Blue Creek's Promise Battles Analyst Skepticism Amid Global Steelmaking Uncertainties

Key Takeaways

• Strategic expansions and operational enhancements point towards significant revenue and cash flow growth through increased production and sales volumes.
  
• Disciplined investment and geographic sales diversification aim to improve profitability and capture emerging market demands without compromising financial health.
  
• Market and operational challenges, including softer steelmaking coal demand, supply competition, logistics issues, and significant project investments, could adversely affect profitability and cash flow.

Catalysts

Engages in the production and export of non-thermal steelmaking metallurgical coal for the steel production by metal manufacturers in Europe, South America, and Asia.

• The anticipated completion and start-up of the Blue Creek project, which is expected to start producing approximately 200,000 short tons of High Vol A steelmaking coal in the second half of 2024, and then 4.8 million short tons annually post-longwall start-up in Q2 2026, suggests substantial future revenue and cash flow growth through increased production capacity and sales volumes.
  
• Continuous operational enhancements and increased production volumes leading to double-digit sales growth indicate a forward-looking improvement in revenue, even amidst weaker global demand, showcasing the company's operational excellence and asset quality.
  
• The disciplined investment of $84 million in Q2 2024 towards the Blue Creek growth project, as part of a larger $1 billion investment over five years without new financial leverage, signals controlled capital expenditure that is expected to result in significant incremental production without deteriorating the balance sheet, enhancing future profitability and shareholder return.
  
• The company’s strategic geographic diversification of sales, particularly towards the Asian markets, coupled with a spot sales volume of 30% aimed at capturing market uptrends, positions Warrior Met Coal to take advantage of emerging market demands and potentially higher spot market prices, impacting revenue positively.
  
• Demonstrated ability to maintain strong cash flow generation of $147 million in operation cash and free cash flow of $25 million during Q2 2024, amidst capital expenditures for expansion, indicates solid operational and financial management that can support sustained earnings growth and provide a buffer against market volatility.

Assumptions

• Analysts are assuming Warrior Met Coal's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.0% today to 18.3% in 3 years time.
• Analysts expect earnings to reach $310.7 million (and earnings per share of $7.25) by about September 2027, down from $422.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $401.7 million in earnings, and the most bearish expecting $253.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2027 earnings, up from 6.5x today. This future PE is greater than the current PE for the US Metals and Mining industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Risks

• Weaker global demand for steelmaking coal and stronger supply from all regions resulted in a softer pricing environment, which could impact Warrior Met Coal's revenue and net income negatively if these conditions persist.
  
• Unexpected spot volume availability from Australia, leading to favorable supply conditions for customers, increases competition and could pressure Warrior's sales volumes and pricing power, affecting gross margins.
  
• The failure of the Demopolis and Holt locks and the resultant reliance on alternate transportation methods could increase logistics costs and impact net margins through higher operational expenses.
  
• Significant capital expenditures for the development of the Blue Creek project, with an expectation to invest $325 million to $375 million in 2024, could strain cash flows and impact financial flexibility, particularly if there are overruns or delays in project timelines.
  
• Fluctuations in steelmaking coal prices due to global economic factors and varying demand from major steel-producing regions like China can lead to unpredictable revenue and earnings, especially given Warrior's increased spot market exposure.

Valuation

• The analysts have a consensus price target of $76.6 for Warrior Met Coal 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 $90.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.7 billion, earnings will come to $310.7 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of $52.6, the analyst's price target of $76.6 is 31.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.