Ramaco Resources, Inc. (METC) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist you in understanding our results of operations and our present financial condition and contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Annual Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
Our primary source of revenue is the sale of metallurgical coal. We are a pure-play metallurgical coal company with 59 million reserve tons and 1,119 million measured and indicated resource tons of high-quality metallurgical coal. Our plan is to continue development of our existing properties and grow annual production over the next few years to approximately seven million clean tons of metallurgical coal, subject to market conditions, permitting and additional capital deployment in the medium-term. We may make acquisitions of reserves or infrastructure that continue our focus on advantaged geology and lower costs.
The overall outlook of the metallurgical coal business is dependent on a variety of factors such as pricing, regulatory uncertainties and global economic conditions. Coal consumption and production in the U.S. is driven by several market dynamics and trends including the U.S. and global economies, the U.S. dollar’s strength relative to other currencies and accelerating production cuts. In addition, blast furnace steelmaking is more prevalent outside the U.S. compared to domestic steel production, which creates demand for exports of metallurgical coal.
Although conflicts overseas continue and economic growth remains uncertain in some regions of the world, supply constraints continue to support the global metallurgical coal market overall. Ongoing bans on the import of Russian coal have affected the availability of supply to certain seaborne markets as well as contributed to volatility in prices.
Metallurgical coal benchmark prices increased significantly in early 2022, but then fell throughout the rest of the year. Market pricing for 2023 was generally down from 2022 levels but remains favorable versus long-term averages. We expect metallurgical coal prices to remain volatile in the near term. In addition, we anticipate that inflation may remain high in the near term for steel prices, freight rates, labor, and materials, which would continue to negatively affect our profitability.
During 2023, we sold 3.5 million tons of coal. North American markets made up 33% of our 2023 revenues and export markets, excluding Canada, accounted for 67% of our 2023 revenues. The Company is responsible for rail and loadout costs for coal sold into export markets. During 2022, we sold 2.5 million tons of coal. North American markets made up 58% of our 2022 revenues and export markets, excluding Canada, accounted for 42% of our 2022 revenues. We purchase coal from third parties for sale for our own account from time to time; however, sales of Company-produced coal made up 95% and 98% of total sales in 2023 and 2022, respectively.
The annual contracting season with North American steel producers generally occurs in late-summer through the fall. As of December 31, 2023, we had entered into forward sales contracts with certain North American customers on a fixed price basis for 1.4 million tons of coal at an average realizable price of $166 per ton, excluding freight. This level of pricing in 2023 is lower than the average price of $198 per ton that was obtained during the previous contracting season for North America. This is due to a combination of factors, including changes in demand, variations in the types of coal qualities being purchased, fluctuations in steel prices, and other macroeconomic trends. The Company shifted to
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more export sales in the Company’s mix of revenues during 2023, which will likely continue into 2024. Export sales often contain index-based pricing and, therefore, greater volatility in pricing and revenues.
In 2023, our capital expenditures were $82.9 million, excluding capitalized interest of $1.1 million. In 2022, our capital expenditures were $123.0 million, excluding cash paid for the acquisitions of Ramaco Coal and Maben Coal assets which totaled $23.6 million as well as capitalized interest of $1.1 million. The decrease in capital expenditures was due to the Company’s progress related to strategic growth projects at our Elk Creek and Berwind mining complexes. We completed the expansion of processing capacity at the Elk Creek preparation plant in 2023, which now has an annualized processing and shipping capacity of approximately three million tons per year.
On July 10, 2022, we experienced a methane ignition at the Berwind No. 1 mine, which was one of the active mines at our Berwind mining complex. There were no personnel in the mine at the time of the incident and no injuries or fatalities occurred. The overall impact to pre-tax earnings in 2022 was immaterial except for idle mine costs of $9.5 million recognized during the year. The Company subsequently recognized other income of $8.1 million in 2023 related to insurance proceeds received for the event. Production from the Berwind No. 1 mine restarted in the first quarter of 2023.
As a result of the increase in capacity at the Elk Creek plant, the re-opening of the Berwind No. 1 mine described above, and the start of production at the Maben mine during 2023, the Company was producing just under an annualized four million tons per year run rate at the later part of 2023. The Company expects to produce between 4.0 million and 4.4 million tons in 2024 depending on market conditions.
On June 21, 2023, the Company distributed Class B common stock, a tracking stock, to provide existing holders of the Company’s common stock an opportunity to participate directly in the financial performance of the Company’s CORE assets on a stand-alone basis, separate from the Company’s metallurgical coal operations. CORE assets were acquired initially by the Company as part of the Company’s acquisition of Ramaco Coal in the second quarter of 2022. The financial performance of CORE assets consists of the following non-cost-bearing revenue streams based on the Company’s current expectations:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Royalty fees derived from the royalties associated with the Ramaco Coal and Amonate reserves, which we believe approximates 3% of Company-produced coal sales revenue excluding coal sales revenue from Knox Creek, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Infrastructure fees based on $5.00 per ton of coal processed at our preparation plants and $2.50 per ton of loaded coal at the Company’s rail load-out facilities, and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Future income derived, if and when realized, from advanced carbon products and rare earth elements initiatives. |
The Company anticipates paying a quarterly cash dividend equal to 20% of the total fees above; however, any dividend amounts declared and paid are subject to the sole discretion of the Company’s Board of Directors. Dividends paid on the tracking stock allow the Company to return to Class B common stockholders a portion of the savings from royalties and infrastructure usage fees resulting from the acquisition of Ramaco Coal. In addition, the tracking stock provides an opportunity for Class B common stockholders to participate directly in the potential revenue growth associated with the development of carbon products and rare earth elements. The Company paid cash dividends on Class B common stock during the third and fourth quarter of 2023.
