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.
5.   Coal production:
Warrior Met Coal’s current production capacity stands at 8 million tonnes, with actual production reaching 7.6 million tonnes in the last year. This solid production base is set to expand significantly with the development of the Blue Creek mine, which is expected to add an additional 4.8 million tonnes of run-rate production once fully operational. Miner production at Blue Creek will begin next quarter, with full production expected by the second quarter of 2026. Upon completion, Warrior’s total production capacity will increase to 12.8 million tonnes, with the potential to reach 17.6 million tonnes if the company decides to build a second wall at Blue Creek.
During the mine’s development phase, Warrior will store any coal produced by Blue Creek before the second half of 2025 as inventory until the preparation plant comes online. Once Blue Creek reaches full capacity, Warrior Met Coal is expected to solidify its position as a predominant producer of High-Vol A (HVA) coal which trades at a slight discount compared to LV coal.
6.   Leadership:
Walter J. Scheller has been the CEO of Warrior Met Coal since its formation in 2015 following the bankruptcy of Walter Energy, where he also served as CEO. His extensive background in the coal industry includes senior roles at Peabody Energy, CNX Gas Corporation, and CONSOL Energy. Scheller's leadership has been crucial in transforming Warrior Met Coal into a leading producer of metallurgical coal, with a focus on financial discipline and operational efficiency. He holds degrees in Mining Engineering from West Virginia University, a law degree from Duquesne University, and an MBA from the University of Pittsburgh. Scheller also owns 0.65% of Warrior Met Coal, demonstrating his personal investment in the company's success.
7.   Capital allocation
Warrior Met Coal's capital allocation strategy prioritizes maintaining and growing its business, with dividends and share buybacks considered once those goals are met. Historically, the company has focused on paying dividends to shareholders, with occasional smaller buybacks. However, this focus shifted when Warrior began heavily investing in the development of the Blue Creek mine, leading to a significant reduction in dividend payments.
The current emphasis on the Blue Creek project reflects the company’s long-term vision of enhancing production capacity, lowering costs, and boosting profitability. Once the investment in Blue Creek is completed, Warrior plans to resume dividend payments and increase share buybacks.
There is ongoing debate among coal investors regarding capital allocation strategies. Some compare Warrior Met Coal’s approach to companies like Alpha Metallurgical Resources (AMR), which focus primarily on aggressive buybacks. While buying back 20% of shares can drive shareholder returns, Warrior’s strategy of investing in new production capacity offers long-term growth potential by increasing earnings and improving cost efficiency. Both approaches have merit, and while future focus on buybacks would be welcomed, Warrior’s current capital allocation, centered on growth, is a strategic move that will likely enhance future profitability and shareholder value.
8.   Geography:
Warrior Met Coal's client base is geographically diverse, with a strong presence in Europe, Asia, and South America. One of their key competitive advantages is their ability to deliver coal to Europe in just two weeks, compared to the five weeks it takes for Australian producers. This faster delivery time allows Warrior to be more responsive to European demand, giving them a clear logistical edge in that market.
In addition to Europe, Warrior exports a significant portion of its coal to Asia and South America. Looking ahead, the company expects Asia to become its primary market, with India and the Southeast Asia (SEA) region driving most of the growth in demand for metallurgical coal. This shift reflects the increasing industrialization and infrastructure development in these regions, where demand for steel—and consequently, high-quality met coal—is projected to rise significantly. Warrior’s strategic positioning allows it to capitalize on these growing markets while maintaining a competitive edge in Europe.
9.   China causing downward pressure on met coal prices:
China's economic slowdown has impacted its steel consumption, which declined by 3.3% year-over-year between 2022 and 2023. Despite this, steel production remained relatively flat. As a result, China ramped up its steel exports by 39% in 2023, with expectations of a further 25% increase in 2024.
This surge in Chinese steel exports has put downward pressure on global steel prices, not due to a lack of demand, but because of the increased steel supply. Lower steel prices are restricting the amount producers are willing to pay for metallurgical coal, keeping met coal prices depressed in the near term.
