 billion and free cash flow of $8 billion (58% of CFO) for the fourth quarter of 2023. The market capitalization is $400 billion and the enterprise value is $420 billion so the free cash flow yield is 7.6% at current oil (and LNG) price. For the full year of 2023, shareholder distributions were $32.4 billion ($14.9 billion of dividends, and $17.4 billion of share repurchases) which is a 8% shareholder yield.

Imperial Oil Ltd (IMO)
We mentioned IMO last week. Production in the fourth quarter was up 8.5% versus the prior year, while capex for the quarter was down 34% versus the prior year. (See results. Full year capex was down 2% from 2022.) Free cash flow for the quarter was $667 million, which is about an 8.6% yield on the enterprise value. Imperial is a share cannibal. During 2023, they shrank the share count by 8.3%. 

Enbridge Inc (ENB)
Enbridge shares have been really weak, under-performing Enterprise Products, for example. (Also compare with EPD, NTG, and FEI over the past three years.) It's a $70 billion market capitalization company yielding 7.9% (dividend) which is quite high compared to what it has yielded historically. And it is a C-corp so you don't even get the annoying Schedule K-1 that you do from other midstream companies. From the Q4 call:

2023 showcased the predictability of our business amid continued geopolitical instability, persistent inflation and rising interest rates. This is as a result of the 98% of Enbridge's earnings being generated from either cost of service or take-or-pay contract assets. Our debt portfolio is less than 10% exposed to floating rate volatility. Our customer base is over 95% investment grade, and 80% of our EBITDA is earned from assets with protection against inflation. We are rated BBB+ by all rating agencies and remain committed to our long-held leverage target of 4.5x to 5x.

Half of the EBITDA is from their liquids pipelines. They've got the Mainline pipeline from the western Canada oil sands and then the Line 5 that takes it to eastern Canada refiners. The Flanagan South and Seaway can also take that Mainline oil from Canada down to Gulf Coast refiners. ("We transport about 30% of the crude oil produced in North America. We transport about 65% of U.S.-bound Canadian exports.")

A quarter of their EBITDA is gas transmission. They carry from western Canada to export, also to eastern U.S. Connects PA gas to eastern U.S. as well as Gulf Coast. ("Enbridge moves about 20% of the natural gas consumed in the United States. We are the largest natural gas supplier to New England, the Southeast and virtually all of Florida. Our transmission network is also webbed throughout the Gulf Coast. We are also one of the largest offshore natural gas transporters in the Gulf of Mexico.") They are working on LNG export from western Canada, called the Woodfibre LNG project.

Other quarter is gas distribution (utility). ("Enbridge’s gas utility business, Enbridge Gas Inc., becomes the largest by volume in North America—with about 7,000 employees delivering 9.3 billion cubic feet of natural gas per day (Bcf/d) to about 7 million customers.")

Allison Transmission Holdings Inc (ALSN)
We keep noticing ALSN on the daily all-time highs list. Per their website, Allison is the world’s largest manufacturer of fully automatic transmissions and hybrid propulsion systems for commercial-duty vehicles. 

On fourth quarter sales of $775 million, they did $170 million of net income and $186 million of adjusted free cash flow (24% free cash flow margin). On full year sales of $3 billion, they did $659 million of adjusted free cash flow (22% FCF margin). Revenue for the year was up 10% for 2022 and adjusted free cash flow was up 37%. They repurchasing $260 million of shares during 2023 (6 percent of outstanding). The market capitalization is $6.25 billion and the enterprise value is $8 billion, so the FCF yield is 8%.

Penske Automotive Group, Inc. (PAG)
Highlight from fourth quarter results:

For the three months ended December 31, 2023, total new and used units delivered increased 8% to nearly 117,400, and total retail automotive revenue increased 5% to $6.2 billion. Same-store new and used units delivered increased 9% to nearly 116,700, and same-store revenue increased 4%, including a 7% increase in service and parts revenue. Total retail automotive gross profit decreased 1% to $1.0 billion, including a 1% decrease on a same-store basis. Same-store service and parts gross profit increased 7%.

Revenue for the fourth quarter was $7.3 billion, gross profit was $1.2 billion, EBITDA was $357 million, and capital expenditures were $103 million. The current market capitalization is $10 billion. Net income was $190 million for the quarter and $1 billion for the full year.

