American Resources Corp Q1 FY2022 Earnings Call

Good day, ladies and gentlemen. And thank you for joining this American Resources Corporation First Quarter 2022 conference call. As a reminder, all phone participants are in a listen-only mode, but later you will have the opportunity to ask questions. Also, please be aware today's session is being recorded. And now to get us started with opening remarks and introductions. I'm pleased to turn the floor over to VP of Corporate Finance and Communications. Mr. Mark LaVerghetta. Welcome, sir.

Thank you, Jim. Good afternoon, everyone. On behalf of American Resources Corporation, I'd like to welcome everyone to our first quarter of 2022 conference call and business update. We welcome this opportunity to not only provide an update and discuss our accomplishments since our last update, which was only just about six weeks ago, 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 with me 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 of our normal cautionary statement. 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 the 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 today following our prepared remarks and for anyone waiting to ask a question, you'll need to dial in by phone to get into the queue. Because we recently held our last update call just about six weeks ago, we'll try to streamline today's call the best that we can and then get to the questions and answers. We're going to begin today's call with a few comments from Kirk Taylor, our Chief Financial Officer. Kirk.

Thank you, Mark and thank you, everyone for joining us. Again, we appreciate everyone's time and interest in American Resources Corporation. The first quarter of 2022 signifies the beginning of our production ramp during one of the strongest carbon and infrastructure markets you've ever experienced. For the quarter, our total revenue of $9.8 million is just over a 100% sequential increase from our fourth quarter 2021 revenues of $4.53 million. You're not really comparing it to the revenues during the closures of 2020 and 2021. We marked the beginning of an inflection point for our company. Given the supply disruptions, labor shortages, and supply constraints, our team has forged ahead in monetizing the investments we have made over the past year and a half. On our last call, we communicated the majority of our Q1 revenue was generated during the month of March when we provided the range of $5.5 million to $6 million of revenues for the month. While mining is not completely linear today, we're seeing our Carbon operations produce more consistently in a market where our current realized pricing is very strong. Also for the first quarter of 2022, we were able to generate adjusted EBITDA of $5.8 million compared to a positive $1.3 million adjusted EBITDA in the fourth quarter 2021 and an adjusted EBITDA loss of $2.8 million in the prior year period. Again, this signifies the beginning of a significant inflection point for our company and operations. Based on our broader, more consistent production level, strong pricing environment, and the strong team execution, we believe this is a foundational point for future growth in 2022. Our unique platform of assets is in a great position to deliver what we believe are attractive returns of value to all of our shareholders. This includes our mining assets, which we are currently operating, as well as dozens of idled permits within our portfolio, including the permits for gained complex, which we had idled in 2019, but we've recently leased to a new operator which will enable us to further leverage the strong carbon market without expanding our own capital. This also includes our ancillary value creation assets, such as our sponsored SPAC, American Acquisition Opportunity, as well as our ownership in Novusterra. I would ask you both to look at those companies' public documents for future updates. Over the past year, we've been able to eliminate $15.6 million of debt and payables, as well as investing over $23 million of expense development costs, positioning both our American Carbon and American Rare Earth platforms for strong growth in high demand markets. Both the current infrastructure and the electrification economies, where we are currently expecting to maintain a certain degree of pricing power in both markets. Our debt balance currently sits at approximately $13.1 million in total dollars of which $2.6 million is equipment financing, $8.9 million is in the form of convertible notes with our long-term partners, as well as $1.6 million remaining on our outstanding PPP loans. At the end of the quarter, our shares outstanding currently stood at 66.2 million Class A common shares. Again, at the end of the quarter, our cash on hand is approximately $5.2 million, allowing us to fully execute our business plan. I do now turn the call over to Mark LaVerghetta for some comments on our American Rare Earth Division. Mark.

