Ramaco Resources, Inc.: Form 10-Q for the period ended Mar 31, 2021

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report, as well as the financial statements and related notes appearing elsewhere in this Quarterly Report. The following discussion 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 Quarterly Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and in our Annual Report under the heading “Item 1A. 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. As of March 31, 2021, we had a 262-million-ton reserve base of high-quality metallurgical coal and a development portfolio including four primary properties. Our plan is to complete development of our existing properties and grow production to more than 4-4.5 million clean tons of metallurgical coal, subject to market conditions, permitting and additional capital deployment. 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. have been driven in recent periods by several market dynamics and trends, such as the global economy, a strong U.S. dollar and accelerating production cuts.

During the first quarter of 2021, we sold 0.4 million tons of coal. Of this, 46% was sold in North American markets and 54% was sold in export markets, excluding Canada, principally to Europe, South America, Asia and Africa. During the first quarter of 2020, 73% of our sales were sold in North American markets, with the remaining 27% being sold into the export markets, excluding Canada.

At March 31, 2021, we had outstanding performance obligations for the remainder of 2021 of approximately 1.2 million tons for contracts with fixed sales prices averaging $87/ton and 0.3 million tons for contracts with index-based pricing mechanisms.

The Company was adversely affected by the deterioration and increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19. After the initial outbreak, we observed a declining demand for, and declines in the spot price of, metallurgical coal as business and consumer activity decelerated across the globe. In the first quarter of 2021, we saw an increase in demand from our primary customers, as the global economic recovery began. In first quarter of 2021, U.S. steel prices increased significantly due to this recovery and the effects from large-scale government stimulus measures.

We continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities.

Results of Operations

(In thousands)

We reported a net income of $4.1 million and Adjusted EBITDA of $11.5 million in the first quarter of 2021, which were each higher than that of the first quarter of 2020. In the first quarter of 2021, we benefited from a lower cash cost per ton sold and recognition of $2.5 million for the CARES Act Employee Retention Tax Credit. We expect the company will qualify for and recognize a similar amount for the CARES Act Employee Retention Tax Credit in the second quarter of 2021.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Revenue. Our revenue includes sales to customers of Company produced coal and 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. Revenue per ton sold (FOB mine) and cash cost per ton sold (FOB mine) each exclude the impact of transportation billings and costs.

Coal sales information is summarized as follows:

(In thousands)

Coal sales revenue in the first quarter of 2021 was $43.5 million, 4% higher than in the first quarter of 2020 principally due to slightly higher volumes and higher billings for transportation in the first quarter of 2021. Revenue per ton sold (FOB mine) declined 5% from $93/ton in the first quarter of 2020 to $88/ton in the first quarter of 2021. We sold 422 thousand tons of coal in the first quarter of 2021, a 1% increase over the same period of 2020.

Cost of sales. Our cost of sales totaled $31.2 million for the three months ended March 31, 2021 as compared with $30.9 million for the same period in 2020, a slight increase due to higher transportation costs from a higher mix of export shipments. The cash cost per ton sold (FOB mine) for the first quarter of 2021 was $59, compared with $67 in the first quarter of 2020. Improvement in our cash cost per ton sold in the 2021 period is principally due to higher production volumes, which better leveraged our fixed costs, along with a severance tax recovery of $1.0 million for one of our mines.

Asset retirement obligation accretion. Asset retirement obligation accretion was $0.2 million for the three months ended March 31, 2021 and $0.1 million for the three months ended March 31, 2020.

Depreciation and amortization. Depreciation and amortization expense was $6.2 million and $5.0 million for each of the respective periods ended March 31, 2021 and 2020, principally due to higher production volumes in the first quarter of 2021.

Selling, general and administrative. Selling, general and administrative expenses were $4.7 million for both of the three-month periods ended March 31, 2021 and 2020.

Other income. Other income was $2.9 million for the three months ended March 31, 2021, as compared with $1.2 million for the three months ended March 31, 2020, principally due to the recognition of $2.5 million for the CARES Act Employee Retention Tax Credit during the three months ended March 31, 2021.

Interest expense, net. Interest expense, net was approximately $0.2 million for the three month period ended March 31, 2021 and $0.3 million for the same period in 2020.

Income tax expense. During the three months ended March 31, 2021, we recognized a tax benefit of $0.4 million due to legislative changes in the state of West Virginia. The effective tax rate for the three months ended March 31, 2021, excluding this discrete benefit, was approximately 5%. Our effective tax rate for the three months ended March 31, 2020 was also 5%. The primary difference from the federal statutory rate of 21% in each period is related to state taxes, permanent differences for non-deductible expenses and depletion expense for income tax purposes.

Cash taxes paid for 2021 are expected to be less than $40 thousand.

Liquidity and Capital Resources

At March 31, 2021, we had $5.5 million of cash and cash equivalents and $13.6 million available under our existing credit agreements for future borrowings.

Significant sources and uses of cash during the first three months of 2021

Sources of cash:

• Cash flows from operating activities were $0.5 million. This included a negative impact from the primary components of our working capital (receivables, inventories and accounts payable) of a net $8.4 million, primarily associated with a build-up of inventories.
• We made net borrowings of $3.0 million principally to manage our normal operating cash position and to fund capital expenditures.