AutoNation Inc (AN)
Highlight from fourth quarter results:

New Vehicle Gross Profit - Decreased $102 million reflecting gross profit per vehicle retailed of $3,653, compared to $5,633 a year ago, partially offset by an 8% increase in unit sales. Used Vehicle Gross Profit - Decreased $27 million reflecting gross profit per vehicle retailed of $1,455, compared to $1,847 a year ago and a 4% decrease in unit sales. After-Sales Gross Profit - $540 million, an increase of $61 million or 13% from a year ago.

Revenue for the fourth quarter was $6.8 billion, gross profit was $1.2 billion, and net income was $216 million. During the quarter, AutoNation repurchased 1.15 million shares of common stock (3% of shares outstanding at start of quarter) for an aggregate purchase price of $151 million. The current market capitalization is $6 billion. Net income was $1 billion for the full year.

Enterprise Products Partners LP (EPD)
Highlights from fourth quarter results:

Enterprise reported net income attributable to common unitholders of $5.5 billion, or $2.52 per common unit on a fully diluted basis, for 2023 compared to $5.5 billion, or $2.50 per common unit on a fully diluted basis, for 2022. Operational DCF was $7.5 billion for 2023 compared to $7.6 billion for 2022. DCF provided 1.7 times coverage of the distributions declared with respect to 2023. Enterprise retained $3.2 billion of DCF in 2023 to reinvest in the partnership, repurchase partnership common units, and reduce debt. Distributions declared with regard to 2023 increased 5.3 percent compared to those declared for 2022 and marked Enterprise’s 25^th consecutive year of distribution growth.

Steady as she goes. The real question will be, do the growth investments pay off? If so, earnings will rise and capex will go down, resulting in a lot more cash for distributions. (As we pointed out in October, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years.)

Altria, Inc (MO)
Highlight from fourth quarter results:

Smokeable products segment reported domestic cigarette shipment volume decreased 7.6%, primarily driven by the industry’s decline rate (impacted by macroeconomic pressures on ATC disposable income and the growth of illicit e-vapor products) and retail share losses, partially offset by trade inventory movements. When adjusted for trade inventory movements, smokeable products segment domestic cigarette shipment volume decreased by an estimated 9%.

Cigarettes volumes down 9%. Cigarette revenues down 2.4% y/y net of excise tax. They are not able to raise price of pack enough to maintain flat revenue. Operating income from cigarettes down 1.3% y/y.

Chipotle (CMG)
Highlights from fourth quarter results:

Total revenue increased 15.4% to $2.5 billion. Comparable restaurant sales increased 8.4%. Operating margin was 14.4%, an increase from 13.6%. Restaurant level operating margin was 25.4%, an increase of 140 basis points.

Market capitalization is $70 billion, they earned $282 million in Q4 on sales of $2.5 billion. Sixty times earnings is steep! Net income for fourth quarter was up 11% year-over-year.

Marathon Petroleum (MPC)
This Marathon is the refiner, not the E&P company (MRO). They refine almost 3 million barrels per day, which is the most in the U.S., followed by Valero (VLO) and ExxonMobil, each with about 2 million barrels per day. Highlight from fourth quarter results:

“In 2023, the business generated $14.1 billion of net cash from operations, driven by strong operational performance and commercial execution,” said Chief Executive Officer Michael J. Hennigan. “This enabled the return of $12.8 billion of capital to shareholders. We believe MPC is positioned to generate strong through-cycle cash flow with the ability to deliver superior returns to our shareholders.”

That's on a market capitalization of $63 billion. 

Marriott International, Inc. (MAR)
We wrote about Marriott in November as a royalty-like business. Highlights from Q4 results:

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled $1,197 million in the 2023 fourth quarter, a 10 percent increase compared to fourth quarter 2022 adjusted EBITDA of $1,090 million. The company repurchased 4.7 million shares of common stock in the 2023 fourth quarter for $965 million. For full year 2023, Marriott repurchased 21.5 million shares for $3.9 billion. 

In 2024, we expect another year of solid growth and significant shareholder returns. With normalizing RevPAR growth around the world, we anticipate a worldwide full year RevPAR increase of 3 to 5 percent and net rooms growth of 5.5 to 6 percent. We expect this should yield adjusted EBITDA of approximately $4.9 billion to $5.0 billion for the year and enable us to return $4.1 billion to $4.3 billion to shareholders after factoring in $500 million to purchase the Sheraton Grand Chicago.

