About Alpha Metallurgical Resources
Headquartered in Bristol, Tennessee, Alpha Metallurgical Resources is one of the world’s most prominent leaders in the coal mining industry.
It wouldn’t be uncommon for readers to ask, “isn’t coal pretty much obsolete at this point and even more so insignificant to the economy overall?”
Close but no cigar.
And by that we mean anyone who thinks that is way off.
Namely, coal is still used widely in the production of cement (which clearly has a multitude of real-world applications itself) as well as its important function of playing a role in producing electricity, paper, plastics, soaps and many other products across various categories, whether one immediately realizes it or not.
Next time you visit your neighborhood Walmart, think of all of that coal!
As one can derive from the company’s name, Alpha specializes in the production, manufacturing and sale of metallurgical (referred to simply as “met” in the industry) products (mainly coal) primarily to those operating in the steel industry, according to TD Ameritrade’s platform.
Alpha Metallurgical Resources is a mining company, at the end of the day.
Also according to TD Ameritrade’s website, its met production business currently has five active mines along with two preparation plants in Virginia, plus fourteen active mines and five preparation plants in West Virginia.
This is a company that hardly receives any attention but it (and those who do the hard work, mining) serves a crucial role and purpose in societies locally and globally. Although it’s a company that is cyclical in nature, subject to wavering or surging demand along an unforgiving pendulum and has also filed for Chapter 11 bankruptcy protection in recent years (due to declining coal prices in 2017) this company’s share price has surged over the last few years, trading at around $4 in 2020 and now trading at around $167, likely due to heightened demand for coal.
One must be willing to bear some extra volatility risk if they were to put some money behind this company.
Before jumping into the company’s financials, we’d like to briefly mention that there is a lot of stigma with the word “bankruptcy.”
Yes, it can be a scary word in certain contexts.
But bankruptcy can also simply mean that a company is restructuring its capital structure or aspects of its balance sheet or books in order to make its operations more efficient and in the case of Alpha, perhaps make itself a bit more immune to supply and demand shocks in the coal industry.
This is why we’re not drastically concerned with Alpha’s previous Chapter 11 filing, which is the type of bankruptcy that specifically focuses on restructuring.
Now, if this company had filed Chapter 7, which is a bankruptcy in the form of liquidation, or the sale of assets and was on the verge of closing shop for good, that would be a completely different story with a completely different ending.
However, time after time it has been proven that, under certain circumstances, perceived risk which leads to fear which leads to selling can ultimately lead to profits for the pigs that have some patience and a stomach made of Teflon.
That being the case, what better way to uncover the current financial status of Alpha Metallurgical Resources than to start now.
Alpha Metallurgical Resources’ stock financials
At its current share price, Alpha has a market capitalization of $2.6 billion, a price-to-earnings (P/E) ratio of 2.03 and distributes an annual dividend of $1.67 to its shareholders.
From a price-to-earnings standpoint alone, this stock is devastatingly cheap.
This is usually a good sign as it’s an indication that the company’s stock is trading at a current share price that doesn’t fully (by a long shot in this case) appreciate the company’s assets and operating capabilities. On the other hand, one could make an argument that the company isn’t undervalued but actually just not worth much to begin with.
We would peg the latter scenario to be considerably less likely than the former in the case of Alpha because it is a relatively large company with a lot of solid assets and its production has a direct impact on many corners of the economy, solidifying its importance to the world.
However, the proof is in the numbers so let’s proceed.
Alpha’s executive team tends to nearly $1.9 billion in total assets and around $1.3 billion in total liabilities according to its balance sheet. This doesn’t surprise us in the slightest as mining is a very machine and cost-heavy industry that not only requires a lot of upfront investment(s) but also additional consistent maintenance investments as well, not to mention the prevailing inflationary and other cost-related headwinds.
However, given the relative financial weakness it was working through in 2017, we’re definitely glad to see that the company’s total assets are larger than its total liabilities, although we’d prefer it if they differed by a greater amount given the cyclicality of coal.
All in all, we’re fine with Alpha’s present balance sheet structure.
As it relates to the company’s income statement, Alpha’s total revenue has fluctuated but not by much, generally staying between $1.4 billion (2020) and $2.2 billion (2021). We initially presumed that the company’s total revenue would be flat over the past five years and we were pretty much right. Nevertheless, we predict that over the next five years, Alpha’s total revenue is going to stretch its legs a bit and venture into the $3 billion and possibly $4 billion territory as demand for coal climbs as more societies open up and steel and precious metal production ramps up in the coming years for a multitude of reasons.
According to the company’s cash flow statement, Alpha’s net income has seen its ups and downs. Namely, the company’s net income in 2017 was $154.5 million, increasing the next year to almost $300 million and subsequently dropping to -$316.3 million in 2019 and nearly -$447 million the following year.
This is why cyclicality is a major factor, be it a positive during some years and a negative in others, for Alpha and other mining companies for that matter.
This is the sort of volatility one has to grapple with and be comfortable assuming when storing their money in a company such as this one.
In the mining industry, investment is constantly required and there are a lot of input costs and prices that are out of these companies’ hands.
Alpha Metallurgical Resources’ stock fundamentals
Profitability can be difficult for companies in the industrials and mining space(s).
However, Alpha crushes the competition’s trailing twelve month (TTM) net profit margin by quite a substantial amount.
Hopefully you enjoyed the brief yet ever so cringe rock-related pun.
You know, “crushes.”
Whatever.
Alpha’s TTM net profit margin is 36.11% to the industry’s average of -6.86% which is as wide a margin of difference that we’ve ever seen, which is probably a byproduct of the company specializing its operations in a certain region (Virginia and West Virginia) and concentrating on met coal, whereas others might over-diversify into other areas of mining like met, copper, gold among many others.
As investors, we like that Alpha is focused on met coal.
In addition to strong profitability, the company’s TTM returns on equity, assets and investment are all spectacularly higher than that of the industry’s average as well, which is another great sign that this company is focusing on efficiency with its capital investments and operations across the board.
Should you buy Alpha Metallurgical Resources stock?
Volatility is sticky in the mining industry, as the industry and the companies within the industry are constantly subjected to external variables and prices that they in no way can control, but only try to hedge against.
However, if you as an investor are comfortable with assuming this sort of risk and are bullish on the demand for coal (as we currently are), Alpha’s financials are compelling to say the least and we don’t think it would necessarily be a bad idea to inch into a position if you’re seeking some exposure in commodities, namely coal.
If you’re not comfortable with assuming such risk, which is more than understandable, it would likely be wise to stay on the sideline and look to deploy your capital elsewhere.
Given all of this information and our macroeconomic views, we give this company’s stock a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.