Warrior Met Coal, Inc. (HCC) is a U.S.-based, environmentally and socially-conscious supplier to the global steel industry. The company is dedicated entirely to mining non-thermal metallurgical (met) steelmaking coal, a critical component in the steel production process for metal manufacturers in Europe, South America, and Asia.

Warrior Met Coal's History and Operations

Warrior Met Coal was formed in 2016 through the acquisition of certain core operating assets of Walter Energy, a leading producer of met coal for the global steel industry, during Chapter 11 bankruptcy proceedings. The company operates two highly-efficient underground mines, Mine No. 4 and Mine No. 7, located in Alabama's Southern Appalachian region. These mines produce a premium quality met coal, also known as hard coking coal (HCC), characterized by low sulfur, low-to-medium ash, and low to high volatility.

As of December 31, 2023, Warrior Met Coal's two operating mines had approximately 82.9 million metric tons of recoverable reserves. Additionally, the company's undeveloped Blue Creek mine held 67.6 million metric tons of recoverable reserves and 39.7 million metric tons of coal resources exclusive of reserves, totaling 107.3 million metric tons.

Warrior Met Coal's steelmaking coal is in high demand globally, with the company selling substantially all of its production to steel producers outside the United States. The company's strategic geographic positioning, coupled with its high-quality coal, has historically allowed it to realize prices in line with or at a slight discount to the Platts Premium Low Volatility (PLV) Free On Board (FOB) Australia Index Price.

In 2017, Warrior Met Coal went public on the New York Stock Exchange, raising proceeds that were used to pay down debt and invest in its mining operations. Over the next several years, the company ramped up production and made important capital investments to maintain and upgrade its mining infrastructure.

Throughout its history, Warrior Met Coal has faced various challenges common to the coal mining industry, such as regulatory requirements, fluctuating commodity prices, and transportation and logistics issues. However, the company has demonstrated operational excellence and financial discipline, allowing it to navigate these obstacles and establish itself as a leading producer and exporter of premium metallurgical coal.

In 2021, the company's Collective Bargaining Agreement with the labor union representing certain hourly employees expired, leading to a strike that initially idled one of its mines and reduced production at the other. After a prolonged negotiation process, the labor union ended the strike in early 2023, and Warrior Met Coal was able to resume full operations.

Navigating the Challenges of the Global Steelmaking Industry

The steelmaking industry's demand for met coal is affected by various factors, including the cyclical nature of the industry, technological developments in the steelmaking process, and the availability of steel substitutes. A significant reduction in the demand for steel products would reduce the demand for met coal, which would have a material adverse effect on Warrior Met Coal's business.

The company has recently faced several challenges in the global steelmaking industry. In 2024, the met coal market experienced a confluence of weaker demand, excess Chinese steel exports in Warrior Met Coal's customer markets, and ample availability of steelmaking coals, which led to a three-year low in high-quality met coal prices.

Specifically, the Platts Index price for premium low-volatility (PLV) coal reached $186 per metric ton at the end of the third quarter of 2024, down $26 from the end of the second quarter. This decline in prices has put pressure on Warrior Met Coal's profitability, with the company's average net selling price per metric ton decreasing from $203.56 in the third quarter of 2023 to $189.54 in the third quarter of 2024.

Despite these market challenges, Warrior Met Coal has remained focused on operational excellence and strategic decision-making. The company has carefully managed its spot sales opportunities and exercised patience in certain geographies, prioritizing the protection of its outstanding assets and coal quality until market conditions improve.

Financial Performance and Liquidity

For the nine months ended September 30, 2024, Warrior Met Coal reported net income of $249.47 million, with revenue of $1.23 billion and adjusted EBITDA of $394.63 million. The company's cash cost of sales per metric ton was $140.07, compared to $132.49 in the same period of 2023.

In the most recent fiscal year (2023), Warrior Met Coal achieved revenue of $1.68 billion, net income of $478.63 million, operating cash flow of $701.11 million, and free cash flow of $209.43 million. However, the third quarter of 2024 saw a decline in financial performance, with revenue of $327.72 million (a 22.5% decrease compared to Q3 2023), net income of $41.77 million, operating cash flow of $62.21 million, and negative free cash flow of $53.67 million. The decrease in revenue was primarily driven by a 17.6% decrease in sales volume and a 7% decrease in average net selling price.

