American Resources Corp Q4 FY2021 Earnings Call

Greetings. Welcome to American Resources Corporation’s Fourth Quarter 2021 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll now turn the conference over to Mark Laverghetta, Vice President, Corporate Finance and Communications. Mr. Laverghetta, you may now begin.

Thank you, Rob. Good afternoon, everyone. On behalf of American Resources Corporation, I'd like to welcome everyone to our fourth quarter and full year 2021 conference call and business update. We welcome this opportunity to not only discuss our accomplishments over the past year but also on how we’ve positioned ourselves and where we have our sights set as we embark on this exciting time. Also on the call today is Mark Jensen, American Resources Chairman and CEO; Kirk Taylor, our Chief Financial Officer; and Tom Sauve, our President. Before we kick it off, I'd like to remind everyone that this call is being recorded and of our normal cautionary statements. Certain statements discussed on today's call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from the results discussed in the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors, uncertainties, and other cautionary statements, which are laid out in our press releases and SEC filings. We also do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Lastly, we’ll be holding a question-and-answer session following our prepared remarks. And for anyone wanting to ask a question, you will need to dial in by phone to get into the queue. With that said, I'd like to turn the call over to Mark Jensen.

Thanks, Mark, and thanks, everyone, for joining today. I apologize; my voice is a little raspy as we get going. I'm excited about having the opportunity to speak to you and walk through what we did last year, but also focus on where we're at today and where the business is going. Overall, the fourth quarter of 2021 continues to show ongoing execution and growth in terms of positioning American Resources as a low-cost and innovative supplier of raw materials to the infrastructure, metal, and electrification market. Given our strategic positioning, we remain extremely well-aligned with our national priorities in terms of providing steelmaking carbon to traditional and modern infrastructure initiatives worldwide, as well as being the first domestic supplier of isolated and purified critical and rare earth elements to the domestic supply chain to support the rapid growth and advancement of electrification, clean tech, and national security. Our innovative processes allow us to not only bring these solutions to the domestic marketplace but also to accomplish it through low-cost and environmentally safe and scalable methods. Last year, we defined our critical and rare earth element technology chain specific to capture processes and purifying critical and rare earth elements. More recently, we had the opportunity to begin introducing our strategic partnerships that enable us to leverage expertise and networks that we feel will ensure our success in synthesizing the domestic and circular supply chain. As of today, we are just a handful of weeks away from commercially producing domestically sourced and sustainable purified critical and rare earth elements, which, as far as we know, will be the first in the country to achieve this within the domestic supply chain, producing purified and isolated rare earth and critical elements of 99.5% greater purity. As we embark on this very important milestone, it's worth noting that this is occurring as we're hitting a higher and more consistent level of metallurgical carbon production in one of the strongest markets we have ever seen, which puts us in a much stronger position to fulfill our 2022 order book backlog of approximately $110 million. With a confluence of these factors, we are both confident and excited about our ability to deliver our best year in our history. As we go through and talk about where we're at today, I want to take a brief reminder for those that are just joining us on our history and why we positioned ourselves within the marketplace as we have done. Since 2015, we have closed on over eight acquisitions. What we did was laser in, focusing on acquiring an asset base at a very substantial discount to replacement value. More importantly, an asset base that could be repositioned and drive innovation to not only drive revenue growth but also utilize our high-value technologies on these properties to eliminate legacy liabilities, but also drive future value from what these assets could generate. We're leveraging that asset base using a streamlined and efficient operational platform across several business lines and positioning these assets to capitalize on current and future markets at a very low cost, because of the efforts we put forth over the last few years. Additionally, we've acquired a suite of patents and technologies that allow us to drive innovation and expand the resources we produce and how we produce them. Subsequently, we've been strategically aligning ourselves with best-in-class partners to efficiently synthesize our technologies and processes in order to efficiently establish a domestic secure supply chain, as we announced with the Heritage Group, and additional partnerships we're currently working on as well. What I'd like to do now is take a quick moment to walk you through the carbon market strength and where we're currently at within the business line. Carbon demand for steel production remains very strong and supply remains very constrained. As we've heard over the past several months, the vast majority of our industry in 2022 production is largely sold out, and we continue to corroborate that assessment. More importantly, the labor markets are tight, and supply chains are encountering challenges sourcing parts and materials and getting the equipment needed to grow the existing marketplace, resulting in a strength in metallurgical carbon pricing. We anticipate that pricing to be more stable than what we've seen in the peaks and valleys of the industry in prior years. Overall, demand for metallurgical coal, like most commodities, is being driven by broad economic and infrastructure growth worldwide, and as the world emerges from the COVID-19 pandemic, along with the ongoing challenges taking place within the world today, we see a significant amount of demand taking place on the infrastructure side of the world, as well as increased government stimulus, continuing to drive economies out of this pandemic. The infrastructure bill, in our opinion, will keep a higher floor under carbon prices as federally funded infrastructure projects require US-produced steel that will help drive the demand for products such as ours produced out of our complexes today. Unlike past cycles, the industry remains more constrained with its ability to bring incremental supply online due to various factors. More importantly, we're witnessing a lack