Thanks, Kirk. As we've previously stated, our American Rare Earth division represents a very strategic opportunity for us. We continue to be on a timeline to commence operations at our first critical Rare Earth element isolation and purification facility in the coming weeks. I'd like to reiterate and stress the significance of this milestone. As we bring this facility online, we will be the first domestic commercial producer of isolated and purified Rare Earth elements. Additionally, we feel it is strategic and to our advantage to address not only our domestic supply chain needs but also our sustainability needs. Accordingly, our first production line will be focused on producing isolated and high purity Rare Earth magnet metals such as neodymium, praseodymium, and dysprosium from recycled Rare Earth permanent magnets. These metals are needed to produce high efficiency electric motors, such as those used in electric vehicles and wind turbines, as well as in other advanced technology and defense applications. We expect to have our second production line operating approximately 60 days following the first, which means we'll be targeting late second quarter to early third quarter of this year. This train will isolate and purify specific battery material, such as lithium, cobalt, nickel, and manganese from end-of-life recycled lithium-ion batteries. So what differentiates us? Our technology and our process from others looking to address this market. By addressing our sustainability needs, we eliminate the need to extract feedstocks from traditional mining methods. While the massive expected demand growth will obviously require mined ores, our process eliminates the environmental impact, the lengthy permitting process, and high costs associated with extraction through mining. Additionally, our feedstock reserves from end-of-life products are growing rapidly, especially with the advancement of the electrification movement and the onset of electric vehicles. The time to establish a low cost, flexible, and environmentally safe platform to address this part of the market is now. And that's exactly what our isolation and purification capability supports. Second, our process allows us to separate and purify all of the targeted critical and rare earth elements back to qualities or grades required to be used in the manufacturing of new batteries and magnets. This is key, as currently we believe no one can recycle battery material back to battery grade qualities in a comprehensive cost-effective, and commercially viable application. We recently announced that we secured worldwide rights to new provisional patents for producing battery-grade lithium, cobalt, nickel, and manganese. This milestone highlights not only our ability to accomplish this while we widen and deepen our mode but also showcases our team and partners. We feel that our incredible partnerships and team are clear differentiators as we prove ourselves to be the leaders in the final stage isolation and purification process. And in the domestic marketplace using chromatography. We feel we showcase these unique attributes that put us in a strategically beneficial position to collaborate and partner with other market participants up and down the supply chain, as well as garner support from the federal government given their growing focus in this area. I'd like to now turn it over to Mark Jensen, our Chairman and CEO, for some additional comments. Mark.