However, once China's steel production normalizes and its real estate market regains momentum, steel supply should stabilize, creating the potential for met coal prices to rebound. Until then, the outlook for met coal prices remains challenging, with a rough period ahead as the market adjusts to the current dynamics.
10.   Valuing Warrior Met Coal:
In estimating Warrior Met Coal's future value, we will focus on 2027, the year when their Blue Creek mine is expected to be fully operational. The valuation will incorporate multiple assumptions about coal prices, operating costs, and financial metrics. Here's an outline of our approach:
Revenue Projection (2027):
We will estimate revenue based on the assumption that Warrior Met Coal will sell 90% of their total production capacity, which amounts to 11.52 million tons annually. The revenue projection will be calculated using various coal price scenarios, factoring in market volatility and potential demand shifts.Cost Structure:
Cash Cost of Production: We estimate a cash cost of $120 per ton of coal produced. This will serve as the baseline for operating costs.
Capital Expenditures (Capex): We expect the Capex for 2027 to be approximately $200 million. This figure includes $105 million earmarked for 2024, adjusted for inflation, along with maintenance costs for the Blue Creek mine.
SG&A Growth: Selling, General & Administrative Expenses (SG&A) are expected to grow at a compound annual growth rate (CAGR) of 10% through 2027.
Depreciation & Amortization (D&A): We project D&A to increase at a CAGR of 12.5%, reflecting the expansion of assets with the new mine coming online.
Profitability and Taxation:
After accounting for production costs and operating expenses, we assume a tax rate of 17.5% on the company's earnings.Free Cash Flow (FCF) and Exit Multiple:
To estimate the company's terminal value, we will apply a 15% Free Cash Flow (FCF) yield as the exit multiple. This assumes that Warrior Met Coal will generate strong, consistent cash flow from the fully operational Blue Creek mine and the broader business by 2027.
Through this model, we can generate various future earnings estimates under different coal price scenarios, helping to project Warrior Met Coal's potential valuation at the full capacity of their Blue Creek operations.
We have created this model where you can see the potential returns based on coal prices in the coming years.
If you expect coal prices to be below 200$ per short ton you should not consider investing at current prices, however if you think like me that coal prices will go above the 200s once the China situation goes back to normal you could have a great opportunity with this company.
11.   Conclusion:
Warrior Met Coal presents a compelling investment opportunity, particularly for those seeking long-term exposure to the coal market with significant upside potential. As an investor, finding opportunities that can deliver a 30% IRR over a decade is rare, making Warrior Met Coal's growth prospects with the Blue Creek mine especially attractive. The company's robust balance sheet ensures that even in a scenario where no profits are generated for the next two years, there is minimal risk of the Blue Creek project being delayed or compromised.
Unlike many of its peers, Warrior Met Coal is positioned as a long-term play on coal prices. While other companies may be more reliant on short-term fluctuations for buybacks and dividends, Warrior’s strategic focus allows it to weather near-term volatility better—particularly as coal prices are expected to remain under $200 in the short term due to external factors like China’s economic situation. Moreover, Warrior's position as a low-cost producer further insulates it from economic downturns, reducing downside risks for investors.
Looking beyond 2027, Warrior Met Coal has two potential paths for growth. They could invest in a second longwall for the Blue Creek mine, increasing their capacity by another 4.8 million tons, or they could follow a strategy similar to AMR and implement an aggressive share buyback program. Either option provides further potential upside for shareholders.
The main risk to this investment lies in long-term coal prices falling below $180. However, this seems unlikely given current market conditions, with Australian premium low volatility coke futures already pricing above $200 for 2025. The high-quality coal Warrior produces typically trades at only a slight discount to this, signaling strong pricing stability in the long run.
In summary, Warrior Met Coal's Blue Creek expansion, strong financial footing, and resilience to short-term market pressures make it an attractive long-term investment, with substantial upside potential and manageable risks.