of investment capital over the years for growth projects, an extremely tight labor market, and aging infrastructure at existing mines that are operating today, along with a number of mines nearing depletion. Overall, supply issues remain for parts, supplies, and equipment. Through this call, we'll discuss how we are managing those issues and how our current marketplace positioning is advantageous compared to our peers. While we are not immune to these issues, we have a strong asset base that we can draw upon to position ourselves better than our peers and others entering the market. The investments we've made over the last two years, coupled with our positioning, place us in a strong position to continually ramp up our revenue on a monthly basis as we will showcase further. Regarding Perry County, I'll provide a quick update. We continue to see higher realization and a consistent output from the complex. We began operations at this mine last year but faced challenges with the labor market, competing against federal stimulus and other factors that delayed our ramp-up production. Today, however, we are experiencing strength. We have a strong labor force and an extremely talented team of individuals who are hitting their stride in terms of production, processing, and shipping the product to our customer base. By the end of 2021, we were operating one section in our Perry County mine, utilizing two continuous miners. As of February, we expanded our operations to two sections, utilizing four continuous miners, one super section and one blocking section, offering redundancy in operations to continue to achieve our production goals, effectively doubling our output. We've witnessed a stronger and more consistent rate of output at Perry County, and our second section is now properly equipped and staffed, allowing us to efficiently operate. We applaud our team for its hard work and execution as well as the able workforce that we've attracted, which is looking for a long-term stable place of operation given the mine plan that we're executing. Our mine plan at Perry County is a testament to our restructuring efforts, accessing our reserves efficiently and predictably for the future. Our near-term plan includes adding a fifth continuous miner that will begin operating in a pillar section currently under development in the next 60 days. Additionally, we will be adding a sixth continuous miner approximately 120 days from now to access another boundary of resources. What’s unique about this mine plan is the cost structure; we acquired this complex to pull the mine back to a much more accessible boundary of carbon available to us, and we're executing upon that today. Over the next two years, we aim to implement a pillar mining strategy across the majority of our operations; given current supply chain issues, we aren't needing to purchase infrastructure and we will be able to utilize our existing infrastructure to expand our mine through our development sections and at lower boundaries while accessing current boundaries through pillar and retreat mining, significantly improving yields and reducing cost structures dramatically. This positions us uniquely compared to many of our peers within the industry who are struggling with supply chain issues for products and materials. By doing so, we will be able to reuse infrastructure we have already acquired at Perry County, McCoy Elkhorn operations, and while continuing development on our Wyoming County operation. Currently at our McCoy Elkhorn complex, we are operating one continuous miner at our Carnegie 1 mine since its restart. Most recently, we announced we've delivered our second continuous miner, which enables us to effectively double our production and expand our mine plan there to achieve more consistent and expanded output in the months ahead. Similarly, PCI is now effectively doubling our production, while also exploring additional expansion opportunities at both McCoy Elkhorn and Carnegie 1 complex. With these production enhancements, we feel we are in a better and stronger position to fulfill our stated order backlog. As you can see through our press release and announcement of the March figures, we are not only seeing strong revenue generation but are also operationally profitable, resulting in a favorable cash position for further expansion of our business. To provide predictability with the additional section in Perry County now operational, we expect our met carbon production for March to reflect a revenue number between $5.25 million to $6 million, with the high end achievable based on our continued execution. With these advancements, we are now realizing operating profits in March and continuing to drive the business forward without additional reliance on capital markets for growth. We can execute on cash flow and continue to reinforce our balance sheet with profitable numbers being realized today. Furthermore, we are confident we have implemented mine plans, structures, and teams to capitalize on current and future market prices. As we ramp up production, we can take advantage of prevailing spot market prices, which are very robust, while simultaneously fulfilling our existing backlog of orders from customers, for which we are very thankful. In the recent announcement of acquiring the operating rights of the service operation to supply our McCoy Elkhorn complex, we highlight our nimbleness by leveraging existing infrastructure to bring incremental supply into the robust market environment and serve additional customers. Our update for Wyoming County is regarding our preliminary approval for a $45 million tax-exempt bond from the state of West Virginia. This innovative capital source will assist us in producing metallurgical carbon for the steel industry, which desperately needs this product today, utilizing rare and advanced carbon technologies licensed from the state of Ohio to produce rare earth concentrates in a low-cost manner. We are leveraging electrolysis technology at our Wyoming County complex. This method enables us to generate high-value concentrates cost-effectively by creating byproduct economics, which you've heard us discuss. By processing coal-based waste material from the processing plants, we are producing hydrogen while also separating out and generating rare earth concentrates that will be sent to our Indiana facility for further purification and isolation at our chromatography facility using the technology licensed from Purdue University. Overall, we are managing the tax-exempt bond issuance process and anticipate developments at the Wyoming County complex, possibly accelerating our timeline. We're moving infrastructure from idle mines and facilities to lower the cost of implementation and reduce lead times for getting the complex back into production. Now, I would like to turn it over to Mark Laverghetta to discuss updates on our Rare Earth and Battery Metals division, American Rare Earth.