Thanks Mark and thanks everyone for joining. Overall, we continue to see strong demand for the products that we produce. Not only on the met carbon side, but also on the critical and Rare Earth elements space. We've seen strong interest from customers across all of our products and our ability to continue to ramp up our production to meet this demand. Global carbon demand for steel production continues to be strong from our perspective, supply remains constrained, and ultimately, we believe it will remain constrained for a number of years, which will help sustain this market at very high levels. The pricing environment for our high-vol PCI and especially stoker carbon products remains very healthy. Over the course of the last few months, our pricing of these products has switched to index-based markets and will enable us to take advantage of the current market environment while we continue to expand our production at all of our facilities. As we're closer to bringing our first critical Rare Earth element isolation and purification facility online, we're seeing various parties interested in entering into off-take agreements for our products, both on the magnet side and also on the battery side. It's a very exciting time for our domestic supply chain to begin to establish itself. And we find ourselves in a unique position, capable of being a value-added partner and supplier to a variety of participants. It is clear that the demand for domestically produced products is rapidly materializing, and true sustainable products is definitely an area of high importance. The ability to recycle products that are going to phase out today and bring them back to magnet and battery grade import materials is of high importance and will be needed to sustain the growth of the electrified economy. For American Carbon, we are focused on continuing to ramp up our current operations by bringing additional production online. The broader base of our production we saw merge continues to produce at a more normalized and consistent rate. In any mining business, you have various disruptions, and you have various challenges to overcome. Our team has been able to navigate those, and we will continue to do so consistently to grow our production each month from all of our complexes. At PCR, we currently have two super sections, one on walking and one full super section. And we are also currently developing a second pillar section. What's unique about how we set this facility up is of extreme importance. One, we took over a bankrupt operation that needed significant help. We needed to make it a safer complex for our employees to work at. We needed to make it more rewarding for our employees. We fought for these employees and continue to do so. By establishing the mine plan that we've put in place, we are providing a more productive operation for everyone going to work at this mine now and for the next 20 to 30 to 40 years because of the mine plan we established. Implementing two pillar sections enables us to pillar back the mine to reduce the out by costs, but also reduce the out by risks that are present at this mine due to the degradation of facilities prior to us acquiring it. We have put a substantial amount of capital in place here and we've developed a mine plan that will be the only sustainable plan at the operation. At the McCoy Elkhorn Complex, we are now running two continuous miners at our Carnegie 1 mine. Our focus is on developing this mine to utilize existing infrastructure in the current cost structure to add that second development section. By doing so, we will be able to expand our production by roughly 100% while increasing our costs by only about 30%. Most of the necessary equipment is already in place to accomplish this goal, and we anticipate continuing this development as we speak, with a goal of having it operational in the third quarter. What we also have in place at our Carnegie mines is our Carnegie 2 mine. We are currently in the development phase of this mine and believe we will have substantial announcements in the very near future about our progress in bringing this mine online swiftly. The good news is, we have already invested the majority of the capital needed to develop the Carnegie 2 mine, and the Carnegie 1 mine is already generating solid cash flows. We're excited to announce that we have put a bonus program in place to reward our employees so that our employees’ interests are fully aligned with our stakeholders and our shareholders. During this first week of announcing this bonus structure, our employees achieved that success, allowing them to earn bonuses. Ultimately, we believe this will position our company for success by rewarding our employees in the same way that our shareholders will be rewarded as we generate cash flow. As we bring on the Carnegie 2 Mine, we anticipate a similar structure at the Perry County complex where we can reward these employees too. We have been working on expanding and optimizing these complexes to maximize their efficiency. We initially anticipate our Carnegie 2 mine operating with one section with the goal of expanding that into a second section. We anticipate this mine being brought into production over the next 60 to 90 days, which could add an additional $25 million to $35 million in additional revenue based on producing 8,000 to 10,000 tons of month out of this complex. Beyond our Carnegie 1 and Carnegie 2 mine, we have several other mines in this region that we can bring back online and fully utilize the McCoy Complex to its maximum potential by utilizing our existing infrastructure, lowering our CapEx, and partnering with our customers to bring these mines online faster. With our current operations, we feel we are in a very strong position. We are a growing provider of carbon products for our customers and are able to fulfill the vast majority of our $110 million sales target for the 2022 year while also continuing to expand that production beyond that. As we continue to execute at our Perry and McCoy Complex, we remain focused on progressing our Wyoming County divisions and having conversations with strategic partners on that complex as well. We continue to work through the process of the $45 million tax-exempt bond with the State of West Virginia, which we have received preliminary approval for. With that issuance, we are excited to showcase how we will position this complex to be the first of its kind, combining advanced carbon and Rare Earth element processing facility with premium metallurgical carbon production, along with our unique Rare Earth capture and process technology all in one location to create a profitable venture from day one. Additionally, as we recently announced, we’ve leased out our Dean mining complex, showcasing the magnitude of our asset base. The partner we leased to is projected and committed to hitting that million tons of production within the first year, generating a minimum of $5 million of additional cash flow to our bottom line, while also offsetting approximately $0.5 million of costs. The processing capability that we leased out represents about 3% of our total processing capacity as a company, highlighting our vast asset base that we can continue to bring online or lease out with other partners to generate cash flow for our investors, which is paramount for us. This complex was not considered in our near or immediate term plans, but allows us to generate additional cash flow by leveraging the strong carbon markets we are currently experiencing. We also have a significant number of reserves and permits that we can bring online, as well as processing capabilities to further continue to expand our cash flow. To reiterate the importance of our American Rare Earth Mine, I firmly believe we will be the first commercial producer of isolated and purified Rare Earth and critical elements in the United States while also introducing a practical and efficient solution to our sustainability needs. We are definitely striving to be first to market. But we want to provide the best solutions for the domestic need, and that is what we are confident our process, team, and technology can achieve in showcasing through the numerous conversations we are having with strong strategic partners that we can expand our operations with both upstream and downstream sides of our business. As we achieve these goals, we are highly focused on unlocking value for American Resources. We have long believed that the value of our extensive asset base, growth potential, innovation IP, and leading position in redefining how our most essential resources are sourced and processed is not being reflected in our current stock price and current valuation of our company, especially following the recent market sell-off. Ultimately, we plan to address that. We are looking at opportunities to unlock that value for our shareholders and generate shareholder value that we believe our shareholders deserve from the efforts and performance of our company. As you can see in our public filings, we are putting our money where our mouth is and will continue to do so with consistent insider purchases. We will continue to evaluate all options to execute and deliver the best online value for our shareholders, including a possible spin-off of certain parts of our business and subsidiaries to bring value to areas that we believe are more reflective of what we have in the company. As Kirk stated earlier, the first quarter this year saw a 100% quarter-over-quarter increase in revenues. Our operations are well-positioned to continue on a strong path of consistent returns, revenue growth, and profitability with our operations beginning to put cash back onto the balance sheet. We don't foresee us needing to issue additional equity or raise additional cash. Just to reiterate, as the largest shareholders in American Resources, our management team is focused and committed to maximizing the value for all of our shareholders, and we thank you for joining today and for listening and being a part of our company. We'd like to turn it back over to the moderator for some questions and answers.

