Warrior Met Coal: Facing Near-Term Pricing And Labor Challenges
Summary
- Warrior mainly sells its coal based on Premium Low Vol FOB Australia prices, which have been hampered by deteriorating relations between China and Australia.
- Warrior is also dealing with dwindling inventory due to the mining strike, which would force it to focus on fulfilling its contracts over spot sales.
- Thus Warrior is likely to have some cash burn in 2021, although its overall financial position remains healthy.
- A new labor contract could potentially push its cost of sales up a bit.
- Warrior is roughly fairly valued for a long-term realized price of $120 per short ton.
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Warrior Met Coal (NYSE:HCC) is facing some near-term challenges with the continuing weakness in Premium Low Vol FOB Australia met coal prices and the potential to start running out of inventory if the strike at its mine doesn't end soon.
Warrior's longer-term outlook remains decent, but it is likely going to deal with some cash burn in 2021 while its Blue Creek development may be delayed some more.
Realized Met Coal Prices
Warrior Met Coal is facing some challenges in terms of realized prices for its met coal due to China's unofficial ban on Australian coal imports. The majority of Warrior's sales are priced based on FOB Australian prices, which have been kept relatively low by China's actions. CFR China prices are much higher (roughly double FOB Australian prices), so even with the $40 to $50 freight costs from Alabama to China, CFR China spot sales would net a lot more for Warrior. However, that would only account for a relatively limited amount of its total volume.
Inventory And Strike
Warrior Met Coal may also be running low on inventory now since the strike that started at the beginning of April hasn't been resolved yet.
At the end of 2020, Warrior Met Coal had 998,000 short tons of inventory. This is around 40 to 50 days worth of inventory based on Warrior's typical sales levels. Reports indicated that Warrior drew down some of its inventory in Q1 2021 though, so it may have had fewer days of inventory at the time the strike started. Thus without a restart in production, Warrior may have less than two weeks of inventory remaining at this point in time based on typical sales levels. Warrior's inventory could last a bit longer if it has been focusing exclusively on fulfilling its contracts and avoiding spot sales, but that would have the drawback of reducing its realized prices.
2021 Results
Warrior may end up realizing around $100 per short ton in 2021. FOB Australia prices are still quite similar to Q4 2020 levels when Warrior netted $93.54 per short ton for its coal. It may be able to do a bit better in 2021 due to the general expectation for stronger met coal prices in the latter half of the year, plus Warrior's ability to boost its average realized price a bit through spot sales (at much higher prices than the $110 per metric tonne FOB Australia prices).
This would result in it generating around $780 million in total revenues if it sells 7.5 million short tons of met coal during the year. This also assumes that Warrior can resolve its labor disputes soon.
| Units | $/Ton | $ Million | |
| Short Tons Sold | 7,500,000 | $100 | $750 |
| Other Revenues | $30 | ||
| Total Revenues | $780 |
If Warrior Met Coal's cash cost of sales goes up a bit to $87 per short ton (from $83.74 per short ton in 2021from $83.74 per short ton in 2020), then it would end up with $653 million in total cash cost of sales for 2021. Adding other expenses (including $110 million in capex) would result in its cash expenditures being around $856 million. This includes its current $0.05 per share quarterly dividend.
| $ Million | |
| Cost of Sales | $653 |
| Cost of Other Revenues | $30 |
| Cash SG&A | $25 |
| Cash Interest | $28 |
| Capex | $110 |
| Dividends | $10 |
| Total Expenditures | $856 |
Thus Warrior may end up with around $76 million in cash burn after dividends, but before any spending on Blue Creek development.
Warrior had $212 million in cash and cash equivalents at the end of 2020, so it would be able to handle this level of cash burn fairly easily and would still have $136 million in cash at the end of 2021 in this scenario.
Valuation
Warrior's value may take a bit of a hit if its new labor contracts result in its cost of sales going up. If its cost of sales goes back up to around $90 per ton going forward, then it would generate around $200 million in adjusted EBITDA per year without Blue Creek with a realized price of around $120 per short ton. This is around 20% higher than what I've assumed it will realize in 2021 and around 28% higher than what it realized in Q4 2020.
A 5.5x EV/EBITDA range would then make it worth around $16.65 per share, after adjusting for its projected year-end 2021 net debt.
Conclusion
Warrior Met Coal is facing some near-term challenges in dealing with the mining strike and still weak benchmark Australian met coal prices. The weak coal prices may cause it to have some cash burn in 2021 even if it doesn't run out of inventory due to the strike.
Longer-term, Warrior should be in okay shape as it has plenty of cash on hand still. However, if a new labor contract results in its cost of sales going back up to around $90 per short ton, that would cut into Warrior's margins a bit. Thus I am now neutral on the company at its current stock price, based on valuation calculations using a long-term realized price of $120 per short ton and with the uncertainty about when Blue Creek will end up in production.
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