Met Coal Expansion And Rare Earth Projects Will Strengthen Future Prospects

Key Takeaways

• Strategic expansion and cost reduction initiatives are set to enhance Ramaco's earnings, production, and margins significantly.
  
• Diversification into rare earth minerals and strong liquidity positions promise long-term growth and stability.
  
• Ramaco Resources faces revenue and margin pressures from low met coal prices, global steel industry struggles, and risks from diversifying into rare earths amid potential operational disruptions.

Catalysts

Engages in the development, operation, and sale of metallurgical coal.

• Ramaco Resources is positioned for significant growth in met coal production, expecting to add approximately 2 million tons of low-vol production by expanding their Maben Complex, which could increase overall production by roughly 30% to 7 million tons over a 24 to 36-month period once initiated. This expansion is likely to positively impact revenue and earnings.
  
• The commissioning of the Maben prep plant and potential future additions such as a direct rail loadout are expected to reduce costs by up to $40 per clean ton. This reduction in costs should help increase net margins and improve earnings.
  
• The expected increase in domestic demand due to potential tariffs on steel imports could boost met coal prices, providing a favorable environment for increased revenue and improved net margins.
  
• Ramaco's rare earth and critical minerals project in Wyoming has the potential to become a significant revenue stream. The project is advancing at a rapid pace with plans to start full-scale mining in July and a pilot processing facility construction in the fall, suggesting potential long-term revenue and diversification of earnings.
  
• Maintaining a high level of liquidity, with $140 million recorded at year-end, positions Ramaco strategically to capitalize on potential acquisition opportunities and manage through market downturns, providing stability and flexibility that could enhance future earnings and shareholder value.

Ramaco Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ramaco Resources's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $55.9 million (and earnings per share of $0.54) by about April 2028, up from $11.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $93.8 million in earnings, and the most bearish expecting $18.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 44.5x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 1.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Ramaco Resources Future Earnings Per Share Growth

Risks

• The year-long negative pricing environment for met coal, exacerbated by China's steel overproduction and its impact on global prices, could continue to pressure Ramaco's revenue and margins if not improved.
  
• The financial impact of weather-related disruptions, such as the historic flooding and freezing conditions in Q1 2025, may lead to higher operational costs and lower revenue if such events persist.
  
• Despite high liquidity, the company faces potential risks from its rare earths project, which involves moving into an entirely new business with significant macro-competitive challenges and development costs, possibly affecting earnings and increasing financial risk.
  
• The reduction in U.S. met coal production due to cash negative netbacks and potential further cuts could limit revenue growth potential if the expected price increases do not materialize or are delayed.
  
• Weak profitability and operational struggles in the global steel industry, particularly due to increased Chinese exports and depressed steel demand, could negatively impact met coal demand, affecting Ramaco's sales and earnings performance.

Valuation

• The analysts have a consensus price target of $13.833 for Ramaco Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $9.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $817.0 million, earnings will come to $55.9 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of $9.22, the analyst price target of $13.83 is 33.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.