Separate financial statements for CORE have not been included as exhibits to this filing since CORE’s financial performance and dividends will be evaluated based on non-cost-bearing revenue streams, at least initially, and other potential forms of passive income rather than reduced by allocated costs and expenses.
The Company continues to assess its potential REEs deposit in Wyoming. To date, the results of drilling programs indicate elevated levels of REEs, along with significant concentrations of other critical elements such as Yttrium, Gallium, and Germanium. The exploration target does not represent, and should not be construed to be, a mineral resource or mineral reserve as such terms are used in subpart 1300 of Regulation S-K. The Company also continues its work to advance new carbon product technologies with the goal of commercializing products that use coal in both an improved economic and environmental manner.
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Results of Operations
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | | Years ended December 31, | |||||||
| (In thousands, except per share amounts) | 2023 | 2022 | 2021 | |||||||
| | | | | | | | | | | |
| Revenue | | | $ | 693,524 | | $ | 565,688 | | $ | 283,394 |
| | | | | | | | | | | |
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of items shown separately below) | | 493,793 | | | 332,960 | | | 195,412 | ||
| Asset retirement obligations accretion | | 1,403 | | | 1,115 | | | 615 | ||
| Depreciation, depletion, and amortization | | | | 54,252 | | | 41,194 | | | 26,205 |
| Selling, general and administrative expenses | | | | 48,831 | | | 40,032 | | | 21,629 |
| Total costs and expenses | | | | 598,279 | | | 415,301 | | | 243,861 |
| | | | | | | | | | | |
| Operating income | | 95,245 | | | 150,387 | | | 39,533 | ||
| | | | | | | | | | | |
| Other income (expense), net | | | | 18,321 | | | 2,637 | | | 7,429 |
| Interest expense, net | | | | (8,903) | | | (6,829) | | | (2,556) |
| Income before tax | | | | 104,663 | | | 146,195 | | | 44,406 |
| | | | | | | | | | | |
| Income tax expense | | 22,350 | | | 30,153 | | | 4,647 | ||
| | | | | | | | | | | |
| Net income | | | $ | 82,313 | | $ | 116,042 | | $ | 39,759 |
| | | | | | | | | | | |
| Earnings per common share | | | | | | | | | | |
| Basic - Single class (through 6/20/2023) | | | $ | 0.71 | | $ | 2.63 | | $ | 0.90 |
| Basic - Class A (6/21/2023 - 12/31/2023) | | | $ | 1.06 | | $ | — | | $ | — |
| Total | | | $ | 1.77 | | $ | 2.63 | | $ | 0.90 |
| | | | | | | | | | | |
| Basic - Class B (6/21/2023 - 12/31/2023) | | | $ | 0.42 | | $ | — | | $ | — |
| | | | | | | | | | | |
| Diluted - Single class (through 6/20/23) | | | $ | 0.70 | | $ | 2.60 | | $ | 0.90 |
| Diluted - Class A (6/21/2023 - 12/31/2023) | | | $ | 1.03 | | $ | — | | $ | — |
| Total | | | $ | 1.73 | | $ | 2.60 | | $ | 0.90 |
| | | | | | | | | | | |
| Diluted - Class B (6/21/2023 - 12/31/2023) | | | $ | 0.40 | | $ | — | | $ | — |
| | | | | | | | | | | |
| Adjusted EBITDA | | | $ | 182,126 | | $ | 204,555 | | $ | 79,042 |
Net income and Adjusted EBITDA were lower in 2023 compared to 2022, despite the increase in sales volume, due to lower sales pricing and higher cost per ton sold in 2023. Net income and Adjusted EBITDA for 2023 benefitted from $15.9 million of pre-tax income for proceeds received from insurance claims related to the 2022 Berwind ignition event and 2018 silo failure. Refer to Non-GAAP Financial Measures below for an explanation of the Company’s calculation of Adjusted EBITDA.
Year Ended December 31, 2023 compared to Year Ended December 31, 2022
Revenue. Our revenue includes sales to customers of Company-produced coal as well as smaller amounts of coal purchased from third parties. We include amounts billed by us for transportation to our customers within revenue and transportation costs incurred within cost of sales.
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For the year ended December 31, 2023, we had revenue of $693.5 million from the sale of 3.5 million tons of coal. During 2022, we sold 2.5 million tons of coal for total revenue of $565.7 million.