That would be quite a nice shareholder return on the current market capitalization of $69 billion.

Warrior Met Coal Inc. (HCC)
The market capitalization of Warrior is now $3.2 billion. Their current assets net of all liabilities (ignoring deferred income taxes) are $660 million, so the enterprise value is $2.5 billion. For the fourth quarter of 2023 (release), Warrior's adjusted EBITDA was $164 million, up from $148 million the prior year. For the full year (2023), adjusted EBITDA was $700 million, down from $1 billion in 2022. That puts the EV/EBITDA at 3.8x using the fourth quarter (annualized) or 3.6x using the entire year.

They sold 1.53 million tons versus 1.45 million the prior year. The average price was $234/t and the average cash cost was $121/t. Cash from operations was $245 million for the quarter and they spent $182 million on capital expenditures. 

For the full year 2023, $700 million of cash from operations, but they spent $525 million on capex. No share repurchases, even though the stock was trading for 1.2x EBITDA earlier last year.

The price per ton of met coal averaged $219 in 2023 vs $304 in 2022. It seems insane to invest so much (~$1 billion for the new Blue Creek mine) in producing more of a commodity that does not have a firm price. There are some good pictures of it in the new investor presentation though.

Coal Trader tweeted: "It seems like they’re really struggling to move this coal. Maybe the transition to more HVA is hurting more than I figured, or maybe the spreads in the Atlantic basin are making it more difficult than I assumed. Prices in Q4 were terrible, and inventories increased A LOT."

That's so brutal. There really shouldn't be any question of being able to move the product if you are expanding production.

Occidental Petroleum Corporation (OXY)
From Q4 results, Occidental's oil volume (total U.S.) was down 2.2% in the fourth quarter (year/year). Their total U.S. production in BOEs though was up 1.3%. In the Permian specifically, oil was flat and natural gas was up 14%. The wells are getting gassier!

Total oil and gas capex in the second half of the year was up 4.5% versus the second half of 2022, but in the Permian was actually down 20%. (They really slashed Permian capex in Q4... in Q3 it was up 8% y/y so maybe we'll see volumes fall off more in Q1 2024.)

Their operating cash flow in Q4 was $2.5 billion with capex of $1.4 billion, giving free cash flow of only $1.1 billion. Market cap is $50 billion and the enterprise value is $80 billion. So EV/FCF is only 5.5%.

Truly no idea what Buffett sees here. 

 

Royal Gold Inc. (RGLD)
Reported results: cash from operations was $101 million for Q4 2023 and $416 million for the full year 2023, virtually the same as Q4 2022 and the FY 2022. There were no capital expenditures in Q4 and only $2.7 million for the full year. They spent $325 million on debt repayment and $100 million on dividends. So the shareholder yield is 5.8% on the $7 billion market capitalization. (Net debt is down to $151 million.)

Kraft Heinz Company (KHC)
Noticing from Q4 results that Kraft's North American volumes were down 5.5% despite 2.5% price increase, resulting in fourth quarter sales down 3%. (They're calling this "headwinds that were driven by ongoing consumer pressure".)

 

The market capitalization is $42 billion and the enterprise value $63 billion. Cash from operations for the full year was $4 billion; surprisingly they actually have $1 billion of capital expenditures, so free cash flow is only $3 billion. They spent $191 million on debt repayment, $2 billion on dividends, and $455 million on share repurchases.

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?

Coal Earnings ($BTU $ARCH $AMR $HCC $X)

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

Peabody Energy
The market capitalization of Peabody (BTU) is now $3.2 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 $340 million, and current assets now exceed current liabilities plus long term debt. We would put the enterprise value at $3.5 billion now. For the second quarter of 2023 (release), adjusted EBITDA was $358 million, down from $391 million in the first quarter. That puts the EV/EBITDA at 2.4x (annualized).  

During the second quarter, Peabody's seaborne thermal coal sold for $101 per ton with a $51 cost per ton; seaborne met coal for $190 per ton with a $138 cost per ton; PRB coal for $14 per ton with a $12 cost per ton; and other U.S. thermal coal for $54 per ton with a $40 cost per ton. Once again, seaborne thermal coal was the most profitable segment in Q1, earning $198 million of adjusted EBITDA (production was up 10%), with seaborne met right behind, earning $103 million in adjusted EBITDA. The U.S. thermal coal (PRB & other) earned $78 million for the quarter.

