Earnings Call Transcript - AREC Q2 2022

Operator, Operator

Greetings, and welcome to the American Resources Corporation Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark LaVerghetta, Vice President, Corporate Finance and Communications. Please begin.

Mark LaVerghetta, Vice President, Corporate Finance and Communications

Thanks, Sara. Good afternoon. On behalf of American Resources Corporation, I'd like to welcome everyone to our second 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, but also on how we’re uniquely positioned in both the carbon and critical and rarest element markets. Also on the call with me 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 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 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. For anyone waiting to ask a question, you'll need to dial in by phone to get into queue. We're going to begin today with a few comments from Kirk Taylor. Kirk?

Kirk Taylor, CFO

Thanks, Mark, and thank you, everyone, for taking the time this afternoon to join us. The second quarter of 2022 signifies the continued production ramp that really began this past March. And in a market environment that continues to be highly supply constrained. As a reminder, our mining focus is on high-quality metallurgical carbon as well as PCI specially carbon. For the quarter, our total revenues of $16.2 million represent a 78% sequential increase from our first-quarter revenues this year and are really not comparable to the revenue from prior periods when we were largely idle due to the COVID-19 pandemic. This highlights early growth attributes of our carbon business and a platform that we built. While mining is not completely linear, our carbon platform is uniquely positioned to be a meaningful contributor to the much-needed supply growth of metallurgical carbon and specially carbon products from our region, where many of the mines are actually becoming exhausted and unable to expand. Also for the second quarter of 2022, we generated adjusted EBITDA of $11.5 million, compared to an adjusted EBITDA loss of $537,000 in the prior-year period, and a positive $5.8 million in the first quarter of this year, again signifying the beginning of a significant inflection point for our mining operations. Our unique platform of assets is in a great position to deliver what we believe is an attractive return and value to our shareholders. This includes both our mining assets, which we are currently operating, as well as leased-out margin complexes, including the Dean mining complex. Over the past six months, we've been able to eliminate approximately $2.9 million of debt and invested over $18.3 million of expense development costs to position both American Carbon and reELEMENT for strong growth in high-demand markets. We are currently experiencing and expect to maintain a certain degree of pricing power, especially within reELEMENT, where we are the only domestic producers of rare earth and critical minerals in the United States, as well as the increased tax credits built into the Inflation Reduction Act. Our debt balance currently sits at approximately $12.1 million in total, of which $2.6 million is equipment financing, $8.9 million is in the form of convertible notes held by long-term partners, and $2.5 million is in the form of mine development loans from an offtake partner. Our shares outstanding currently sit at just $66.5 million, all Class A common shares. Our cash on hand at the end of the quarter is approximately $4.8 million. We are in a great position to continue to expand and execute across all of our business lines. I'll now turn it over back to Mark LaVerghetta for some comments on reELEMENT. Mark?