Coal sales information is summarized below:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, | |||||||
| (In thousands) | 2023 | 2022 | Increase | ||||||
| | | | | | | | | | |
| Revenue: | | | | | | | | | |
| Company Produced | | | | ||||||
| Coal sales revenue | | $ | 657,090 | | $ | 553,830 | | $ | 103,260 |
| Tons sold | | 3,299 | | 2,396 | | 903 | |||
| Company-produced revenue per ton sold (GAAP) | | $ | 199 | | $ | 231 | | $ | (32) |
| Purchased from Third Parties | | | | | | | | | |
| Coal sales revenue | | $ | 36,434 | | $ | 11,858 | | $ | 24,576 |
| Tons sold | | 156 | | 54 | | 102 | |||
| Purchased coal revenue per ton sold (GAAP) | | $ | 234 | | $ | 220 | | $ | 14 |
| Totals | | | | | | | | | |
| Coal sales revenue | | $ | 693,524 | | $ | 565,688 | | $ | 127,836 |
| Tons sold | | | 3,455 | | | 2,450 | | | 1,005 |
| Total revenue per ton sold (GAAP) | | $ | 201 | | $ | 231 | | $ | (30) |
| | | | | | | | | | |
| Cost of Sales: | | | | | | | | | |
| Company Produced | | | | | | | | | |
| Cost of sales | | $ | 468,992 | | $ | 323,550 | | $ | 145,442 |
| Tons sold | | 3,299 | | 2,396 | | 903 | |||
| Company-produced cost of sales per ton sold (GAAP) | | $ | 142 | | $ | 135 | | $ | 7 |
| Purchased from Third Parties | | | | | | | | | |
| Cost of sales | | $ | 24,801 | | $ | 9,410 | | $ | 15,391 |
| Tons sold | | 156 | | 54 | | 102 | |||
| Purchased coal cost of sales per ton sold (GAAP) | | $ | 159 | | $ | 174 | | $ | (15) |
| Totals | | | | | | | | | |
| Cost of sales | | $ | 493,793 | | $ | 332,960 | | $ | 160,833 |
| Tons sold | | | 3,455 | | | 2,450 | | | 1,005 |
| Total cost of sales per ton sold (GAAP) | | $ | 143 | | $ | 136 | | $ | 7 |
| | | | | | | | | | |
| Refer to Non-GAAP Financial Measures for supplemental calculations of revenue per ton sold (FOB mine) and cash cost per ton sold (FOB mine) | | | | | | | | | |
Coal sales revenue for 2023 increased 23% from 2022, which was driven by the 41% increase in tons sold. The increase in sales volume was due to greater export sales and was aided by the Company’s increased capacity for production achieved during 2023. Revenue per ton sold decreased 13% from $231 per ton in 2022 to $201 per ton in 2023. Revenue per ton sold (FOB mine), a non-GAAP measure which excludes transportation revenues and demurrage, decreased 18% from $207 per ton in 2022 to $170 per ton in 2023 including company-produced coal and purchased coal. The decrease in both revenue per ton sold measures in 2023 was driven by the variability in index-based pricing for export sales.
Refer to Note 2—Summary of Significant Accounting Policies—Concentrations and Note 11—Revenues in Item 8, Part II for additional information regarding sales to customers.
Cost of sales. Our cost of sales increased 48% from 2022, which was driven by the increase in tons sold discussed above. Cost of sales per ton sold increased 5% from $136 per ton in 2022 to $143 per ton in 2023. Cash cost per ton sold (FOB mine), a non-GAAP measure which excludes transportation costs and idle mine costs, increased 3% from $108 per ton in 2022 to $111 per ton in 2023, including company-produced coal and purchased coal. The increase in both cost per ton sold measures in 2023 was primarily due to inflationary pressures on labor and supplies.
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Asset retirement obligation accretion. ARO accretion was $1.4 million for 2023 and $1.1 million for 2022. The higher level of accretion in 2023 was driven primarily by changes in estimates of future cash flows.
Depreciation, depletion, and amortization. Depreciation, depletion, and amortization expense totaled $54.3 million in 2023 compared to $41.2 million in 2022. The increase in 2023 occurred across all asset classes consistent with the Company’s initiative to grow production.
Selling, general and administrative expenses. Selling, general and administrative expenses were $48.8 million for 2023 compared to $40.0 million for 2022. The 22% increase in 2023 was primarily due to greater compensation-related expenses and headcount as well as increased spending for professional services consistent with the Company’s growth efforts.
Other income (expense), net. Other income, net was $18.3 million in 2023 compared to $2.6 million in 2022. The activity in 2023 was related mostly to insurance proceeds received in 2023 related to the 2022 Berwind ignition event that occurred in 2022 and the silo failure that occurred in 2018. The Company received proceeds of $17.0 million during 2023 and had accrued a recovery asset of $1.1 million in the previous period; thus, a gain of $15.9 million was recognized in 2023. This activity is not indicative of expected future results. The activity in 2022 was driven by the gain of $2.1 million recognized on the sale of mineral rights.
Interest expense, net. Interest expense, net was approximately $8.9 million in 2023 as compared to $6.8 million in 2022. The increase in net interest expense in 2023 was primarily due to increased use of the revolving credit facility during 2023.
Income tax expense. We recognized income tax expense of $22.4 million and $30.2 million in 2023 and 2022, respectively. The lower amount in 2023 was largely due to the decrease in income before taxes. Refer to Note 13 to the Consolidated Financial Statements included in Item 8 of Part I in this Annual Report on Form 10-K for an explanation of differences versus the statutory rate of 21%.