Thank you, gentlemen. And to our audience joining us today over the phones, at this time, if you would like to ask a question, please signal us. Once again, ladies and gentlemen, if you would like to ask a question, we'll pause just for a moment to give everyone a chance to signal. Once again, ladies and gentlemen, if you do have a question, we'll hear from Steven Segal at KBB Asset Management. Please go ahead. Your line is open.

Hi Mark. So my question is, it seems like the market is not giving value at all to the progress you've made every year. And I know you mentioned about the spin-out. Is there any real plan for that to separate the companies this year?

Yes, I appreciate you joining. Yes. I believe there is. One, we've had numerous conversations with many institutional investors that have stated it is not that they don't require us to separate the companies; they believe that it would be highly beneficial if we did. There are people that are looking to invest in the Rare Earth critical elements side of the business that may not be looking to invest in the met carbon side of the business. So we are actively working on a plan and evaluating a plan to unlock that value and separate the company into two distinct public companies of which all of our investors will benefit from that. This would also position our Rare Earth and critical elements side of the business to further expand through collaborative partnerships on both the magnet and the motor side of what we're doing, as well as on the upstream and downstream sides of the business. So it’s something that we believe our shareholders are not valuing, and we are looking to implement that plan very quickly.

Hey Mark, congratulations again on a good quarter. I just had two quick questions. Do you think that the Rare plant will be up by the end of June? Did I think about what you said, or was it the third quarter that we're looking at? That was the first question. The second question would be, can you give us maybe an idea of what you're looking for revenue-wise off of the coal in the next quarter going forward? Thanks.

Thanks, Mike. We believe that our initial production train will be operating in the month of June in Noblesville, Indiana, and we are excited about the progress. Jeff Peterson, Bill Smith, and the team there have done a phenomenal job putting this plan into execution and getting the facility ready to scale up and grow. If you look at our last quarter, we went from right around $4 million to $9 million. We anticipate seeing similar growth in our business and will continue to execute on that growth. Looking into the third quarter, we expect similar expansion as we talked about Carnegie 2 and the expansion of all the Carnegie operations will allow us to continue that revenue growth with minimal CapEx needed since we have already spent the money and have the equipment in place.

You mentioned you did roughly $6 million in March, so I'm assuming if we maintain that pace, we would reach about $18 million this quarter?

We are not providing exact revenue guidance. However, we do think we'll have strong growth. There will be some volatility depending on when trains go out and similar factors. As we continue, the volatility should diminish as we expand, given it's based on timing of shipments and production expansions. There will always be disruptions and positives as well, but we anticipate good steady growth and cash flow putting more cash back onto the balance sheet.

Right. One more question. Are you seeing the market slowing down at all right now in the coal side? With the infrastructure bill coming up, you would think it would pick up again.

We are not seeing any slowdown from customers. What people need to realize is that the stock market is not always indicative of what people are selling products for. There is not always a direct transaction that reflects pricing volatility. Demand-wise, we can produce everything and sell everything we produce, probably five times over. There's still a considerable amount of demand, both domestically and internationally. As we ramp up, we will be able to take advantage of market conditions. For example, at our Carnegie 1 mine, we just switched to index-based pricing from a legacy contract. So we went from selling between a $100 and roughly $118 in the first quarter, and that ramps up to around $180 now, and we are likely close to $300. That will be reflected in this coming quarter. We are starting to see our growth ramp up because we are moving onto better contracts, and that’s a good sign. Overall, we are witnessing consistent demand.

Hey guys, thanks for taking my questions. I hope you can hear me okay.

Yeah, I can.

Wonderful. Let's talk a little bit about these $45 million in West Virginia tax-exempt bonds that you have working on. Can you provide some color on the timing of the close, and can you confirm that there aren't any steps, approvals, or anything that is required?