Peabody reported "Available Free Cash Flow" (AFCF) for the quarter of $375 million. They have said that they plan to return to shareholders at least 65% of AFCF. That would imply a shareholder yield on the current market capitalization of 31% (annualized). During the quarter, they repurchased $173 million of shares and paid $11 million in dividends. They bought back 8.3% of outstanding shares during the second quarter.

The seaborne thermal coal is mined in Australia. Seaborne met coal is mined in Australia and Alabama. The PRB coal is, of course, mined in Wyoming, and the other U.S. thermal is mined in Illinois, Indiana, Colorado, and New Mexico.

At the end of 2022, Peabody had 2.1 billion tons of proven coal reserves and 379 million tons of probable reserves. The proved reserves were comprised of 94 million tons of seaborne thermal coal, 102 million tons of seaborne met coal, 1.7 billion tons of thermal coal in the Powder River Basin, and 155 million tons of other U.S. thermal coal. The enterprise value is thus $1.62 per ton of proved and probable reserves. One thing to mention is that you get a lot of thermal coal with Peabody: almost 2 billion tons. That is a lot of BTUs and you never know; they might come in handy.

Arch Resources
The market capitalization of Arch Resources (ARCH) is $2.5 billion versus $2.1 billion last quarter. Their total liabilities less current assets are now $143 million, and current assets exceed current liabilities plus long term debt. We would put the enterprise value at $2.6 billion now. For the second quarter of 2023 (release), adjusted EBITDA was $130 million, down from $277 million in the first quarter. That puts the EV/EBITDA at 5x using this quarter or 3.2x using the first half of the year (annualized).

They sold 2.5 million tons of coal in Q2, up from 2.2 million in Q1, but the price of met coal was $153/t versus $210/t the prior quarter. The cash cost per ton was up to $90 versus $83 the prior quarter even though total production was up.

They said they had "discretionary cash flow" of $151 million for the quarter, which was the difference between their CFO of $197 million and $46 million of capital expenditures. They returned all of the DCF to shareholders via a dividend of $75 million and $74 million spent repurchasing stock. That gives a shareholder yield of 24% (annualized) on the current market capitalization.

Alpha Metallurgical Resources
The market capitalization of Alpha Metallurgical Resources (AMR) is $2.6 billion, up from $2 billion last quarter. Their total liabilities (excluding deferred taxes) less current assets are now negative $320 million. We would put the enterprise value at $2.3 billion now. For the second quarter of 2023 (release), adjusted EBITDA was $259 million, down from $354 million in the first quarter. That puts the EV/EBITDA at 2.2x using this quarter or 1.9x using the first half of the year (annualized).

They sold 4.3 million tons in Q2, up from 3.9 million in Q1. They got $173/t for met coal versus $209/t the previous quarter. Their cost of coal sales improved to $106 per ton from $110.56 per ton.

Cash from operations was $317 million and capital expenditures were $55 million. They paid $7 million of dividends and bought back $150 million of stock during the quarter, for a shareholder yield of 24% (annualized) on the current market capitalization. The company announced that they are going to cease paying a dividend after the fourth quarter and focus their cash on share repurchases. (See investor presentation.)

Warrior Met Coal
The market capitalization of Warrior Met Coal (HCC) is $2.1 billion, up slightly from $2 billion when we wrote about them last quarter. Their total liabilities (excluding deferred income taxes) less current assets are negative $700 million, so the enterprise value is $1.37 billion. For the second quarter of 2023 (release), adjusted EBITDA was $130 million, down from $259 million in the first quarter. That puts the EV/EBITDA at 2.6x using this quarter or 1.8x using the first half of the year (annualized).

They sold 1.8 million tons versus 1.9 million in the first quarter, although the production level was actually higher this quarter. The average price fell from $257/t to $209/t and the cash cost increased from $119/t to $129/t. 

Cash from operations was $125 million and they spent $136 million on capital expenditures. Warrior is developing a Blue Creek mine, and this capex is displacing shareholder returns. What's worse is that there have been some cost overruns:

More than a year after the relaunch of the Blue Creek mine development in May 2022, Warrior has initiated important and highly beneficial project scope changes that will require incremental capital expenditures over the life of the project while lowering operating costs, increasing flexibility to manage risks, and make better use of multi-channel transportation methods. Most of these scope changes are transportation and logistics-related, with additional amounts related to inflation for these changes only. They are expected to increase total capital expenditures for the Blue Creek mine by approximately $120 - $130 million over the remainder of the project development period. [...]