Year Ended December 31, 2022 compared to Year Ended December 31, 2021
Please see Part I, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report on Form 10-K for a discussion of the results of operation for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Non-GAAP Financial Measures
Adjusted EBITDA. Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.
We define Adjusted EBITDA as net income plus net interest expense; stock-based compensation; depreciation, depletion, and amortization expenses; income taxes; certain non-operating expenses (charitable contributions); and accretion of asset retirement obligations. A reconciliation of net income to Adjusted EBITDA is included below.
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Adjusted EBITDA is not intended to serve as a substitute to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Years ended December 31, | |||||||
| (In thousands) | 2023 | 2022 | 2021 | ||||||
| Reconciliation of Net Income to Adjusted EBITDA | | | | ||||||
| Net income | | $ | 82,313 | | $ | 116,042 | | $ | 39,759 |
| Depreciation, depletion, and amortization | | 54,252 | | 41,194 | | 26,205 | |||
| Interest expense, net | | 8,903 | | 6,829 | | 2,556 | |||
| Income tax expense | | 22,350 | | 30,153 | | 4,647 | |||
| EBITDA | | 167,818 | | 194,218 | | 73,167 | |||
| Stock-based compensation | | 12,905 | | 8,222 | | 5,260 | |||
| Other non-operating expenses | | | — | | | 1,000 | | | — |
| Accretion of asset retirement obligation | | 1,403 | | 1,115 | | 615 | |||
| Adjusted EBITDA | | $ | 182,126 | | $ | 204,555 | | $ | 79,042 |
Non-GAAP revenue per ton sold. Non-GAAP revenue per ton sold (FOB mine) is calculated as coal sales revenue less transportation revenues and demurrage, divided by tons sold. We believe revenue per ton (FOB mine) provides useful information to investors as it enables investors to compare revenue per ton we generate against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal prices from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing our financial performance. Revenue per ton sold (FOB mine) is not a measure of financial performance in accordance with U.S. GAAP and, therefore, should not be considered as a substitute to revenue under U.S. GAAP.
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, 2023 | | Year ended December 31, 2022 | ||||||||||||||
| | Company | Purchased | | | Company | Purchased | | | ||||||||||
| (In thousands, except per ton amounts) | Produced | Coal | | Total | Produced | Coal | | Total | ||||||||||
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 657,090 | | $ | 36,434 | | $ | 693,524 | | $ | 553,830 | | $ | 11,858 | | $ | 565,688 |
| Less: Adjustments to reconcile to Non-GAAP revenue (FOB mine) | | | | | | | | | | | | | | | | | | |
| Transportation | | (100,174) | | (4,723) | | (104,897) | | (57,299) | | (813) | | (58,112) | ||||||
| Non-GAAP revenue (FOB mine) | | $ | 556,916 | | $ | 31,711 | | $ | 588,627 | | $ | 496,531 | | $ | 11,045 | | $ | 507,576 |
| Tons sold | | 3,299 | | 156 | | 3,455 | | 2,396 | | 54 | | 2,450 | ||||||
| Non-GAAP revenue per ton sold (FOB mine) | | $ | 169 | | $ | 203 | | $ | 170 | | $ | 207 | | $ | 203 | | $ | 207 |
| | | | | | | | | | | | | | | | | | | |
| Refer to coal sales information for revenue per ton sold (GAAP) calculations | | | | | | | | | | | | | | | | | | |
Non-GAAP cash cost per ton sold. Non-GAAP cash cost per ton sold (FOB mine) is calculated as cash cost of sales less transportation costs and idle mine costs, divided by tons sold. We believe cash cost per ton sold provides useful information to investors as it enables investors to compare our cash cost per ton against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal cost from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing our financial performance. Cash cost per ton sold (FOB mine) is not a measure of financial performance in accordance with U.S. GAAP and, therefore, should not be considered as a substitute to cost of sales under U.S. GAAP.
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| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, 2023 | | Year ended December 31, 2022 | ||||||||||||||
| | Company | Purchased | | | Company | Purchased | | | ||||||||||
| (In thousands, except per ton amounts) | Produced | Coal | | Total | Produced | Coal | | Total | ||||||||||
| | | | | | | | | | | | | | | | | | | |
| Cost of sales | | $ | 468,992 | | $ | 24,801 | | $ | 493,793 | | $ | 323,550 | | $ | 9,410 | | $ | 332,960 |
| Less: Adjustments to reconcile to Non-GAAP cash cost of sales | | | | | | | | | | | | | | | | | | |
| Transportation costs | | (101,564) | | (4,175) | | (105,739) | | (57,300) | | (813) | | (58,113) | ||||||
| Idle mine costs | | (3,978) | | | — | | | (3,978) | | | (9,474) | | | — | | | (9,474) | |
| Non-GAAP cash cost of sales | | $ | 363,450 | | $ | 20,626 | | $ | 384,076 | | $ | 256,776 | | $ | 8,597 | | $ | 265,373 |
| Tons sold | | 3,299 | | 156 | | 3,455 | | 2,396 | | 54 | | 2,450 | ||||||
| Non-GAAP cash cost per ton sold (FOB mine) | | $ | 110 | | $ | 132 | | $ | 111 | | $ | 107 | | $ | 158 | | $ | 108 |
| | | | | | | | | | | | | | | | | | | |
| Refer to coal sales information for cost per ton sold (GAAP) calculations | | | | | | | | | | | | | | | | | | |
2024 Sales Commitments
As of December 31, 2023, we had entered into forward sales contracts for approximately 1.4 million tons to North American customers at an average fixed price of $166 per ton, excluding freight, as well as roughly 2.1 million additional tons to export customers priced against various benchmark indices. The Company expects to satisfy approximately 88% of these commitments in 2024 and the remainder in 2025. Sales commitments of another 0.4 million tons were obtained subsequent to December 31, 2023 for delivery in 2024. We expect the shift to more export sales in the Company’s mix of revenue that occurred in 2023 to continue during 2024, which may lead to volatility in revenues due to index-based pricing.