As of September 30, 2024, Warrior Met Coal had total liquidity of $746.40 million, consisting of $583.20 million in cash and cash equivalents, $49.70 million in long-term investments, and $113.50 million available under its asset-based revolving credit facility. The company's debt-to-equity ratio stood at 0.08, with a current ratio of 5.81 and a quick ratio of 4.67, indicating a strong liquidity position.

Warrior Met Coal's geographic customer mix in Q3 2024 was 44% in Europe, 41% in Asia, 15% in South America, and 1% in the United States. This mix varies each period based on the timing of customer orders and shipments.

Blue Creek Growth Project

One of Warrior Met Coal's key strategic initiatives is the development of its Blue Creek mine, which represents one of the few remaining untapped reserves of premium high-volatile A (HVA) steelmaking coal in the United States. The company expects that the Blue Creek project will enhance its already advantageous position on the global cost curve, improve profitability and cash flow generation, and cement its position as a leading pure-play steelmaking coal producer.

In the third quarter of 2024, Warrior Met Coal commenced continuous miner development of the first longwall panel at Blue Creek, producing the first 39,000 short tons of development coal. The company expects to spend approximately $325 million to $375 million on the Blue Creek project in 2024 and has invested a total of $612 million in the project as of the end of the third quarter.

Warrior Met Coal remains focused on executing the Blue Creek project within its reset baseline cost estimate and on schedule, with the longwall expected to start up in the second quarter of 2026. Once operational, Blue Creek is expected to have the capacity to produce an average of 4.4 million metric tons per annum of premium HVA met coal over the first ten years of production, thereby increasing the company's annual production capacity by approximately 60%.

Product Segments and Business Overview

Warrior Met Coal operates in two main product segments:

1. Mining Segment: This is the company's primary business, focusing on mining and exporting steelmaking coal for the global steel industry. The company's highly-efficient longwall mining operations in Alabama produce premium quality HCC from the Blue Creek coal seam, which is characterized by very low sulfur content and strong coking properties. Key financial metrics for this segment include sales volumes, average net selling price per metric ton, and cash cost of sales per metric ton.

2. All Other Segment: This segment includes revenues from the sale of natural gas extracted as a byproduct from the company's underground coal mines, as well as royalty revenues from leased properties. While these activities provide supplementary income, they are not the core focus of Warrior Met Coal's business model.

Guidance and Outlook

Warrior Met Coal has reaffirmed its previous full-year 2024 guidance. The company expects its full-year 2024 cash costs to be in the range of $125 to $135 per short ton, assuming a premium low-vol coal price of $250 to $260 per metric ton. Given the current lower premium low-vol coal price of around $200-$204 per metric ton, the company anticipates being at the lower end of its full-year cost guidance range, as long as pricing and volumes do not deteriorate further.

For sales volume, Warrior Met Coal expects to be within the midpoint to higher end of its guidance range for full-year 2024, though the company remains cautious on spot opportunities until market conditions improve. The company's cash cost of production for Q3 2024 was 66% of their total cash cost per short ton, compared to 62% in the same quarter last year. The cash cost per short ton, FOB port, was approximately $123 in Q3 2024 compared to $115 in Q3 2023, running slightly below the midpoint of their full-year guidance.

Conclusion

While Warrior Met Coal faces near-term challenges in the global steelmaking industry, the company's high-quality asset base, flexible cost structure, and strong operational performance position it well to navigate these conditions. The successful development of the Blue Creek project is expected to further enhance the company's competitiveness and profitability in the long run.

Despite the ongoing market headwinds, Warrior Met Coal remains focused on delivering strong operational and financial results by leveraging its best-in-class operations and maintaining a disciplined approach to capital allocation. As the company continues to execute its strategic initiatives, investors will closely watch Warrior Met Coal's ability to capitalize on the expected improvements in global steel demand and steelmaking coal pricing.