Mark LaVerghetta, Vice President, Corporate Finance and Communications

Thanks, Kirk. As we've previously stated, our newly rebranded reELEMENT Technologies division represents an incredibly exciting and very strategic opportunity for us. I'd like to remind everyone to visit our new website, reelementtech.com, and if you haven't yet watched the two new videos that provide some insight and imagery into our separation and purification process and technology. One of the videos is on the home page, and one of the videos is under the technology portion of the website. I'd like to reiterate and stress the significance of our recently announced milestone of achieving ultra-high pure Rare Earth elements on a commercial scale at our first separation and purification facility. Now that we have brought this facility online, we are the first domestic commercial producer of separated and purified Rare Earth elements. Additionally, we feel it is strategic to our advantage to address not only our domestic supply chain needs but also our sustainability needs. This first commercial production line produces 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 other advanced technology and defense applications. We are still on track to have our second production line operating later this year. This production train will isolate and purify specific battery minerals such as lithium, cobalt, nickel, and manganese from end-of-life recycled lithium-based batteries. We staggered the build-out of these two production lines to improve the overall implementation and operations of the facility. Additionally, to support these growth efforts, we recently bolstered our already amazing team with the addition of a Chief Commercial Officer, Chris Moorman, to further develop our upstream and downstream partnerships, and our Director of Research and Development, Yi Ding, who was an important part of our amazing team at Purdue University that developed this innovative chromatographic separation and purification technology. So, what differentiates us, our technologies, and our process from others looking to address this market? First, it's our team. As a reminder, chromatography has been around for a century and commercially used in various industries like pharmaceutical manufacturing for decades. We believe we have the world's best chromatography experts and team behind our reELEMENT division. Second, by initially addressing our sustainability needs, we eliminate the need to extract feedstock from traditional mining methods. While the daunting demand growth will obviously require an all-hands-on-deck approach, our process eliminates the environmental impact, lengthy permitting process, and high costs associated with extraction from mining. Additionally, our feedstock reserves from end-of-life products are growing significantly. The time to establish this low-cost, flexible, and environmentally safe platform we've put together to address this part of the market is now. With our recent milestone, we have truly brought the circular economy for these critically important minerals online. Third point, our process allows us to separate and purify all of the targeted critical and rare earth elements back to qualities, purities, or grades that are required in the manufacturing of new batteries or new magnets and for the requirements spelled out in the newly passed Inflation Reform Act. This is key as currently, we believe no one can recycle battery material back to battery-grade qualities in a comprehensive, cost-effective, or commercially viable application other than us. An important distinction to highlight is that our technology is the only comprehensive solution to recover and re-purify all of the critical and rare earth elements in the entire powertrain of an electric vehicle, including both batteries and motors. No other solution today can offer that value. We feel we will further showcase these unique attributes as we scale our real-world solutions across our domestic supply chain, putting us in a strategically beneficial position to collaborate and partner with other market participants throughout the supply chain, as well as garner support from the federal government, given their obvious focus in this area. Included in both the Bipartisan Infrastructure Law and the newly passed Inflation Reform Act, which positions us greatly, given we are the only commercial source of separate and purified rare earth elements in the United States today that we know of. With that, I'd like to now turn it over to Mark Jensen for some additional comments.