Liquidity and Capital Resources
Our primary source of cash is proceeds from the sale of our coal production to customers. Our primary uses of cash include the cash costs of coal production, capital expenditures, acquisitions, royalty payments, and other operating expenditures.
Cash flow information is as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Years ended December 31, | |||||||
| (In thousands) | 2023 | 2022 | 2021 | ||||||
| Consolidated statement of cash flow data: | | | | ||||||
| Cash flows provided by operating activities | | $ | 161,036 | | $ | 187,870 | | $ | 53,340 |
| Cash flows used for investing activities | | (72,211) | | (145,708) | | (59,613) | |||
| Cash flows (used for) provided by financing activities | | (82,517) | | (28,495) | | 22,369 | |||
| Net change in cash and cash equivalents and restricted cash | | $ | 6,308 | | $ | 13,667 | | $ | 16,096 |
Cash flows provided by operating activities during 2023 decreased $26.8 million versus the prior year driven by lower cash earnings. Changes in operating assets and liabilities were favorable versus the prior year due to a variety of factors, most notably, variations in income tax payments as the Company received an $11.8 million refund in 2023.
Net cash used for investing activities during 2023 decreased $73.5 million versus the prior year primarily due to lower capital expenditures and acquisition-related activity of $40.1 million and $22.2 million, respectively. The decrease in capital expenditures was due to the Company’s progress related to strategic growth projects at our Elk Creek and Berwind mining complexes. The strategic acquisitions Maben Coal and Ramaco Coal, as well as the concurrent sale of mineral rights, took place in 2022 and no such transactions occurred in 2023. In addition, the Company received $11.2 million of insurance proceeds during 2023 related to property, plant, and equipment claims from the 2022 Berwind ignition event and 2018 silo failure.
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Net cash used for financing activities was $54.0 million higher in 2023 versus 2022, which was driven by greater repayment of debts and similar financings including $25.0 million and $9.6 million related to the Ramaco Coal and Maben Coal asset acquisitions, respectively. In addition, the Company also paid $5.8 million more cash dividends during 2023, which was largely due to $3.6 million of cash dividends paid on Class B common stock that was initially distributed in 2023, as part of the Company’s strategy to increase value for its shareholders. The Company declared an additional quarterly cash dividend for holders of Class B common stock in February 2024, subsequent to the date of the financial statements, in the amount of $0.242 per share of Class B common stock.
All cash dividends declared to date for Class B common stock were based on 20% of CORE royalty and infrastructure fees for the previous quarter as shown below.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Three months ended December 31, | Three months ended September 30, | | Three months ended June 30, | | ||||
| (In thousands) | 2023 | 2023 | | 2023 | | ||||
| | | | | | | | | | |
| Royalties | | | | | | | | | |
| Ramaco Coal | $ | 3,276 | | $ | 3,572 | | $ | 1,351 | |
| Amonate Assets | | 722 | | | 614 | | | 752 | |
| Other | | 14 | | | 13 | | | — | |
| Total Royalties | $ | 4,012 | | $ | 4,199 | | $ | 2,103 | |
| | | | | | | | | | |
| Infrastructure Fees | | | | | | | | | |
| Preparation Plants (Processing at $5.00/ton) | $ | 4,432 | | $ | 4,521 | | $ | 3,433 | |
| Rail Load-outs (Loading at $2.50/ton) | | 2,198 | | | 2,202 | | | 1,726 | |
| Total Infrastructure Fees (at $7.50/ton) | $ | 6,630 | | $ | 6,723 | | $ | 5,159 | |
| | | | | | | | | | |
| CORE Royalty and Infrastructure Fees | $ | 10,642 | | $ | 10,922 | | $ | 7,262 | |
| | | | | | | | | | |
| Total Cash Available for Dividend for Class B Common Stock | $ | 10,642 | | $ | 10,922 | | $ | 7,262 | |
| | | | | | | | | | |
| 20% of Cash Available for Dividend for Class B Common Stock | $ | 2,128 | | $ | 2,184 | | $ | 1,452 | |
Restricted cash balances at December 31, 2023 and December 31, 2022 were $0.8 million and $0.9 million, respectively, and consisted of funds held in escrow for potential future workers’ compensation claims. Restricted cash balances were included in other current assets on the consolidated balance sheets.
