CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this annual report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in this report.
Forward-looking statements may include statements about:
We caution you that these forward-looking statements are subject to a number of risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of coal. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Annual Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.
Ramaco Resources, Inc. is a Delaware corporation formed in October 2016. Our principal corporate offices are located in Lexington, Kentucky. We completed our initial public offering (IPO) on February 8, 2017 and our common stock is listed on the NASDAQ Global Select Market under the symbol “METC.”
As used herein, “Ramaco Resources,” “we,” “our,” and similar terms include Ramaco Resources, Inc. and its subsidiaries, unless the context indicates otherwise.
General
We are an operator and developer of high-quality, low-cost metallurgical coal in southern West Virginia, southwestern Virginia, and southwestern Pennsylvania. We are a pure play metallurgical coal company with 252 million tons of high quality metallurgical coal reserves and advantaged geology leading to lower cash costs. Our near-term development portfolio includes four key assets: Elk Creek, Berwind, RAM Mine and Knox Creek.
We commenced initial production of metallurgical coal at our Elk Creek mining complex in late December 2016. During 2017, we developed and opened two deep mines and a surface mine at Elk Creek. Development production started at a third deep mine at Elk Creek in January 2018. Additionally, we constructed and activated the Elk Creek preparation plant and rail loadout facility in late October 2017. We also began development mining at our Berwind property in late 2017 and continued our purchase coal program which augments our sales. Our production for 2017 totaled 548 thousand clean tons of metallurgical coal.
In 2017, we sold approximately 608 thousand tons of coal, including approximately 236 thousand tons of purchased coal.
On February 8, 2017, we completed the IPO of our common stock pursuant to a registration statement on Form S-1 (File 333-215363), as amended and declared effective by the SEC on February 2, 2017. Pursuant to the registration statement, we registered the sale of 6,000,000 shares of $0.01 par value common stock, which included 3,800,000 shares of common stock sold by the Company and 2,200,000 shares of common stock sold by the selling stockholders.
Proceeds of our IPO, based on the public offering price of $13.50 per share, were approximately $51.3 million. After subtracting underwriting discounts and commissions of $3.6 million, we received net proceeds of approximately $43.7 million, after deducting discounts and offering expenses paid directly by us. We used $10.7 million of the net proceeds to repay indebtedness owed to Ramaco Coal, LLC, an affiliated entity. The remaining proceeds of the IPO were used for general corporate purposes, including development of the Elk Creek mining complex. All units of our then-outstanding convertible Series A preferred units automatically converted into an aggregate of 12.76 million shares of common stock at the time of the IPO.
Metallurgical Coal Industry
Metallurgical coal is used to make metallurgical coke, a key ingredient in the steel-making process. Coke is used as a fuel and a reducing agent in a blast furnace during the smelting of iron ore into iron before it is converted into steel. Demand for coking coal in the U.S. is limited by the number of coke batteries. Annual U.S. metallurgical coal consumption is approximately 16 to 21 million tons per year. Any supply in excess of what can be consumed domestically is exported to buyers in North America, Africa, Europe, South America and Asia.
U.S. metallurgical coal production increased from 57.4 million tons in 2016 to 73 million tons in 2017, down from a peak of 90.9 million tons in 2011. U.S. metallurgical coal is primarily produced from underground mines located in the Appalachia coal regions. Metallurgical coal is transported by truck, rail (primarily Norfolk Southern or CSX), and barge to coke batteries located in the U.S. Metallurgical coal contracts in the U.S. frequently have one-year terms, although some buyers contract for shorter or longer terms. Domestic prices are historically not as volatile as international benchmark or indexed prices. Due to the modest but stable market for metallurgical coal consumption in the U.S., any supply in excess of what can be consumed domestically is exported.
The United States is the second largest seaborne exporter of metallurgical coal, behind Australia and ahead of Canada. The volume of metallurgical coal trading on the seaborne market was estimated to be 308 million metric tons in 2017, up 1% from 305 million metric tons in 2016. Australia is the dominant seaborne supplier and is expected to have accounted for approximately 60% of 2017 volumes, followed by the U.S. with approximately 12% of supply and Canada with approximately 10% of supply. U.S. metallurgical coal exports totaled 40.8 million tons in 2016 and 55.5 million tons in 2017. The United States has a geographic advantage over Australia and Canada in serving customers in the Atlantic Basin, primarily Europe and Brazil.
The metallurgical coal benchmark, which was traditionally negotiated quarterly between key Australian producers and key Japanese steel mills, has been replaced by utilizing a series of indices from a number of independent sources. Contracted volumes have terms that vary in duration from spot to one year, rarely exceeding one year. In some cases, indices are used at the point that the coal changes hands. In other cases, an average over time may be utilized. While the term “benchmark” is still utilized, it too is determined based on index values, typically for the preceding three months.
Seaborne metallurgical coal prices in 2016 and 2017 saw significant volatility. A new Chinese policy that limited domestic coal miners to 276 work days a year resulted in a significant decrease in Chinese production and a resulting increase in seaborne demand, which increased prices from well below $100 per metric ton (“MT”) in early 2016 to over $300 per MT. A reversal of this policy in late 2016 caused prices to fall to the mid-$150s per MT. A subsequent cyclone that hit the center of metallurgical coal production and supply chain operations in Australia in early 2017 caused prices to briefly spike to near $300 per MT. In the remainder of 2017, the significantly weakening U.S. dollar, global economic growth that was stronger than expected and surprisingly strong steel production in China combined to cause seaborne metallurgical coal prices to continue to show strength, trading at around $200 per MT in late 2017.