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

[We wrote about met coal producer Warrior a couple of weeks ago. Now it is time to take a look at quarterly results for other coal producers Peabody Energy (previously), Arch Resources, and Alpha Metallurgical Resources. Also, note: we are big fans of The Coal Trader for coverage of the coal producer stocks.] 

Peabody Energy
The market capitalization of Peabody is down to $2.8 billion versus $4 billion when we wrote about them in August 2022. Total liabilities less current assets are under $400 million, and current assets now exceed current liabilities plus long term debt. We would put the enterprise value at $3.2 billion now. For the first quarter of 2023 (10-Q), adjusted EBITDA was $391 million, down from $500 million in the fourth quarter. That puts EV/EBITDA at 2x (annualized). 

As of 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. One calculation that you could make is that the enterprise value is now about $1.30 per ton of proved and probable reserves.

During the first quarter, seaborne thermal sold for $97 per ton with a $51 cost per ton; seaborne met coal for $220 per ton with a $151 cost per ton; PRB coal for $14 per ton with a $12 cost per ton; and other U.S. thermal coal for $55 per ton with a $41 cost per ton. Once again, seaborne thermal coal was the most profitable segment in Q1, earning $164 million of adjusted EBITDA, with seaborne met right behind, earning $91 million in adjusted EBITDA. The U.S. thermal coal (PRB & other) earned $100 million for the 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.

Peabody reported "Available Free Cash Flow" (AFCF) for the quarter of $262 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 24% (annualized). Some critics have pointed out that Peabody is a laggard compared with other miners in terms of cost inflation. The Coal Trader says:

"The companies who are able to manage costs will be most capable of maintaining positive operating margins no matter what the fundamental supply/demand situation looks like. These companies will therefore provide superior shareholder returns over time and will begin to separate themselves from their peers. Right now, they all sort of look the same and they’re all sort of valued more or less in the same range, in terms of EV/FCF metrics. But I think we’re starting to see some clear hints of who can separate themselves from the pack, and it might be easier to simply pick out the laggards and avoid them at all costs."

He puts Peabody in the laggard category, given how its costs per ton jumped dramatically in the first quarter. We agree with his notion that mineral producers with lower costs and lower capex requirements will outperform going forward. (That is why it was so important to look at capex growth versus production growth for our U.S. shale and Canadian oil producers this quarter.) Maybe one thing to mention though 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 is down to $2.1 billion. As of their Q1 2023 earnings report, total liabilities less current assets are around $100 million, putting the enterprise value at $2.2 billion. Their current assets exceed their current liabilities plus long term debt. For the first quarter of 2023 (10-Q), adjusted EBITDA was $277 million, which puts the EV/EBITDA at 2x (annualized). 

Adjusted EBITDA for 2022 was $1.26 billion, which is an EV/EBITDA on the current valuation of 57%. Last year they spent $493 million repaying debt, paid $456 million of dividends, and $157 million on share repurchases. Capital expenditures were $173 million compared to $133 million of depreciation.

For the first quarter, the pace of adjusted EBITDA was obviously a little lower (annualizing to $1.1 billion). For the quarter, they spent $31 million on capex (compared with $35 million of depreciation), repaid $71 million of debt, paid $67 million of dividends, and bought back $21 million of stock.

The Coal Trader points out that Arch did a very good job with lowering their cash cost per ton of met coal production in the first quarter of 2023. He says that Arch and Warrior should be the low cost met coal producers in the U.S. and that Arch is the best buy and hold producer if you do not want to have to think too hard.

Alpha Metallurgical Resources
The market capitalization of Alpha is down to $2 billion. As of their Q1 2023 earnings report, total liabilities less current assets are negative $300 million, putting the enterprise value at only $1.7 billion. For the first quarter of 2023 (10-Q), adjusted EBITDA was $354 million, which puts the EV/EBITDA at 1.2x (annualized).

Adjusted EBITDA for 2022 was $1.7 billion, which is an EV/EBITDA on the current valuation of 100%. Last year, they spent $451 million repaying debt, $13 million of dividends, and $522 million repurchasing stock. Capital expenditures for the year were $164 million compared to $108 million of depreciation.

For the first quarter, the pace of adjusted EBITDA was obviously a little lower (annualizing to $1.4 billion). For the quarter, they spent $74 million on capex (compared with $29 million of depreciation), paid $86 million of dividends, and bought back $145 million of stock. With all the repurchases, the share count is down 18.6% year-over year. Since starting its share buyback program five quarters ago, Alpha has repurchased 23% of total shares outstanding.

They have 323 million tons of met coal reserves, all in West Virginia and Virginia, and they account for around one-fifth of U.S. met coal production. That's an enterprise value of $5.26 per ton of U.S. met coal.

Coal Trader says that he agrees with Alpha's management that it is "criminally undervalued" but that they may not occupy as favorable a position on the cost curve as Warrior and Arch. Last week, he posted a writeup of a site visit to Alpha which is very interesting. He says that the Alpha CEO reads his coal Substack!

U.S. Steel
While obviously not a coal producer, U.S. Steel is one step down, vertically, from the production of metallurgical coal, and we have mentioned them in the past as a possible Cheap Cyclical (see also). In our review of Capital Returns, we mentioned that The Coal Trader had made an interesting comment about the relative capital cycle position of the coal producers versus the steel companies:

"[M]y preference is to maintain a bullish stance on the supply-constrained segment of the supply chain, specifically focusing on metallurgical coal and metallurgical producers. If necessary, I will hedge my position by shorting the oversupplied segment, which includes steel companies. While steel companies typically have strong balance sheets, similar to metallurgical producers, they have been investing heavily in capacity additions in an attempt to lower carbon emissions from basic oxygen furnace (BOF) production towards electric arc furnace (EAF) production, especially in North America and Europe. This is the classic Capital Returns cycle at play and if you haven’t read the book I highly recommend it."

We do not like heavy capital investments! (Unless we are in the position of getting a royalty on gross revenue.) U.S. Steel spent $740 million on capex in Q1 compared with $350 million the prior year quarter. That is quite a heavy lift compared with Q1's reported $200 million net income and $427 million of adjusted EBITDA. There is something quite unsatisfying about spending $2.1 billion over the trailing four quarters on capex while CFO was $2.9 billion and your market capitalization is only $4.9 billion. Not to mention the fact that U.S. Steel is trading for less than half of book value - that is a strong market signal not to be investing.