Mark Jensen, Chairman and CEO

Thanks, Mark. I'd like to first start off by recognizing and discussing the recently devastating floods that have taken place in Eastern Kentucky. We've had many employees and/or members of the local community that have been hit hard by this catastrophic event. If you're looking to support the cause, please look to some of the local charities that are providing assistance. It has been tough for many of our team members, and they are in our thoughts and prayers. Second, I'd like to discuss our special committee, which we recently announced. Our intentions are to form a special committee to better unlock the value of American Resources. Through the establishment of the committee, which includes members of management and members of the Board, we are looking at identifying methods to unlock value, which we believe we hold underneath the corporate umbrella of American Resources. This may include stock buybacks, which we believe are currently being undervalued based on our operation strength, or spinning off shares to underlying investors of one of the divisions and/or continuing to evaluate other alternatives such as sales of assets. We are looking at maximizing value for all of our shareholders. Given the execution of American Carbon and reELEMENT, we believe and are extremely excited about the opportunities that both entities have, and we believe that the enterprise value as a whole is currently trading at a substantial discount relative to our peers. We’re going to continue to work on ways to unlock that value for our shareholders. Let me talk a little bit about American Carbon. This is an exciting division of our business in which we see strong growth for many years to come by unlocking the value of our specific properties. We have spent years restructuring and positioning it for the future. At American Carbon, we continue to see strong demand for the products that we produce. Global carbon demand for steel production continues to be relatively strong, albeit off of its recent highs due to COVID restrictions in China. We believe these COVID-related restrictions and the related carbon price softness off of their all-time highs will abate relatively soon. From our perspective, supply continues to be constrained, and ultimately, we will see major shortages in the metallurgical carbon industry for a number of years to come. Furthermore, thermal coal prices are extremely high, as the world is experiencing its first energy crisis of the 21st century. We see significantly higher prices over in Europe due to the need to supplement traditional feedstocks that historically came from Russia. These high energy prices are driving decade-high inflation in some of the countries experiencing major energy shortages, exacerbated by the situation in Russia and Ukraine. As a result, we're seeing net carbon crossing over into the global thermal coal market, further squeezing met carbon supply given these extremely high thermal coal prices. We believe this entire backdrop has put a higher floor in place for carbon prices for the foreseeable future. Ultimately, this will exacerbate the supply problem that the world is going to face within carbon prices as China comes back online from their COVID restrictions and as the overall economy stabilizes. This puts our growth-oriented American Carbon platform in a unique position as being one of the largest sources of domestic growth in the market and the ability to continue to ramp up supply by bringing additional mines online from our existing permits. Our focus is to continue to ramp up our currently operating complexes by bringing additional production online at our producing mines, as well as creating new organic mine production. Our McCoy Elkhorn Complex continues to be one of our biggest growth engines for American Carbon. Now that we've commenced production at our Carnegie 2 Mine, we're already planning the next two mines to bring online to feed our McCoy Elkhorn Complex. As a backdrop, McCoy Elkhorn is a large complex with two processing plants, a rail load-out facility. Historically, it was fed by over 10 mines. Our ability to continue to ramp up and feed the processing plant capacity is substantial, and we can bring these additional mines online. The unique thing about these mines is their low-cost operational nature. They fit well within the current labor market and allow for expansion once we get underground, driving revenue growth from our existing producing volumes. We've already started planning and development on Carnegie 3, mine 17, and additional surface jobs in the region. We are looking at bringing three to four additional mines online in a low-cost format. Each of these mines is intended to be brought online using cash flow from operations without needing to raise additional equity or substantially leverage up the balance sheet for this growth. Our Perry County operation has been impacted by the recent floods, but we anticipate getting back online in the next five to 10 days. The Dean mining complex is getting ready to start production, and we’re excited about that cash flow contributor as we evaluate leasing out additional operations to bolster cash flow across all properties. We are actively working through the process of the $45 million tax-exempt bond that the state of West Virginia has preliminarily approved. This complex is unique as it will be the first time ever that a mining complex will tie into our electrolysis technology, producing both high-value metallurgical carbon, as well as rare elements. We are excited to showcase this complex with the advanced carbon process and our RE processing facility. To expand upon the reELEMENT comments that Mark just made, I want to reiterate the importance of our recent milestone. We firmly believe as the first commercial producer of isolated and purified critical and rare elements in the US market, we are introducing a practical solution to address sustainability needs. The US needs a domestic supply chain that can meet aggressive government targets. We believe our technology and its scalability will allow us to support the demand driven by both battery materials and EV applications. We are well positioned to showcase our chromatography and purification technology as the new industry standard. The passage of the Inflation Reform Act, with its significant targets for the automotive industry, further supports our strategy. The EV tax credit and the advanced manufacturing tax credits align with our objectives, ensuring that we are capable of meeting the increased demand within the next few years. The second quarter this year saw a 78% increase in revenues quarter-over-quarter, following a 100% sequential increase in the first quarter. Our operations are on a strong path of consistent returns, revenue growth, and profitability. I thank you for joining the call today. We’d like to turn the call back over to the moderator for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Mike Niehuser with ROTH Capital Partners. Please go ahead.

Mike Niehuser, Analyst

Good afternoon. Congratulations on all of the above. I won't isolate any particular thing, but really quite an amazing quarter. Just a couple of quick questions for you. In addition to the Inflation Reform Act, you mentioned about the national strategic reserve. How might that practically fit in with your purification of Rare Earths, is it real?