Thanks, Mark. American Rare Earth Division represents a highly strategic opportunity for us to provide the domestic supply chain with not only domestically sourced critical and rare earth metals but also those that are truly sustainable, produced from recycled end-of-life products and waste streams. We believe this is a critical component in establishing ourselves and our country as a competitive leader while also making significant strategic sense. Addressing our domestic supply chain and sustainability challenges, in our opinion, can make a substantial impact throughout the economy. As a reminder and point of reference, last year at this time, we were still unveiling and defining our suite of IP that we acquired. Today, as Mark just mentioned, we are only a short time away from having our first commercial production line in operation. This first production train will be focused on producing isolated and high-purity rare magnet metals such as Neodymium, Praseodymium, and Dysprosium from recycled rare earth permanent magnets. Shortly thereafter, our second production train will commence operations, isolating and purifying battery metals like lithium, cobalt, nickel, and manganese from end-of-life recycled lithium-ion batteries. These high-purity critical and rare earth metals can both be sold and used in manufacturing new high-growth products and applications such as electric vehicles, defense technologies, green energy, and tech devices. It is essential to highlight our execution, sense of urgency, strategic positioning, and the incredible partnerships we are cultivating. With that said, I would like to briefly outline some of our strategic partnerships and underline our leading role in addressing these challenges. Purdue University and the Davidson School of Chemical Engineering, along with Texas Tech and their Department of Chemical Engineering, contribute scientific and laboratory excellence in applying processing technology and chromatography expertise to isolate and purify critical and rare earth elements. It’s crucial to note that while chromatography is a commercially proven technology used largely in the pharmaceutical, food and beverage, and chemical industries, it is not a plug-and-play or off-the-shelf process. Our team from Purdue, combined with our partners at CMID, are the leading experts in utilizing chromatography for the separation and purification of various critical and rare earth element feedstocks. Furthermore, our partner from CMID brings decades of experience in chromatography design, build, and operations from Eli Lilly, making them ideally suited to efficiently transition our process from lab to commercial-scale facilities alongside market growth. Again, I want to highlight our partnership with the Heritage Group and their investment arm, HG Ventures. This is a highly strategic relationship for us given their longstanding success in environmental services, materials science, and sustainability, along with their leadership position in battery recycling. This partnership ensures our execution will further synthesize our upstream and downstream operations. These are just a few of our foremost partnerships that we have publicized, demonstrating our readiness and willingness to collaborate with industry leaders to bring real solutions to fruition. We look forward to communicating additional relationships in the near future. Lastly, with heightened federal government attention to these matters, especially following the infrastructure bill passage that includes funding for supply chain advancements in clean energy technologies, we feel we are well-positioned and closely aligned with our national priorities, whether related to traditional infrastructure for roads, bridges, or ports, or advancements in green energy or clean tech infrastructure. As we embark on this exciting time being the first domestic commercial supplier of truly sustainable, domestically sourced high-purity critical and Rare Earth elements, we believe the market will better reflect the value of our highly significant and high-growth initiatives. I would now like to turn the call over to our Chief Financial Officer, Kirk Taylor, for some additional comments.