In addition, the Company has experienced inflationary cost increases ranging from 25 to 35 percent in both operating expenses and capital expenditures for its existing mining operations since late 2021. The Company is also experiencing inflationary pressures at Blue Creek, especially in relation to labor, construction materials and certain equipment, that is expected to continue during the remainder of the project development period. As a number of key material contracts are currently being negotiated, and due to uncertainty regarding future inflation rates, the Company is not providing an estimate of the impact of inflation at this time. [...]

Subject to the considerations discussed above, our revised estimate of capital expenditures in 2023 for the development of the Blue Creek mine is approximately $250 to $300 million and is subject to change. The increase in 2023 capital expenditure estimate is primarily driven by change in transportation scope discussed above. The Company currently expects development spending at Blue Creek to be the highest in 2023 and 2024, with 2024 being a similar amount to 2023 that is subject to change.

The project remains on schedule with the first development tons from continuous miner units expected in the third quarter of 2024 and the longwall scheduled to start up in the second quarter of 2026.

It is not clear whether it is a great idea to be expanding capacity when the met coal price is already showing some weakness. Why not just return cash to shareholders? Maybe it's a smart investment, if the coal price holds up for the next decade, but the market is already saying (through the producers' valuations) that it doesn't believe that the coal price will hold up for even a couple years.

United States Steel Corporation
The market capitalization of U.S. Steel (X) is $5.5 billion, up from $4.9 billion when we wrote about them last quarter. Their total liabilities (excluding deferred income taxes) less current assets are $1.1 billion, so we would put the enterprise value at $6 billion.  For the second quarter of 2023 (release), adjusted EBITDA was $804 million, up significantly from $427 million in the first quarter. That puts the EV/EBITDA at 1.9x using this quarter or 2.4x using the first half of the year (annualized). Some color on developments:

“We are executing exceptionally well against our strategic initiatives, with all in-flight projects progressing on-time and on-budget. Notably, our non-grain oriented, or NGO, electrical steel line at Big River Steel is currently being commissioned and on track to start-up later in the third quarter. Customer demand has been robust for our NGO steels and we are pleased to announce that we've already secured our first customer orders in both industrial and electric vehicle markets.”

For the current year-to-date, the company has generated cash from operations of $894 million but spent $1.4 billion (157% of cash from operations) on capital expenditures. They have borrowed $200 million, repurchased $150 million of stock, and drawn down cash by $420 million. For the period of 2021 through the first half of 2023, U.S. Steel generated $8.5 billion of cash from operations. They invested $4.6 billion of that in capital expenditures.

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 ~2x EBITDA and your market capitalization is half of book value. Those are strong signals from the market not to be investing in capacity. 

There is enormous volatility in product demand and price for U.S. Steel's products. Over the past four quarters, the price of flat rolled steel has been as low as $1,012 per ton and as high as $1,339 per ton. The price of steel pipe has been as low as $2,727 per ton and has high as $3,757 per ton.

We just saw today that offshore driller Valaris is borrowing money to buy more ships. When you invest in cyclical industrial companies a constant theme is valuations that are (ostensibly) punishingly cheap but where managements want to expand capacity. If the demand was so great you could theoretically lay the risk off on the customers with long term contracts for the output - but you never see this. (Although the WSJ points out today that small bakeries have figured out that capping croissant production is good for profits.)

We keep coming back to the question of producers versus royalties. The conventional wisdom being, "date the producers, marry the royalties." In theory, there is a set of relative valuations at which you should be indifferent between the two business models. And if the royalty companies are selling for 2% free cash flow yields but the producers are 1x EBITDA, you should probably prefer the producers.

Where this gets more difficult is when the royalty companies are also cheap (say, double digit yields) and the producers are expanding production instead of returning cash. If we look ahead a year or two, what if that cheap producer ends up expanding, having cost overruns on its expansion, and it and its competitors end up reducing their margins because of the increased capacity? The amount of cash that shareholders ultimately receive may be a lot less than the EBITDA multiple suggests. That would imply that the producers are never as cheap as they look.