Kirk Taylor, CFO

Yes, Mike. I'll address it pretty broadly, and I'll let Mark jump in as well. What’s unique about the products we produce? From the Rare Earth perspective, we produce oxide. So neodymium and praseodymium dysprosium oxide are very storable. So from a strategic reserve perspective, we’ve had many conversations with individuals from military applications to the Department of Defense about our technology and what it provides. So from a strategic reserve perspective, there's a pretty big emphasis on that right now. For example, we would love to supply our government and make it more secure, and our technology enables that. Importantly, we are the only company in the country that produces dysprosium in a pure form, putting us in a unique position as a supplier for both the strategic reserve perspective and the magnet production industries.

Mark LaVerghetta, Vice President, Corporate Finance and Communications

Mike, it's Mark LaVerghetta. The only thing I would add to that is I think the Department of Defense and Department of Energy are highly focused on the sustainability needs of our supply chain. As I mentioned earlier, it's an all-hands-on-deck approach. We will need both virgin ore sources and recycling, and all are focused on sustainability needs. We've had discussions around that with government officials. Our technology and process, given the flexibility, the low cost, and our ability to co-locate, provides good sources and good uses for collaboration with them. So we'll continue to drive those initiatives forward.

Mike Niehuser, Analyst

Yes, I guess I was just thinking that with a lot of manufacturing in China, you'd likely be providing material that would actually accelerate the return of those manufacturing organizations back to the United States or North America, and that the strategic reserve would be a nice buyer for these materials to bridge their ramp-up to help encourage you.

Mark Jensen, Chairman and CEO

Yes. The scale of our business in the sale of our oxides is not predicated upon the strategic reserve. There are numerous magnet manufacturers both domestically and overseas looking to buy our product. Our cost structure is extremely attractive—especially given the current regulations and tax bills that have been passed, we have no concerns with selling rare earth elements, especially being the only domestic producer. In terms of growth, our current facility can produce at an expanded scale, and we will be looking at co-locating additional production facilities beyond Indiana.

Mike Niehuser, Analyst

Okay. That's a good answer. So basically, you can sell everything that you produce. Do you think we are going to see revenues, a new line for revenues for rare earths in the third quarter?

Mark Jensen, Chairman and CEO

Probably not in the third quarter, but in the fourth quarter.

Mike Niehuser, Analyst

Okay. And that's pretty much all my questions. I imagine it will probably be the same kind of ramp-up scenario for your battery materials purification, different processes. But as far as the timeline should be fairly representative of what we've seen with rare earths, is that close?

Mark Jensen, Chairman and CEO

Yes, battery recycling is an interesting space. There’s a lot of talk about it. While we are committing to recycling batteries and looking at needed feedstocks, we see tremendous growth potential and capability due to our technology. We're on the path to be the first in the country to start battery production. We anticipate continuing to scale rapidly and position ourselves effectively in this market.

Mike Niehuser, Analyst

Great. One more question before I jump back in the queue. As you compare the perception of the rare earth line versus the battery purification line, I think that the materials you'll be pulling out with purifying the battery end-of-life batteries, people pretty much have heard of lithium, cobalt, nickel, those kinds of materials, and I'm wondering if the market might respond to that segment more significantly compared to the rare earths.

Mark Jensen, Chairman and CEO

Yes, from a headline perspective, the battery production line is going to attract significant attention. However, being the only player in the space for rare earths, we see a huge market potential there as well. Demand for electric motors will continue to increase, and the demand for purified products domestically is substantial. We believe revenue from the battery production line will outgrow rare earths, but they'll both see tremendous growth.

Mike Niehuser, Analyst

Well, very impressive quarter. Thank you for your answer. Also, for your comments on Dean Mining and the Kentucky operations. And thank you very much for taking my call.

Mark Jensen, Chairman and CEO

Mike, thank you. We appreciate you joining.

Operator, Operator

Our next question comes from Steven Segal with KBB Asset Management. Please go ahead.