Thanks, Mark. I'd like to begin by mentioning our entrepreneurial, innovative, and shareholder-focused culture that drives additional value creation initiatives. Novusterra Inc., as a reminder, is a company to which we’ve licensed on a non-exclusive basis two of our exclusive licenses and patents for the production of carbon-nanostructure and Graphene. Additionally, as we discussed previously, American Acquisition Opportunity Inc. is a SPAC sponsored by American Resources, and through it, we have the opportunity to participate in future acquisitions without causing dilution. Just to reiterate, as the largest shareholder of American Resources, holding approximately 30% of shares outstanding, our management team remains focused and committed to maximizing shareholder value in every possible way. As mentioned, we maintain a strong desire to distribute a portion of our underlying shares to all stakeholders, allowing everyone to participate in this value creation. From a progress standpoint, I would direct you towards the respective companies, Novusterra and American Acquisition Opportunity Inc., for their latest updates. Let’s go over a few financial highlights from this past quarter and year. Over the course of 2021, we substantially improved our balance sheet in order to better capitalize on and strengthen the infrastructure and raw material market as we emerged from COVID-19 disruptions. By having a robust and flexible balance sheet, we could navigate labor shortages and supply chain disruptions ensuring our suppliers could adequately meet our needs. We successfully eliminated approximately $15.6 million in debt and payables while generating about $30 million in cash through a common stock offering during 2021. Both of these initiatives allowed us to eliminate the going concern disclosure that had appeared in our financial statements, enhancing our long-term viability. Furthermore, these items opened up new non-dilutive capital sources for our expansion plans. Firstly, we established an equipment line of credit with a leading lender, strategically positioning us for opportunities to acquire available equipment. In today's climate, if you don’t have cash or highly liquid resources, desirable equipment can vanish quickly. During periods of rapid growth, essential equipment is vital for securing that growth. Additionally, as Mark discussed, we secured initial funding commitments of $45 million in tax-exempt bond financing from the state of West Virginia. This is another strong non-dilutive financing method for funding our growth in West Virginia, where we will produce the highest quality carbon needed by the metallurgical coal market. Furthermore, we successfully navigated our new market tax credit program that we entered into in 2016. This is a jobs program that generates the initial outside capital we secured as a company. The net benefit to American Resources from this program was over $1 million, serving as a critical platform for creating 40 direct jobs in 2016, with hundreds of low-paying jobs created since then through contractor partners. In 2021, we continued to invest in our operations, notably with $18.1 million in development costs for enhanced equipment and infrastructure at American Carbon, specifically in the Perry County and Carnegie operations as well as our processing and purification equipment with the development of our Murkmire process chain. These investments positioned our metallurgical carbon assets for growth in a time when there is minimal incremental supply growth across the industry, providing us with a certain level of pricing power as we increase production. After recommencing our American Carbon operations and product sales last year to our steelmaking clients, we observed sequential pricing increases, albeit initially at a slower pace due to some supply chain and labor tightness, but this rate is now beginning to accelerate. Currently, our total debt stands at approximately $15 million, which includes $2.6 million in equipment financing, $9.1 million in convertible notes from long-term partners, and $2.7 million in outstanding PPP loans. Presently, our shares outstanding are just $65.7 million in Class A shares. We concluded the year 2021 with approximately $11.5 million in cash reserves. Our balance sheet, the capital structure, our development, and growth plans further position us strongly for the flexibility needed to execute our innovation and growth plans across all divisions. With that, I would like to turn the call back to the moderator for some Q&A.

