Summary
- After seeing a recovery in 2021, Warrior Met Coal reinstated their special dividends during 2022.
- This was not surprising given their net cash position from the massive cash windfall provided by the recent booming metallurgical coal prices.
- When looking ahead, their special dividends appear poised to surge higher as their existing cash balance is virtually equal to the total cost of their flagship Blue Creek project.
- Since funding is already secured, it leaves no other uses for their free cash flow aside from shareholder returns.
- Even with far softer operating conditions, they could still provide a very high 10%+ dividend yield on current cost, and thus I believe that upgrading to a buy rating is appropriate.
Introduction
After operating conditions recovered during 2021 for Warrior Met Coal ( HCC ), upon entering 2022 there were prospects for shareholders to effectively buy now and receive a 10% to 20% refund once their special dividends returned, as my previous article highlighted. Thankfully these soon returned and if continued at their most recent quarterly rate, would provide a very high dividend yield of slightly over 10%. This is already very exciting for shareholders but when looking ahead, it sees king-sized dividends coming from king coal thanks to their massive cash windfall thus far into 2022.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
Author
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
Detailed Analysis
Following their cash flow performance recovery during 2021, the booming operating conditions during the first half of 2022 provided a massive cash windfall that few investors expected when the year began. These resulted in metallurgical coal prices reaching new records with their average net selling price hitting $377 per ton and thus well ahead of the $180 per ton across 2021. This saw their operating cash flow soar to a massive $399.7m, which unsurprisingly was several magnitudes higher year-on-year and most impressively, even managed to surpass their full-year result of $351.5m during 2021, despite literally being only half the length of time.
Even though they ramped up their capital expenditure almost three-fold year-on-year to $99.8m during the first half of 2022 as they pushed ahead with their flagship Blue Creek project, they still produced an extremely impressive free cash flow of $285.8m. Despite giving rise to the return of their special dividends and their resulting very high 10%+ yield, their latest quarterly dividend of $0.06 per share and accompanying special dividend of $0.80 per share attributable to the second quarter only cost a combined $44.4m given their latest outstanding share count of 51,653,534. This is obviously a mere fraction of their potential given their free cash flow, in fact, even with the far softer results of 2021, $44.4m is still affordable since it annualizes to $177.6m and their free cash flow was much higher at $239.8m. Unlike in previous years, they now sport a net cash position and given recent commentary from management, it seems that their special dividends are poised to surge higher.
After seeing their cash balance swell past their total debt levels during 2021, the booming operating conditions during the first half of 2022 saw their net cash position continue soaring to reach an extremely impressive $313m and thus far higher than the $64.5m where it ended 2021. Quite obviously, this once again makes assessing their leverage in detail pointless because they clearly have zero leverage and thus no handbrakes placed upon their special dividends, which could be poised to surge higher as soon as next quarter thanks to their massive cash windfall, as per the commentary from management included below.
“Now that we have nearly enough cash to prefund the entire Blue Creek project, we are pleased to be able to continue to balance capital investments for medium to long-term growth with near-term returns to our stockholders without incurring any debt.”
-Warrior Met Coal Q2 2022 Conference Call.
Once they reach this point, they will have no reasons to continue retaining most of their operating cash flow as the funding for their largest project is already secured, thereby allowing for shareholder returns to safely exceed their free cash flow. There should be no reason that this point is not reached during the third quarter of 2022 since they ended the second quarter with a cash balance of $653.4m and thus already within range for the total estimated capital expenditure for the Blue Creek project of $650m to $700m, as per slide eleven of their second quarter of 2022 results presentation . Whether they opt for this approach will only be known during the coming quarters as their next dividends are declared, although their capital allocation strategy only calls for a minimum $150m cash balance, as per the commentary from management included below.
“As previously disclosed, there are certain key metrics that we're continuing to focus on achieving as we make those capital allocation decisions during the 5-year development at Blue Creek. They include: first, maintaining a higher amount of minimum total liquidity of $250 million, including a minimum cash balance of $150 million at all times during the development of Blue Creek”
-Warrior Met Coal Q2 2022 Conference Call (previously linked) .
Seeing as this is less than one-quarter of their current cash balance, it indicates that shareholder returns and thus special dividends are far more likely to increase than decrease, or even remain flat going forwards into the second half of 2022 and beyond into 2023. Even if they opt to remain conservative and only linked their shareholder returns to their free cash flow, even the $239.8m generated during 2021 would see a very high yield of 14% at their current market capitalization of approximately $1.7b and thus even without booming metallurgical coal prices, shareholders can still look forward to king-sized dividends. Obviously, if metallurgical coal prices remain lofty well into the future, the upside for dividends is immense and could quickly surpass a massive 20% yield on current cost, although given the mixed short-term economic outlook with risk of a recession on the horizon that could damage steel and thus metallurgical coal demand, it seems prudent to keep any expectations tempered.
Upon seeing their cash balance soar to levels never imagined following the first half of 2022, it also strengthened their already strong liquidity with their respective current and cash ratios now at 7.71 and 4.52 versus their previous respective results of 5.14 and 3.31 at the end of 2021. Unless their cash balance plunges below their total debt level, which does not appear on the cards in the foreseeable future, it leaves zero concerns over their future debt maturities or ability to access capital from credit facilities.
Conclusion
Thanks to their massive cash windfall during the first half of 2022, they are sitting in an extremely advantageous position whereby they already have the cash required to fund their flagship growth project, which results in a net cash position leaving them with zero leverage. Barring any unexpected acquisitions, this leaves no other uses for their free cash flow other than shareholder returns, which means their special dividends are likely to surge higher and thus could easily provide more than a very high 10%+ yield even without booming metallurgical coal prices. Following this analysis, I believe that upgrading my hold rating to a buy rating is appropriate given their preference for special dividends over share buybacks.
Notes: Unless specified otherwise, all figures in this article were taken from Warrior Met Coal's SEC filings , all calculated figures were performed by the author.
For further details see:
Warrior Met Coal: King-Sized Dividends Coming From King Coal