As we announced, we received preliminary approval by the State of West Virginia, with Citigroup underwriting the deal. We are currently working with the engineering firm to get through that process. We are also in conversations with strategic partners in that area, including customers that are very interested in that quality of coal. The hurdles involve completing the engineering report and addressing questions that arise. We are engaging in discussions with very strong strategic alliances in the meantime that could help expedite the ramp-up of the operation as well. We believe this is standard for what we are going through right now to get wrapped up. We have always anticipated this to be an end-of-year type development as we start to bring it online and begin ramping it up. We have a lot of growth on the horizon and a lot of execution planned for the upcoming quarters.

Your current specialty metallurgical carbon backlog is both a $110 million; obviously, that's a huge number. At what point should we expect you guys to start tightening pricing a little? Given that inventory has many quarters of sales, there must be a point where that starts making sense?

We're starting to see a strong ramp-up in revenue from our sold products. We honored existing contracts and will continue to do so. At the McCoy Complex specifically, we are now taking advantage of the current market environment, where we've transitioned to index-based pricing from legacy contracts. We sell at a slight discount to the high mid-vol, high-vol MEK index on the East Coast, minus transportation costs. We are starting to take advantage of this market, and I don't anticipate it coming down from where we are currently selling. Demand is very strong.

That makes sense.

Does that answer your question?

It does. Just a clarification regarding the quote from your release. You mentioned a significant increase in carbon demand and price realization being seen as companies scale operations and are on track this March to realize operating profit. The March numbers are included in the financials that you provided. Are you indicating that this should be the standard going forward? Do you expect to see operating profits for every month?

No, I think you're interpreting that a bit too much. We break even at about $3.5 million a quarter in revenue. Although we currently have some variable costs involved but not many. As we continue to ramp up production, as in the March quarter that was a highly profitable time for us, we anticipate being profitable moving forward. We will have previous months that started slower. January is a slow starting month. But we are ramping up, and I don't foresee any issues with meeting expectations for continued profitability. However, it will be a gradual process as we bring on the next sections at various mines. The mining sector experiences fluctuations, but we have many positive aspects as well.

Very helpful. Thank you all and stay safe.

Thank you.

We'll hear next from Phil Cordell at Cordell Enterprise. Hello, Mr. Cordell, your line is open. Is there any chance you may have us on mute?

I did. Thank you. Can you hear me now?

Yes, we can.

Mark, thank you for your time and for sharing all this and congratulations on all the progress. You mentioned you'd do some things to help the share price reflect the increasing value that you've been pulling out. I saw some conversations about whether you all were considering some share buyback program of some type. Is that something more noise or is that something you're considering?

Yes. I appreciate it, Phil. Right now, we are focused on putting cash back onto the balance sheet. We are not worried about our markets, but the world is facing volatility, and we believe it is prudent to build up our cash reserves. Our debt continues to decrease, and we are in a good position from a balance sheet perspective. In terms of using cash for stock buybacks, I would not anticipate that over the next few quarters as we prioritize cash back on the balance sheet. However, if afterward we still see the market not reflecting our value, that is an option. For now, we are focused on growth in the Rare Earth business, which should also generate cash flow based on existing customer discussions. After we've clarified values for both businesses, spinning them off may be a potential strategy then, assuming the carbon side of the business acts as a significant cash generator. For the time being, we think it is wise to continue building our cash balance and seek opportunities for organic expansion.

Thank you. Yes. Sounds good.

Thank you.

At this time, we have no further questions from our audience today. Mr. Jensen, I will turn it back to you for any additional or closing remarks.

I want to thank everybody that joined today. I think we are in a really unique position as a company. We have a business that has strong markets for all of the products we produce. The rare-earth and critical elements side of the business for both magnets and batteries is growing. As a team, we are not just sitting back; we are actively seeking out partnerships and working toward ramping up our operations. We believe we are not being fully valued at this moment. We consider ourselves to be undervalued based on our peers. Execution is key, and we believe continued effort from our team will help drive that value and bring in institutional investors who have been reaching out to us recently. Our focus remains on generating value for our shareholders, and we thank you all for your interest in our company. We look forward to the coming quarters. Thank you.

Ladies and gentlemen, this does conclude today's American Resources Corporation First Quarter 2022 Conference Call. You may now disconnect your lines, and we hope you enjoy the rest of your day.