Warrior Met Coal, Inc. ($HCC)

We wrote about coal miner Peabody Energy last year a couple times, but it is time to start looking at the other miners, too: Arch Resources, Alpha Metallurgical, and today's subject: Warrior Met Coal (HCC), which announced its results last week:

Warrior reported net income for the first quarter of 2023 of $182.3 million, or $3.51 per diluted share, representing a 25% increase over net income of $146.2 million, or $2.83 per diluted share, in the first quarter of 2022. Adjusted net income per share for the first quarter of 2023 was $3.57 per diluted share, compared to adjusted net income per share of $2.97 per diluted share in the first quarter of 2022, representing a 20% increase. The Company reported Adjusted EBITDA of $259.4 million in the first quarter of 2023, compared to Adjusted EBITDA of $243.8 million in the first quarter of 2022, representing a 6% increase. [...]

The Company generated cash flows of $192.9 million from operating activities in the first quarter of 2023, compared to $70.1 million in the first quarter of 2022. Capital expenditures and mine development for the first quarter of 2023 were $82.6 million, resulting in free cash flow of $110.3 million. Free cash flow was $60.6 million higher than the first quarter of 2022 and reflected higher sales volumes offset partially by higher capital expenditures and mine development.

The current market capitalization of Warrior is $2 billion. They have about $725 million in net current assets, so the EV is now $1.25 billion. The FCF/EV yield is now 35%, and the EBITDA/EV is 83% (both annualized) based on first quarter figures. (For the past three years, EBITDA was $1 billion (2022), $500 million (2021) and $110 million (2020). Something interesting about mining companies is that when oil prices and diesel fuel costs fall, the cost of production falls too.)

As Warrior has been earning money, the enterprise value has been falling. When we looked in March, about six weeks ago, the EV was $1.3 billion. Valuations based on this quarter's profit and cash flow figures would obviously require profits to stay steady at current levels, which would essentially mean a similar price for met coal, although they could also earn the same amount by selling more at a lower price. For the first quarter, their average realized price for met coal was $283 per ton. 

The price of Hampton Roads met coal (which is high-vol, a lower grade) is $207.50 per ton. Australian coking coal, which is a more similar quality coal to what Warrior produces, is selling for $246/ton. As they describe it:

As a result of our high quality coal, our realized price has historically been in line with, or at a slight discount to, the Platts Premium Low Volatility ("LV") Free On Board ("FOB") Australia Index Price ("Platts Index"). Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and LV to mid-volatility ("MV"). These qualities make our coal ideally suited as a coking coal for the manufacture of steel.

What is interesting is that if you look at the Australian met coal futures, the price is above $250/ton through the end of next year. The cash cost of production this quarter was $131 per ton and they sold 1.8 million tons. Corporate overhead (besides COGS) was about $14 per ton. Even at lower met coal prices than $283 they are still making money - all the way down to a breakeven of around $145 per ton or so. And since the company has net cash, we do not need to worry as much about periods of time when prices are less robust.

Their two operating mines (No. 4 and No. 7) have 89 million tons of reserves. The Blue Creek mine, which the company is currently developing, has 107 million tons of reserves and resources. So the aggregate of almost 200 million tons of coal would be almost 30 years of production at current levels, and represents an enterprise value of around $6 per ton.

Warrior's assets once belonged to Walter Energy, which was a 2014 short idea, when we said, "management that won't use a $378 million market cap as a currency to retire debt trading in the 50s is going to crash the plane into the mountain with full afterburners on." The situation has changed a great deal subsequently.

The new fund manager of Third Avenue Value has made Warrior his second largest position (after Tidewater offshore drilling!). Here is how he describes the valuation:

There’s $500 million in net cash on the balance sheet, $200 million in excess inventories and significant tax-loss carryforwards remaining. There’s also Blue Creek, which we think is reasonably valued at the company’s NPV estimate of $1 billion. That all basically covers the current market cap.

That leaves roughly zero value being ascribed to the producing assets, which on a normalized basis should produce 7 to 8 million tons per year and – at current coal prices – should earn close to $1 billion in EBITDA annually. Even if you halve that EBITDA level assuming much lower normal coal prices, that’s a pretty attractive asset to have no value given to it. We think the math here gets us very quickly to playing with the house’s money, with a risk/return profile that is very much in our favor.

We really like royalties and we are always looking for first class assets. We generally don't favor producers as much but we are open to the idea that certain types of commodity producers are "royalty-like" if they have attributes such as: debt-free, front-loaded costs, low marginal cost.