Steven Segal, Analyst

Hey, Mark, how are you? I just want to congratulate you and your team on the excellent quarter and all that you've achieved; it truly is impressive. In that context, since the stock price seems to have more potential, could you elaborate on the special valuation committee you mentioned that was formed to explore options? Can you provide any insights on the timing of that?

Mark Jensen, Chairman and CEO

Yes. So we're actively working on it, and thanks for joining, Steve. I appreciate the questions. From a special committee perspective, we're definitely looking at ways we can act quickly. We believe our stock is not reflective of the overall enterprise value of all of the divisions combined, and that's something that our team is actively looking at, given the strength of operations and the production growth we’re seeing. We're hoping to make some decisions here imminently, as quickly as possible, while also working hard on the growth of the business.

Steven Segal, Analyst

That's great. Okay. Well, thank you very much.

Mark Jensen, Chairman and CEO

Excellent. Thank you.

Operator, Operator

Your next question comes from Michael Samuels with Berthel, Fisher. Please go ahead.

Michael Samuels, Analyst

Hi Mark. Thanks for taking my call, and another great quarter. I just wonder if you could touch a little on the met coal side. I think at the last report, you said you had about a $100 million backlog and just wondering; plus, how does the pricing look going forward?

Mark Jensen, Chairman and CEO

Yes, backlog is still extremely strong. If you look at our development expenses, we have invested heavily into the operations to set them up for future growth. Our Perry operation is set up to expand production rapidly, and we are looking to take advantage of current market trends on both the met carbon and specialty products side. Our CapEx expense is going to drop dramatically next quarter, which will help our cash flows significantly. Given the current environment, we're expecting volatility in met carbon prices due to limited supply, but we see significant upside potential in carbon prices moving forward.

Michael Samuels, Analyst

Right. Mark, being inline, you mentioned something about the thermal coal price you’re beginning to pay, and I think it was $5 a ton or 5%, whichever is higher. Do you think that will start up in September?

Mark Jensen, Chairman and CEO

Yes, they have a train scheduled to go out in September, so it's a great deal for us. It’s a cash flow contributor, and the contractor has made substantial improvements here.

Michael Samuels, Analyst

Right. Well, again, everything you guys seem to be doing is phenomenal, and I'm sure eventually the market will reflect that. But congratulations in the meantime, and just keep up the good work.

Mark Jensen, Chairman and CEO

Mike, I appreciate you. Thank you.

Operator, Operator

The next question comes from Lyle Posey with NIMO.

Lyle Posey, Analyst

Mark, thanks. I don’t have all of my questions, but I do have one, when do you believe that the lithium line will be up and running?

Mark Jensen, Chairman and CEO

Yes, we stated in the fourth quarter. I think the beginning of the fourth quarter is realistic. It’s set up as a continuous production line; it’s a unique design, and we are currently designing our second production line as well. We can scale it once we get this initial unit up and running.

Lyle Posey, Analyst

My second question was, is it possible to refine ores or have the patents not been covering that?

Kirk Taylor, CFO

So on our magnet – the legacy patents we acquired for the magnet production train do not cover ores. However, we do have all feedstocks for the battery production train. We can produce lithium from lithium brines, ores, or any materials on the battery production train. Our focus right now is looking at recycled products due to higher margins and will consider ores in the future.

Unidentified Analyst, Analyst

Well, I understand that. Our government has spent a great deal of money down in Hondo, Texas, with Lynas developing some processing.

Kirk Taylor, CFO

That’s a classic extraction. The permitting and environmental requirements may pose challenges as we move forward, but our technology positions us favorably, and we've engaged with government entities about our technology.

Mark Jensen, Chairman and CEO

Our focus on recycled materials is where we see significant opportunity. The battery recycling market and sourcing end-of-life materials can provide us with an attractive feedstock.

Unidentified Analyst, Analyst

I agree. Thank you very much, and good luck in bringing us money.

Mark Jensen, Chairman and CEO

Thank you for being on the call, and thanks for your questions.

