Warrior Met Coal, Inc.
Moat: 3/5
Understandability: 2/5
Balance Sheet Health: 4/5
Warrior Met Coal, Inc., is a U.S.-based, environmentally and socially minded supplier in the global steelmaking industry. The Company is dedicated to mining premium non-thermal met coal used as a critical component of steel production by steel manufacturers in Europe, South America and Asia. The Company is a key player in the mining of high-vol metallurgical (met) coal from underground mines in Alabama and sells its premium-quality coal to steelmakers in Asia, Europe, and South America
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Warrior Met Coal operates exclusively in metallurgical coal, which is a type of coal used in steel production, unlike thermal coal used for electricity generation. This distinction is crucial for understanding the company’s market and economics.
Business Overview
Revenue Distribution
Warrior Met Coal generates all its revenue from sales of metallurgical coal. This is different from other coal companies that also generate revenue from thermal coal used for power generation. The company primarily serves steel manufacturers globally, focusing on key regions, mainly in Europe, South America and Asia. These regions are chosen because they offer attractive prices for premium-quality met coal. Geographically, the company’s production is solely in Alabama, but sales are broadly distributed. There is minimal revenue derived from North America, given their focus on premium high-vol A coals, which are mostly not used in the US.
The company is a “pure-play” met coal company, offering no diversification in other sectors, such as energy production.
Industry Trends The global steel industry is a key driver of HCC’s business. Growth in steel production, particularly in developing markets, leads to higher demand for metallurgical coal. The industry is cyclical, with demand for steel and met coal fluctuating based on economic conditions. In the past year, demand for steel has recovered significantly as countries recovered from covid lock downs, but current demand for steel is facing headwinds from high inflation and interest rates. The metallurgical coal industry has undergone significant consolidation in recent years, leading to a more competitive but stable environment. This consolidation, also, has helped pricing power in recent history. A significant trend is the emphasis on “green steel”. Steel producers are seeking to produce steel using lower-emissions techniques, often involving hydrogen instead of coal. While this could create a substitute in the future, currently, the need for coke coal in electric arc furnace technology, coupled with the global need for steel production, is unlikely to significantly affect short term revenues.
The steel industry is notoriously cyclical, and is prone to periods of over-and under-supply. This affects the price of metallurgical coal.
Margins
As a commodity producer, Warrior Met Coal’s profitability is highly sensitive to the price of met coal and, because of their lower cost operations, also to cost. For example, the company mentioned in its latest earnings call that the price for their HVA coal had decreased by more than $100 a ton in the last 9 months, affecting earnings significantly. The company has managed to reduce costs, but a substantial part of production costs is highly dependent on fixed costs (such as salaries and electricity) and, also, prices of consumables. The company has a high-cost structure compared to other coal producers, given the inherent expense of underground mining. Despite cost pressures, the company has enjoyed strong profit margins in the past, owing to higher coal prices. But recent declines in prices have made margins more volatile. A sharp increase in royalties with new agreements between the company and Alabama will also dampen margins.
The company is very sensitive to price volatility and has minimal control over the ultimate price of the coal it sells.
Competitive Landscape
The met coal industry is dominated by a few large players, giving them some pricing power. Competitors include other domestic producers, as well as international suppliers, mostly from Australia and China. Warrior Met Coal is a “price taker” and has a limited influence on met coal prices. It has built its operations on high quality met coal, as such, it has carved out a name for its product and commands a premium above market prices. A competitive advantage can be found in companies with better quality coal that have mines that are close to water ways or rail systems as transporting heavy coal over large distances is usually not profitable, unless done through the company’s own private transportation.
The company does have some unique properties that have high quality met coal that is needed in certain steel productions, as such, they have high quality product that commands better pricing.
What Makes the Company Different
The company’s focus on premium-quality hard coking coal that is essential for high quality steel production that commands high prices and a loyal customer base. Their cost structure is optimized by operating multiple high-vol mines in close proximity to the Port of Mobile, allowing for efficient shipping and infrastructure usage. The company has long-term relationships with its customers. It has implemented various technologies, including cutting-edge safety, sustainability, and production, that has improved its operational efficiency. Their product quality is significantly higher than most other producers in the same locations. They command higher pricing because their HVA is highly coveted.
Financials Analysis
Income Statement
Revenue is almost entirely from sales of metallurgical coal. Sales have been volatile due to price changes and shifts in demand. The company reports operating earnings (EBITDA) with a large portion of non-operating expenses. In the past couple of years, they have had losses from extinguishment of debt and significant gains and losses from their pension and benefit obligations. The company’s profitability is highly dependent on commodity prices and cost management. The most important cost for the company seems to be the cost of production, that is determined by many factors, including wages, raw material costs, and energy prices. The company has focused on lowering costs via various measures, but its production costs are highly sensitive to commodity prices and fixed costs.