Thank you. We'll now be conducting a question-and-answer session. Thank you. Thank you. And our first question is from the line of Heiko Ihle with H.C. Wainwright. Please proceed with your questions.

Hey there. Thank you guys for taking my questions.

Thank you for joining.

Hey, just a clarification, your backlog of $110 million is an obviously extremely meaningful number. Can you walk us through what you've been seeing with pricing then versus now? And also, is there a timeline to delivery, please?

Yes. That's a great question. So regarding pricing, we built this backlog of $110 million with a fixed band, which affords us downside protection. Given the volatile nature of the market, we wanted to safeguard against downturns while retaining flexibility for potential upside. Currently, we are realizing peak pricing out of Perry County and the McCoy Elkhorn Complex. The pricing over there mirrors our quarterly pricing adjustments, indicating a market-driven adjustment. We're witnessing a higher realization than previous quarters given the current market dynamics. For March, we provided an update indicating revenue between $5.25 million to $6 million, and we anticipate hitting the high end of that range. The growth we expect will continue as we ramp up production, and we've added substantial capacity. Currently, we expect our new mine plan, running pillar sections, to drop mining costs by about 25% to 30%, significantly enhancing cash flow to meet backlog demands as revenue continues to climb.

Makes a lot of sense. Thank you for that. And then I guess this is a little bit of a touchy-feely question. Can you just walk us through what you're seeing with end-market demand from geopolitically safe sources for really anything but especially rare earth metals? I mean, given recent global events, I assume you're receiving calls from companies that previously hadn’t reached out, seeking to secure some long-term supply.

Yes, I mean, rare earth elements and battery metals are extremely important for the electrification economy, such as wind turbines and electric vehicles, and especially for high-end applications like those used by the US government and Department of Defense in drones, which rely heavily on rare earth elements. Currently, about 85% to 90% of various rare earth elements are isolated and purified in China using solvent-based extraction. Consequently, there is increasing concern regarding the sourcing of these materials and, more importantly, the methods used to produce them. Our utilization of chromatography is significantly environmentally friendly compared to solvent-based extraction, and it is also cost-effective enabling us to compete with Asian markets on price. We're indeed witnessing heightened interest from various potential customers. While we haven't announced any new partnerships yet, we are actively pursuing discussions and making good progress. Our immediate focus is on operationalizing our facility to showcase our cost structures, quality, and consistency, which will attract end-users for rare earth magnets. The battery metals market is huge, with few, if any, domestic lithium, cobalt, or nickel producers recycling batteries to create battery-grade material. Our technology allows us to produce high-purity battery metal that can be used directly in manufacturing. Moreover, the domestic battery manufacturing sector is developing rapidly, which creates a favorable environment for scaling our revenue post-facility startup. Significant cobalt production originates from the Congo, while lithium production remains limited domestically. So we are excited about the potential to provide real solutions to the market while collaborating with top-tier personnel.

Okay. Well, that's good. I appreciate that. Thank you, guys a lot, and we'll stay in touch.

Thank you, Heiko. Appreciate your joining the call.

Our next question is from the line of Steven Segal with KBB Asset Management. Please proceed with your questions.

Hi, Mark. How are you? Great job on all the advancements you're making. I was just wondering, I heard you mention pillar mining. Can you explain that a little bit, in terms of the cost implications it has for the company and how it helps with current supply issues? Does it make production more efficient?