Please see Part I, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report on Form 10-K for a discussion of the Company’s cash flows for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Indebtedness
At December 31, 2023, we had $91.4 million of outstanding debts, or $90.2 million net of unamortized discounts and issuance costs. Our indebtedness was comprised of $42.5 million of outstanding borrowings under the Revolving Credit Facility, $34.5 million of Senior Notes ($33.3 million net of unamortized discounts and issuance costs), $11.4 million of unpaid financing related to the Maben Coal assets acquisition, and $3.0 of various equipment loans. Of these amounts, $56.5 million is expected to be repaid in 2024, including $42.5 million of revolver borrowings that were repaid shortly after the balance sheet date using funds from current operations and $11.4 million of acquisition financing that is contractually due in 2024. The remaining amount of $34.9 million, or $33.7 net of unamortized discounts and issuance costs, is mostly comprised of the Senior Notes due in 2026.
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The Company’s outstanding debt decreased approximately $37.0 million in 2023 and was due primarily to the repayment of financing associated with the previous acquisitions of Ramaco Coal and Maben Coal in the amount of $40.0 million and $9.6 million, respectively. The Company’s outstanding borrowings under the Revolving Credit Facility increased $17.5 million compared to 2022.
The acquisition of Ramaco Coal helps to reduce royalty expenses associated with the Company’s metallurgical operations in the Appalachian basin and, along with the acquisition of Maben Coal, complement our existing low-vol portfolio, both of which help achieve the Company’s objective of remaining among the lowest cost producers of metallurgical coal in the U.S. In addition, the acquisition of Ramaco Coal includes potential concentrations of rare earth elements and is being used to support the Company’s possible expansion into the manufacture and commercialization of advanced carbon products and materials from coal, both of which provide additional growth opportunities in the future. The financing associated with the acquisition of Ramaco Coal, which was provided by a related party, was repaid in full during 2023.
Revolver borrowings are typically used for the management of our normal operating cash position. Revolver borrowings that were outstanding at December 31, 2023 were repaid in full during January 2024.
In addition to the debts discussed above, the Company finances the payment of premiums associated with various insurance policies. The Company’s liability at December 31, 2023 was $4.0 million, which must be repaid in 2024.
The Company also has various finance leases for mining equipment, which generally include terms from three to five years. The Company’s total liability for finance leases at December 31, 2023 was $10.4 million, which includes $5.5 million due in 2024 and $4.9 million due thereafter.
Refer to Notes 7 and 8 to the Consolidated Financial Statements included in Item 8 of Part I in this Annual Report on Form 10-K for additional information on indebtedness and leases.
Liquidity
As of December 31, 2023, our available liquidity was $90.6 million, comprised of $42.0 million of cash and cash equivalents and $48.6 million of availability under the Revolving Credit Facility for future borrowings. Total current assets were in excess of total current liabilities, which included $42.5 million of revolver borrowings repaid in January 2024, by $19.7 million. The Company is party to an arrangement that began in 2023 whereby our cash and cash equivalents are placed at various banks in amounts no greater than the $250,000 FDIC-insured limit to help safeguard against potential losses in the financial sector. The Revolving Credit facility, which includes multiple lending parties and has a maturity date of February 15, 2026, provides added flexibility to the Company to pursue our strategic growth initiatives and manage our normal operating cash position as well as withstand potential changes in macroeconomic conditions.
The terms of the Revolving Credit facility include covenants limiting the ability of the Company to incur additional indebtedness, make investments or loans, incur liens, consummate mergers and similar fundamental changes, make restricted payments, and enter into transactions with affiliates. The terms of the facility also require the Company to maintain certain covenants, including fixed charge ratio and compensating balance requirements. A fixed charge coverage ratio of not less than 1.10:1.00, calculated as of the last day of each fiscal quarter, must be maintained by the Company. In addition, the Company must maintain an average daily cash balance of $5 million, as determined on a monthly basis, in a dedicated account as well as an additional $1 million in a separate dedicated account to assure future credit availability. At December 31, 2023, we were in compliance with all debt covenants under the Revolving Credit Facility.
Our primary use of cash includes capital expenditures for mine development, infrastructure, and equipment as well as ongoing operating expenses and repayment of financing associated with previous acquisitions. As of the date of this Annual Report, we expect to fund our capital and liquidity requirements for the next twelve months and the reasonably foreseeable future with cash on hand, borrowings under the Revolving Credit Facility, and projected cash
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flows from operations. Factors that could adversely impact our future liquidity and ability to carry out our capital expenditure program include the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Timely delivery of our product by rail and other transportation carriers; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Late payments of accounts receivable by our customers; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Cost overruns in our purchases of equipment needed to complete our mine development plans; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Delays in completion of development of our various mines, processing plants and refuse disposal facilities, which would reduce the coal we would have available to sell and our cash flow from operations; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adverse changes in the metallurgical coal markets that would reduce the expected cash flow from operations. |
If future cash flows were to become insufficient to meet our liquidity needs or capital requirements, due to changes in macroeconomic conditions or otherwise, we may reduce our expected level of capital expenditures for new mine production and/or fund a portion of our capital expenditures through the issuance of debt or equity securities, new debt arrangements, or from other sources such as asset sales.