Operator, Operator

The next question comes from Michael Alicastro, private investor. Please go ahead.

Michael Alicastro, Private Investor

Yes, hello. This is a rather tactical question, but when it comes to the Rare Earth minerals, ReElement, and recycling, who are the target customers? I've heard about government agencies, but are there battery companies or car manufacturers?

Mark Jensen, Chairman and CEO

Yes, on the magnet side, our customers include magnet manufacturers here in the U.S. market that are expanding their operations. For battery materials, those would be battery manufacturers and cathode producers. We believe that with the recent tax credits and regulations, the domestic supply will not meet the required demand, and we are well-positioned to support that demand.

Michael Alicastro, Private Investor

All right, great. I appreciate the answer. So then having a scalable operation like that, you will be challenged with the amount of demand?

Mark Jensen, Chairman and CEO

It will be exciting. Our scalable operations mean we can grow our footprint rapidly. Our technology allows us to process at scale efficiently, and we have the team to ensure the right execution as we navigate the demanding market.

Unidentified Analyst, Analyst

Great, I look forward to the future and the results. So thank you.

Mark Jensen, Chairman and CEO

Thank you. I appreciate you joining.

Operator, Operator

Our next question comes from Charles Bamberg, Private Investor. Please go ahead.

Charles Bamberg, Private Investor

Hey Mark, congrats on another great quarter. I'm wondering if you have any updates on the Novusterra or grassland side of the business. Thank you.

Mark Jensen, Chairman and CEO

Yes. Recently, we terminated our lease with Novusterra due to a shift in their strategic direction. We are currently aligning our efforts towards monetizing our patents and exploring opportunities with Kenai Defense and Texas Tech. Our goal is to support value creation through potentially spinning off divisions focused on these technologies, and we do not want to compromise our value in the public market.

Michael Alicastro, Private Investor

Great. It's awesome that you're a large shareholder as well, like the rest of the retail investors. So we know you have our best interest at heart.

Mark Jensen, Chairman and CEO

We have an awesome shareholder base. I am the largest shareholder and I have not sold a share. I love what our company is doing. We are mediators and we work hard to drive value for our shareholders. We will continue to communicate and share our vision.

Operator, Operator

Our next question is a follow-up from Mike Niehuser with ROTH Capital Partners. Please go ahead.

Mike Niehuser, Analyst

Yes. Thank you for allowing me back in. Regarding the last question, how do you assess valuation or the value proposition? Just what can you say to help people who may not be familiar with that, like myself?

Mark Jensen, Chairman and CEO

Yes. The carbon nanostructure graphene patent we licensed from Ohio University has many applications, and we perceive substantial value in it, regarding concrete additives, batteries, and energy applications. Our technology practically employs carbon as feedstock, producing graphene at a lower cost. We value this technology and the market around it highly.

Mike Niehuser, Analyst

Okay. That was really helpful. And is Dean primarily thermal coal?

Mark Jensen, Chairman and CEO

Dean involves high volatile met coal, PCI, and thermal coal. Given the volatile market trends, we're looking at attractive pricing options, but I don’t want to disclose specific numbers until we confirm actual results.

Mike Niehuser, Analyst

And lastly, what was the company you mentioned that produces rare earth? Was that Neo Materials?

Mark Jensen, Chairman and CEO

That would be MP Materials, they produce neodymium and praseodymium but do not produce dysprosium, which is critical for magnet manufacturing.

Mike Niehuser, Analyst

Okay. Sorry for keeping you so long, great call. Thank you for allowing me to participate. Bye, bye.

Mark Jensen, Chairman and CEO

Thank you for joining.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Mark Jensen, Chairman and CEO

I want to say, thanks everybody for joining. Keep everyone in Kentucky and those affected by the floods in your thoughts. We are excited about our positioning and all that we've accomplished. Thank you for your continued interest. We look forward to future communications.