Yes, thanks, Steven. Thanks for joining us. Our team has worked hard to position us to benefit from the current market environment, and one of the strategies we explored was the ability to pull back and mine more efficiently, ultimately producing safer operations. The pillar strategy was developed two years ago, and now we're executing it. Currently, we're working with the existing sections to implement this method; our second operational section is rolling out in the next 60 days. What’s unique about pillar mining is that we're pulling existing infrastructure close to the surface, contrasting starkly with industry norms today where labor is rare and raw materials are scarce. We are in a unique position compared to our peers because we're not sourcing new infrastructure; we're repurposing existing resources. Consequently, we anticipate a substantial gross profit margin, as we’re simultaneously mining while maximizing our existing infrastructure, putting us at a competitive advantage versus industry players struggling to procure both personnel and essential components to maintain production. This strategy is expected to reduce our operational costs by about 30%, enhancing not just production but also cash flows moving forward, and we look forward to better results as we enter the second quarter.

Okay, great. Thank you for that.

Thank you. We appreciate you. Thanks for joining.

Thank you. Our next question is coming from the line of Kyle Gallagher with Merrill Lynch. Please proceed with your questions.

Yes. Hey, thanks, Mark, for the call, and congratulations on grinding through this with voice issues. I hope you feel better after this call. I just have a question. I want to ensure that I'm wrapping my head around this correctly. You had a tweet come out around March 1, if I remember correctly, mentioning your mini stoker representing around 22% of daily output and about $110,000 of daily sellable revenues from it. So just basic math: am I to expect you guys are able to sell about $500,000 a day in stoker, is that correct?

Stoker represents about 22% of our overall daily production output from Perry County. So, 600 tons of stoker constitutes roughly 22% of our total production. The stoker product has a higher market value than our other products due to its specialized carbon size and ash quality, and it’s being shipped to the Nordic market for various applications, including producing silica in Gorilla Glass. We’re not seeing that the stoker production itself amounts to half a million tons; rather, 22% represents its share within our overall production metrics.

Okay. So, for simplification purposes, what’s the best way to think about your revenue moving forward? I know you're ramping things up and there are fluctuations in the market. But just a straightforward way of contemplating that, what might be expected for revenue trends for the remainder of the year?

We expect our revenue to demonstrate continued strength. For March, as mentioned, we indicated a range of $5.25 million to $6 million. We believe it would fall towards the higher end. With additional sections coming online, our overall production capacity is projected to increase by about 60%. April should reflect better performance, and we are already building inventory for the upcoming month. We anticipate ongoing revenue growth, as March marked our strongest month thus far. Also, investments in mining infrastructure and our ability to strengthen our workforce provide stability for our operations going forward. We believe we will maintain upward revenue growth moving into the second quarter and throughout the year.

Got it. Yes. I appreciate the extra color there. I think I misunderstood something earlier, but thanks again for the clarity on March numbers and what to consider moving forward. Thanks for everything, guys.

Thank you. Thanks for joining.

Thank you. At this time, we’ve reached the end of our question-and-answer session, and I’ll turn the call back to Mark Jensen for closing remarks.

I want to thank everyone for joining the call today. I apologize for my raspy voice and any difficulty understanding me. My little boy was unwell and passed something to me. Fortunately, my wife, the rock of our family, is home taking care of him while I’m engaged in work. 2021 was a developmental year; things initially progressed slower than anticipated, and we understand our obligation to perform and hit our numbers. We take that commitment seriously. We're hitting our stride, executing our business plan from both revenue generation and operational profitability perspectives. Management continues to invest in our operations and the company, purchasing stock personally as we believe the company is undervalued compared to our peers based on current performance. The value from our technologies in critical and rare earth elements combined with revenue generation and operational profits from our carbon business positions us uniquely to execute without needing to revert to the investment community for additional capital, which can unfortunately pressure stock values. We have the capacity and cash flow to continue growing our business and position for sustainable growth using our current assets. We are enthusiastic about the market environment as it stands and forecast sustained demand for our products. We are eager to have our first Rare Earth processing facility operational, marking a potentially great year for both our Rare Earth and carbon business sectors. We genuinely appreciate you choosing to join us on this journey and for being invested in our company. I assure you that our team is dedicated to achieving success by hitting our numbers and driving growth, generating shareholder value to ensure long-term rewards for all. Thank you all again, and we look forward to sharing further updates in the upcoming quarter as we reach several milestones within our business.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.