Warrior Met Coal's Bold Bet on Blue Creek: A New Era for the Company
Dirty money but a ton of it.
Investment Report
NYSE: HCC
Market capitalization: 2881.8 M of dollars
Stock price: 55.09
P/E ratio: 6.81
Div yield: 0.58%
Key points:
Growth Opportunity with Blue Creek: Warrior Met Coal offers rare growth potential in the coal industry with the Blue Creek mine expected to boost production by 2027.
Long-Term Coal Price Play: Unlike competitors, Warrior focuses on long-term coal price trends, providing a more stable investment opportunity.
Low-Cost Production: As a low-cost producer, Warrior can remain profitable even during market downturns, giving it a competitive edge.
Post-2027 Flexibility: After 2027, Warrior can either expand production further or return capital to shareholders through buybacks.
1. Coal market:
While environmental policies and ESG initiatives are pushing for the eventual phase-out of hydrocarbon fossil fuels like coal, this shift may still be years away. In the meantime, the demand for coal, particularly metallurgical coal (met coal), remains robust, driven by global steel production needs. Despite divestments from coal by some large investors, met coal continues to play a critical role in infrastructure and industrial growth, especially in emerging economies.
Met coal is indispensable in steelmaking, and its demand is expected to persist as global construction and industrial activities continue. For a more detailed analysis of the coal market and its investment opportunities, check out my full thesis below:
https://smallcaptreasures.substack.com/p/the-forgotten-commodity-coals-quiet
2. Introduction:
Warrior Met Coal (NYSE: HCC) is one of the leading producers and exporters of premium-quality metallurgical coal in the United States, specializing in coal used exclusively for steelmaking. The company emerged from the bankruptcy of Walter Energy in 2015, successfully transforming its core assets into a financially stable entity under the leadership of CEO Walter Scheller. With a strong focus on operational efficiency and cost management, Warrior Met Coal has generated consistent free cash flow, returning $1.4 billion to stockholders since 2017, and maintains a healthy balance sheet with a net cash position of $550 million.
The company operates two active underground mines in Alabama’s Blue Creek coal seam, renowned for its high-quality coking coal with low sulfur content and strong coking properties. This coal is comparable to the premium Hard Coking Coal (HCC) mined in Australia, giving Warrior a strategic advantage in the global market. A key growth driver for the company is its Blue Creek Mine expansion, which is expected to increase production capacity by 60% and extend production for another 50 years. The expansion, projected to be fully operational by mid-2026, could boost Warrior’s annual output from 8 million tonnes to 12.8 million tonnes.
With its strategic location near the port of Mobile, Alabama, Warrior Met Coal capitalizes on its ability to ship coal globally via sea routes, offering flexibility and access to international markets. This, combined with its low-cost production model, positions Warrior Met Coal as a key player in the global steel industry. Despite the cyclical nature of the coal market, the company’s strong margins, focus on cost efficiency, and growth potential through the Blue Creek project make it an attractive long-term investment opportunity.
3. Mining operations:
Warrior Met Coal operates three mines: Mine 7, Mine 4, and the Blue Creek mine, which is currently under development. The company provides excellent transparency in showcasing the details of its mining operations, and I'll reference their most recent report to highlight the specifics of each mine.
As shown, Warrior Met Coal produces premium-quality metallurgical coal, all of which is exported to international markets. This export focus can be a strategic advantage, particularly if the demand for steel in the U.S. weakens, as the company is less reliant on domestic market conditions.
4. Competitive advantages:
Warrior Met Coal benefits from several key competitive advantages that position it strongly in the global metallurgical coal market. One of its primary strengths lies in the strategic location of its mines. All of Warrior’s mines are situated near each other in Alabama, and more importantly, close to key East Coast ports. This proximity significantly reduces transportation and logistical costs, giving Warrior a cost advantage over many competitors. With the development of the Blue Creek mine, the company is set to lower its production costs even further, reinforcing its position as one of the cheapest producers of high-quality metallurgical coal globally.
Another key advantage is the premium quality of the coal Warrior produces. The high-quality metallurgical coal, with low sulfur content and excellent coking properties, is in great demand across global steel markets. This demand gives Warrior access to a broad customer base, and its premium product allows the company to secure competitive pricing and favorable contracts in international markets. Combined, these factors make Warrior Met Coal a leader in the production of high-grade met coal, with a strong competitive position supported by cost efficiency and product quality.