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Introduction and business model
Alpha Metallurgical Resources is a producer of metallurgical coal (although it also produces thermal coal to a lesser extent) with assets in the states of East Virginia and West Virginia, in the USA. Specifically, it is the largest producer of metallurgical coal in the United States (producing ~1/4 of the country's met coal), where it operates 24 mines and has 323 million tons in reserves.
Metallurgical coal, unlike thermal coal, which is used for electricity generation, is used as an important reagent in steel manufacturing in blast furnaces. This type of coal usually contains more carbon, less ash, and less moisture than thermal coal, so they are not interchangeable (especially, thermal coal cannot be used in steel manufacturing). Just like energy, steel production can be equated with global economic progress (used in infrastructure, transportation, construction, machinery...), so the increase in demand for steel is linked to the trend of improving the quality of life, especially in developing countries: in recent years, it has been driven by the growth of India and Southeast Asia, and it is expected that Latin America and Africa will join them in the coming years.
This demand for steel tends to grow every year, although it is a cyclical industry, so it may have some bumps. Although most of the demand growth comes from Southeast Asia (with India and China as major contributors), several Western countries, such as the USA, also need to renew their infrastructure, and measures have been taken in this regard, such as the approval last year of a $1T infrastructure investment program. In 2022, steel demand slightly declined due to the significant reduction in activity in China, due to its Zero Covid policy, although the upward trend is clear.
Although AMR production is 100% in the USA, the majority of its volume is exported and sold abroad: of its revenue, 81% is from foreign sales and 19% is from the USA. Specifically, in 2022 they sold their coal in 26 countries, with a strong predominance in Asia (53% of revenue, with India accounting for 33% of the total). All of their sales are in USD$, which eliminates currency risk. They own 65% of Dominion Terminal Associates, a coal export terminal in Virginia, which gives them additional coal blending capabilities as well as storage and transportation flexibility. Typically, metallurgical coal sales are made FOB (transport and risk borne by the buyer), and through spot sales or short- to medium-term contracts (~1 year), while thermal coal sales tend to be sold under very long-term contracts at prices below the spot price.
The negative economic impacts of the Russian war and intensifying recessionary fears are evident in the most recent global economic indicators showing a continued softening of the global economy. Conversely, data shows that certain areas of the world— such as India, a key market for Alpha—are experiencing growth. The World Steel Association (WSA) cited infrastructure demand as the expected catalyst for slightincreases in 2023 steel demand, contingent on the impact of tightening monetary policies, falling consumer confidence, and potential further inflation risk.
Investment thesis
My investment thesis for the sector, and for this company specifically, which I find most attractive, is based on the following two points:
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