Warrior Met Coal, Inc.

Mining is deemed a ‘critical infrastructure’ industry by the US Department of Homeland Security, which confers participants with certain benefits during the Covid-19 pandemic. Warrior Met Coal (WMC) is an NYSE-listed company that mines metallurgical coal in Alabama, which is converted to coking coal that is critical for steel production.

WMC ships supplies via rail to the Port of Mobile, Alabama – and sells to Europe (54% of sales), South America (26%), and Asia (20%).

It has proven and probable reserves of over 200m tons with production of under 8m tons a year. It also has access to the ‘Blue Creek’ facility that can boost its production by 54% after investing $25m – expected to take place in July 2020.

Average selling prices in Q1 2020 fell to $134.47/ton compared to $194.47/ton in Q1 2019, a decline of over 31%. (Selling prices were $194 and $190/ton in the previous two years.) Fortunes are dependent on the notoriously cyclical steel industry.

It generated revenues of $1.12b and ‘adjusted’ ebitda (a proxy for cash earnings) of $470m in the last twelve months. Net debt amounted to $178m. It has $46.1m in undrawn facilities. Management estimates it has cash to last twelve months under current conditions.

The equity was selling for $747m - equating to an enterprise value of $925m. That represents a trading multiple of under 2x ebitda. This is ridiculously cheap – less than the senior debt that can be safely issued against the enterprise.

In addition, management pay regular and special dividends, and repurchase stock – aggregating $1.45 bn in just the last three years or twice the current market cap. Repurchases were made at an average price of $21.20/share, well above the current price of $14.

Covid-19 has put a halt to repurchases and may put a halt to the quarterly dividends. And there will certainly be a time lag before demand for steel picks up to normal levels.

Investors can take their chances on WMC with such a large margin of safety baked into the price with the important plus of a shareholder-oriented management.