Uses of cash:

• Capital expenditures were $3.7 million principally for development of the Triad mine and for infrastructure at our Elk Creek mining complex.

At March 31, 2021, we also had $1.0 million of restricted cash balances, classified in other current assets in the consolidated balance sheets, for potential future workers’ compensation claims.

Future sources and uses of cash

Our primary use of cash includes capital expenditures for mine development and for ongoing operating expenses. We expect to fund our capital and liquidity requirements with cash on hand, anticipated cash flows from operations and borrowings discussed in more detail below. We believe that current cash on hand, cash flow from operations and available liquidity under our existing credit agreements will be sufficient to meet our capital expenditure and operating plans.

Additional factors that could adversely impact our future liquidity and ability to carry out our capital expenditure program include:

• Timely delivery of our product by rail and other transportation carriers;
• Timely payment of accounts receivable by our customers;
• Cost overruns in our purchases of equipment needed to complete our mine development plans;
• 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
• Adverse changes in the metallurgical coal markets that would reduce the expected cash flow from operations.

If future cash flows are insufficient to meet our liquidity needs or capital requirements, we may reduce our expected level of capital expenditures and/or fund a portion of our capital expenditures through the issuance of debt or equity securities, the entry into debt arrangements or from other sources, such as asset sales.

Indebtedness

*Revolving Credit Facility and Term Loan—*On November 2, 2018, we entered into the Credit Agreement with KeyBank. The Credit Agreement was amended on February 20, 2020 and on March 19, 2021, and consists of Term Loan and the Revolving Credit Facility. All personal property assets, including, but not limited to accounts receivable, coal inventory and certain mining equipment are pledged to secure the Credit Agreement.

The Revolving Credit Facility has a maturity date of December 31, 2023 and bears interest based on LIBOR + 2.0% or Base Rate + 1.5%. Base Rate is the highest of (i) KeyBank’s prime rate, (ii) Federal Funds Effective Rate + 0.5%, or (iii) LIBOR + 2.0%. Advances under the Revolving Credit Facility are made initially as base rate loans, but may be converted to LIBOR rate loans at certain times at our discretion. At March 31, 2021, $11.6 million was outstanding under the Revolving Credit Facility and we had remaining availability of $13.6 million.

The Term Loan is secured under a Master Security Agreement with a pledge of certain underground and surface mining equipment, bears interest at LIBOR + 5.15% and is required to be repaid in monthly installments of $278 thousand including accrued interest. The outstanding principal balance under the Term Loan was $5.9 million at March 31, 2021.

The Credit Agreement contains usual and customary covenants including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants. At March 31, 2021, we were in compliance with all debt covenants under the Credit Agreement.

*Equipment Financing Loan—*On April 16, 2020, we entered into an equipment loan with Key Equipment Finance, a division of KeyBank, as lender, in the principal amount of approximately $4.7 million for the financing of existing underground and surface equipment. The equipment loan bears interest at 7.45% per annum and is payable in 36 monthly installments of $147 thousand. There is a 3% premium for prepayment of the note within the first 12 months. This premium declines by 1% during each successive 12-month period. The outstanding principal balance under the Equipment Financing Loan was $3.4 million at March 31, 2021.

SBA Paycheck Protection Program Loan— On April 20, 2020, we received proceeds from the PPP Loan in the amount of approximately $8.4 million from KeyBank, as lender, pursuant to the PPP of the CARES Act. The purpose of the PPP is to encourage the continued employment of workers. We used all of the PPP Loan proceeds for eligible payroll expenses, lease, interest and utility payments.

The PPP Loan is evidenced by a promissory note dated April 16, 2020, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

The PPP Loan matures on April 16, 2022 and bears interest at a rate of 1% per annum. Pursuant to the subsequently enacted Paycheck Protection Flexibility Act of 2020, we are permitted to defer required monthly payments of principal and interest until such time as an approval or denial of forgiveness is received from the SBA.

Our application for forgiveness was approved by KeyBank and is currently being reviewed by the SBA. We believe it is probable that the full amount of the PPP Loan principal, together with accrued interest thereon, will be forgiven.

Off-Balance Sheet Arrangements

At March 31, 2021, we had no material off-balance sheet arrangements.

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 and amortization expenses and any transaction related costs. A reconciliation of net income to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.

(In thousands)

Non-GAAP revenue per ton

Non-GAAP revenue per ton (FOB mine) is calculated as coal sales revenue less transportation costs, 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 condition. 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 an alternative to revenue under U.S. GAAP.

(In thousands, except per ton amounts)

Non-GAAP cash cost per ton sold

Non-GAAP cash cost per ton sold is calculated as cash cost of sales less transportation 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 condition. Cash cost per ton sold is not a measure of financial performance in accordance with U.S. GAAP and therefore should not be considered as an alternative to cost of sales under U.S. GAAP.

(In thousands, except per ton amounts)

Quantitative and qualitative disclosures about market risk are included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of our Annual Report.

Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.

There were no significant changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our business, financial condition, cash flows or future results of operations.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Annual Report.