On September 1, 2023, the Company filed a shelf registration statement to sell any combination of Class A common stock, Class B common stock, preferred stock, depositary shares, debt securities, warrants, and rights at an aggregate initial offering price of up to $400.0 million, which was declared effective on September 29, 2023. However, the Company has no specific plans to raise capital at this time and no securities may be sold until a prospectus supplement describing the method and terms of any future offering is delivered.
In March 2024, Ramaco initiated actions to extend the maturity date and increase the size of its existing Revolver facility. The Company is targeting a $200 million facility with a $75 million accordion feature and a maturity date of five years from the closing date. The Company hopes to achieve a successful syndication of the new facility during the second quarter of 2024, which would strengthen our liquidity and provide additional flexibility in support of the Company’s strategic initiatives and operations.
Working Capital
Accounts receivable were $96.9 million at December 31, 2023, which increased $55.7 million versus December 31, 2022 driven by the $67.5 million increase in fourth quarter revenues. Inventories were $37.2 million at December 31, 2023, which decreased $7.8 million versus December 31, 2022 driven by the logistical and rail challenges we experienced in 2022. Accounts payable were $51.6 million at December 31, 2023, up from December 31, 2022 due to increased spending.
Capital Requirements
During 2022 we spent $123.0 million for capital additions, over 75% of which related to ongoing growth projects, including the increase in capacity to accommodate higher production levels at the Elk Creek and Berwind mining complexes. During 2023 the Company spent $82.9 million on capital additions, a significantly lower amount versus 2022, as the Company has made substantial progress in achieving its growth initiatives.
We anticipate capital expenditures of approximately $53-63 million in 2024, which will likely be weighted more toward maintenance capital than growth capital and development projects. The shift toward maintenance capital is due to the Company’s substantial investments in growth projects in previous periods and its progress to date regarding these initiatives. Despite this shift, it should be noted that the Company entered into an agreement during February 2024 to purchase preparation plant assets for the Maben Complex at a price of $3 million. The Company anticipates spending an additional $8 million in capital expenditures related to the plant in 2024. These assets will be relocated to the Maben Complex and reassembled there for future use with the purpose of reducing the cost of transporting current raw coal production. These assets will also provide the Company with a preparation facility to handle additional future production from a deep mine complex at Maben should the Company decide in the future to pursue such development.
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Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2023:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Payments due by period | |||||||||||||
| | | | 2 – 3 | 4 – 5 | More than 5 | ||||||||||
| (In thousands) | | Total | 1 year | years | years | years | |||||||||
| Minimum coal lease and royalty obligations | | $ | 27,195 | | $ | 3,358 | | $ | 6,486 | | $ | 6,316 | | $ | 11,035 |
| Debt, excluding interest | | | 91,383 | | | 56,534 | | | 34,849 | | | — | | | — |
| Insurance financing | | | 4,037 | | | 4,037 | | | — | | | — | | | — |
| Leases | | | 11,940 | | | 6,075 | | | 3,953 | | | 1,912 | | | — |
| Take-or-pay obligations | | 20,237 | | 5,612 | | 9,000 | | 5,625 | | — | |||||
| Total | | $ | 154,792 | | $ | 75,616 | | $ | 54,288 | | $ | 13,853 | | $ | 11,035 |
Minimum royalties represent the contractual minimum amounts to be paid monthly, quarterly or annually for the right to access mineral properties and mine certain reserves and resources. The amounts are generally recoupable against future production royalties to be paid.
Refer to the previous discussion of Indebtedness above for additional information regarding the Company’s outstanding debt, insurance financing, and finance leases. Leases payments in the table above include payments for both financing and operating leases.
Take-or-pay obligations represent those liquidated damage obligations as determined by contract volume minimums for transportation of coal at the representative rates of transportation or a portion thereof. Additional take-or-pay commitments for the next annual period were renewed after the balance sheet date and have been excluded from the table above. These commitments are estimated at approximately $14 million based on last year’s average rate.
Asset retirement obligations have been excluded from the table above. Accounting for asset retirement obligations requires a number of estimates, including the amount and timing of payments to satisfy the obligation. The total liability recognized on the Company’s balance sheet for asset retirement obligations was $29.0 million at December 31, 2023. Refer to Critical Accounting Policies and Estimates below as well as Note 5 to the Consolidated Financial Statements included in Item 8 of Part I in this Annual Report on Form 10-K for additional information.
Estimated payments related to worker’s compensation and occupational disease obligations have also been excluded from the table above. Refer to Critical Accounting Policies and Estimates below for additional information related to these obligations. Refer also to Note 6 to the Consolidated Financial Statements included in Item 8 of Part I in this Annual Report on Form 10-K for additional information related to accrued expenses and other long-term liabilities.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations, or cash flows to result from these arrangements. We primarily use surety bonds to secure our financial obligations related to reclamation and other matters. Total surety bonds at December 31, 2023, were $27.2 million.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenue and expenses reported for the period then ended.
