Investment Thesis
Alpha Metallurgical Resources (NYSE:AMR) is a metallurgical producer, this means its prospects are tied to steel production. It does carry 5% exposure to thermal coal, but its thermal coal opportunity is a distraction to the investment thesis.
Moreover, coking coal prices appear to have found support. With steel prices moving higher, this should increase the demand for steel, which in turn will drive coking coal prices higher.
I make the case that a $5 dividend per share could be on the cards. This is on top of its large ongoing buyback program.
Refocusing on Facts, Coal is Here to Stay
I’ll briefly describe to you the difference between myth and reality. While I recognize that I am probably preaching to the converted, I nevertheless believe that this is something worthwhile discussing.
Two days ago Greta Thunberg was arrested for protesting against Germany’s decision to open its lignite mines. Lignite mines are thermal mines with lower energy content. Lignite coal is used in power generation to generate electricity. It’s considered a suboptimal energy source.
What’s more, Germany was one of the pioneers in the green energy movement. But when things got tough, Germany made an about-turn and sought to reopen a highly controversial coal mine. It was time to deal with reality.
Why am I bringing this up? Because energy is crucial for a quality life.
With this premise in mind, let’s now discuss coking coal.
Coking Coal is Not Thermal Coal
When everyone got excited about coal in 2022, they were excited about thermal coal. Thermal coal is used in power generation. What AMR produces is coking coal.
Coking coal is used in steel production. If you believe that in the coming years, we’ll see a large amount of infrastructure construction, namely roads, bridges, and the re-shoring of semiconductor manufacturing to the United States, to name a few end markets, you have to believe that we’ll see a massive increase in steel manufacturing.
But about the great energy transition? Won’t steel have a role there too? Yes, here too, from wind turbines to EVs. In fact, I argue that anything built in for the modern world will require a huge step up in steel.
Why am I saying all this? Because many investors have come to believe that the coking coal trade died in 2022. Allow me to inform you that this is not the case. That’s a myth.
What you see in the graphic above is coking coal futures for the Australian market. This is a very rough proxy for global coking coal.
What you see above is that since the summer, coking coal has been trending slowly higher, after the big run-up on coal prices when the Russian invasion began.
In sum, I argue that irrespective of what the market is saying, AMR’s prospects remain very attractive. Next, I want to turn the discussion to AMR’s return of capital policy.
Come, Collect a Dividend
AMR has essentially no debt on its balance sheet. More specifically, it holds a net cash position of $400 million, meaning that about 15% of this high cash flow generating business is made up of cash.
Given its strong cash position and clean balance sheet, this saw AMR pay out a one-off special dividend in Q4 of $5.00. This is on top of its 1% base dividend.
Consequently, this is my argument, I believe that in 2023, we are very likely to see a similar payout.
Now, to be clear, AMR has so far instead opted for buying back shares instead of focusing on dividends.
In fact, last quarter, AMR increased its buyback allocation by approximately $400 million, meaning that there’s still around $500 million left on its authorization.
Furthermore, unlike other areas of the stock market, where often management announces a buyback but fails to actually use their authorization, recall that in the first 9 months to 2022, AMR repurchased nearly $400 million worth of stock, or buying back close to 14% of the company.
To repeat, AMR is a company that has authorization and is serious about using it. My contention here is that beyond the buyback, there could be another $5 per share dividend in 2023.
The Bottom Line
Alpha Metallurgical Resources is a cheaply valued coal miner. I declare that a $5 dividend could probably be coming in 2023.
What’s more, with coking coal prices having found support since the summer, this is a bullish setup for AMR investors.
There are many catalysts afoot here making this risk-reward very compelling.
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