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Coal Reserves. Our coal reserves and resources are generally updated on an annual basis. There are numerous uncertainties inherent in estimating quantities and values of coal reserves and resources, including many factors beyond our control. As a result, estimates of coal reserves and resources are by their nature uncertain. Information about our reserves and resources consists of estimates based on engineering, economic, and geological data assembled by third-party qualified persons. Information used to determine recoverable reserves and resources include geological conditions, historical production from the area compared with production from other producing areas, assumed effects of regulations and taxes by governmental agencies, assumptions governing future prices, and future operating costs. Each of these may in fact vary considerably from the assumptions used in estimating reserves and resources. For these reasons, estimates of economically recoverable quantities of coal attributable to a particular group of properties, and classification of these reserves and resources based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues, and expenditures with respect to reserves and resources will likely vary from estimates and these variances may be material. Variances could affect our projected future revenues and expenditures, valuation of coal reserves and resources, and amortization and depletion of mine development costs and mineral rights.
Asset Retirement Obligations. We initially recognize as a liability an asset retirement obligation, or ARO, associated with the retirement of a tangible long-lived asset in the period in which it is incurred or a reasonable estimate of fair value can be made, with an associated increase in the carrying amount of the related long-lived asset. The initially recognized asset retirement cost is amortized using the same method and useful life as the long-lived asset to which it relates. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The liability is reduced as the reclamation work is performed and the related costs are applied.
Estimating the ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit-adjusted discount rates, and the timing of the related cash flows. On at least an annual basis, we review our ARO liabilities and make necessary adjustments for significant increases in disturbed acreage, mining permit changes, significant mine plan revisions, and changes in cost estimates or timing of performance. To the extent future revisions are made to the ARO liability, a corresponding adjustment is made to the related asset.
Our ARO liabilities at December 31, 2023 were nearly flat versus December 31, 2022 as the accretion of the liability during the year and the downward revision to estimates were mostly offsetting. We lowered our inflation per year assumption from 3.75% used in 2022 to 3% in 2023 based on macroeconomic trends. If our assumptions differ from actual experience, or if changes in the regulatory environment occur, our actual cash expenditures and costs that we incur could be materially different than currently estimated.
Occupational Disease (Pneumoconiosis) Obligations. We recognize as a liability to provide for occupational illness (pneumoconiosis) benefits to eligible employees, former employees and dependents as required by the Mine Act. The occupational illness benefit obligation represents the present value of the actuarially computed liabilities for such benefits over the employees’ applicable years of service.
Estimating the future occupational disease (pneumoconiosis) benefits requires management to make estimates and judgments regarding timing and existence of a liability utilizing third-party actuaries to assist in preparing what constitutes adequate liability amounts. Inherent in the calculation are numerous assumptions and judgments including the ultimate costs, mortality factors, credit-adjusted discount rates, and timing of settlement. These estimates are subject to uncertainty due to a variety of factors, including limited Ramaco-specific claim volume and future cost trends. As a result, volatility in future estimates may occur and actual costs could differ significantly from the estimated amounts.
Impairment of Long-lived Assets. We review our held-and-used long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which is generally at the mine level or at the mining complex level for mines that share infrastructure and/or developed access. Additional judgment may be required for development properties.
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Events and circumstances that may trigger a recoverability assessment include, but are not limited to, a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in the physical condition of the asset(s), and an accumulation of costs significantly in excess of the amount originally expected. We generally do not view short-term declines in metallurgical coal prices as a triggering event for conducting impairment tests because of historic price volatility. In addition, a temporary idling of operations at a particular mine or complex may or may not be viewed as a triggering event depending on the remaining life of the mine, the length of time the mine is expected to be idle, and the amount of incremental costs expected to resume operations.
When events or changes in circumstances occur that trigger a recoverability test, the test is performed by comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment loss is recorded for the excess of the carrying amount over the estimated fair value of the asset or asset group, if any.
We make various assumptions, including assumptions regarding future cash flows in our assessments of long-lived assets for impairment. The assumptions about future cash flows and growth rates are based on the current and long-term business plans related to the long-lived assets.
Income Taxes. We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for future consequences of events that have been reflected in our financial statements or tax returns for each tax paying jurisdiction in which we operate. This process requires management to make judgments regarding the timing and probability of the ultimate tax impact of various agreements and transactions. We initially recognize the effects of a tax position when it is more than 50% likely, based on the technical merits that the position will be sustained upon examination. Our determination of whether or not a tax position has met the recognition threshold depends on the facts, circumstances, and information available at the reporting date.
We provide for deferred income taxes for temporary differences arising from differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates. A valuation allowance may be recorded to reflect the amount of future tax benefits that management believes are not likely to be realized. The assessment takes into account expectations of future taxable income or loss, available tax planning strategies and the reversal of temporary differences. The development of these expectations involves the use of estimates such as production levels, operating profitability, timing of development activities and the cost and timing of reclamation work. If actual outcomes differ from our expectations, we may record an additional valuation allowance through income tax expense in the period such determination is made. The Company had no valuation allowance at December 31, 2023.
Actual income taxes could vary from the estimates and judgments above due to future changes in income tax law, significant changes in the jurisdictions in which we operate, our ability to generate sufficient future taxable income, or unpredicted results from the final determination of each year’s liability by taxing authorities. These changes could have a significant impact on our financial position.
Recent Accounting Pronouncements. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 2—Summary of Significant Accounting Policies—Recent Accounting Pronouncements.”