Earnings Call Transcript - AREC Q2 2021

Operator, Operator

Greetings. Welcome to American Resource Corporation's Second 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 turn the conference over to Mark Laverghetta, Vice President, Corporate Finance and Communications. Mark, you may begin.

Mark Laverghetta, Vice President, Corporate Finance and Communications

Thanks, Rob. Good afternoon, everyone. On behalf of the American Resources Corporation, I'd like to welcome everyone to our second quarter of 2021 conference call and business update. We welcome this opportunity to not only discuss our accomplishments over the past quarter and first half of the year, but also on where we have our sights set as we continue to embark on this exciting time. Also on the call with me today is Mark Jensen, American Resources Corporation's 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 other 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 that 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 laid out in our press releases and SEC filings. We also do not undertake any obligation to update or revise any forward-looking statements, whether resulting from new information, future events, or otherwise. Also, we will be holding a Q&A session today following our prepared remarks. For anyone wanting to ask a question, you'll need to dial in to get into the queue. With that said, I'd like to turn it over to Mark Jensen. Thank you.

Mark Jensen, Chairman and CEO

Thanks, Mark. And thank you all for joining today's call. I am excited to tell you and give you some updates on our business, a business that is not only disrupting the legacy industry but also transforming new industries in the domestic market, especially focusing on the Rare Earth element component of the business. In the second quarter of 2021 and the first half of this year, we continue to show material execution in terms of positioning American Resource as a low-cost supplier of raw materials for city infrastructure and the electrification marketplace. We've showcased our ability to innovate in our industry and to be positioned well to supply high growth markets, which are highly aligned with U.S. priorities that we've discussed and will continue to talk about in the near future as well. Now that we've been able to further define our technology chain, specifically capturing, processing, and purifying Rare Earth elements in the most environmentally safe and, in certain cases, environmentally positive ways ever developed, while also pushing aggressively to bring these innovative applications to the commercial marketplace. Furthermore, we have the opportunity to strengthen our balance sheet by adding over $30 million of equity capital and pull forward initiatives, which is also better positioning us to collaborate and execute with real commercial partners. Having the strength of a balance sheet will enable us to bring in these partners and showcase that we're a strong company capable of executing our business model. Before we dive into where we're at today as a business, I think it's important to discuss where we came from. Since 2015, we've acquired over eight companies. We acquired these businesses at substantial discounts, focusing on acquiring legacy assets that we can repurpose and reposition for future markets. By doing so, we're able to eliminate high legacy costs and also reposition them for the future, not only looking out for the next couple of years but looking out for the next 10, 20, and 30 years. As we see the United States transition away from coal-fired power plants, we also see continued demand for metallurgical carbon. Our business's transformation upon acquiring these assets involved positioning ourselves as the lowest cost producer of net coal for the next 10 to 20 years, while also utilizing existing assets to provide significant value through our other divisions. More specifically, our American Railroads division will be discussed shortly. We're going to leverage our entire asset base in a streamlined focus, utilizing our existing team and building out that team to execute across all of our business lines efficiently, effectively, and timely. Regarding our American Carbon division, as you see throughout the news, there's strong strength within the steel and carbon markets. With the steel markets ramping up due to an infrastructure plan in place, we're starting to see significant strength within the marketplace and a significant demand expected to kick in shortly. That gives us the ability to pull forward some of our operations over the next couple of years and really start taking advantage of the current market strength. I don't think you can see a company within our sector that doesn't see strength within the metallurgical carbon division over the next three years. That being said, we also see a number of our competitors struggling because they are focused on thermal coal markets, which we anticipate will continue to decline. Meanwhile, we can bring our metallurgical carbon operations back online, utilizing the labor force that is returning to the marketplace. Our Perry County division's ramp-up and focus on delivery of our outtakes have allowed us to build up inventory over the last several months and position ourselves to supply our customer bases very strongly. In this quarter, we began shipping our service to our customers and also supplying excess carbon that we have on the ground while preparing for our PCI shipments this quarter. In the second quarter, we had begun our shipments of our metallurgical carbon business to our main stakeholders and customers in August. We expect those shipments to continue ramping up over the next year as well to our existing customers. Additionally, our main base load customer exercised their right to expand corporate carbon purchases with us and added an additional 20% to their annual contract. We're currently in conversations with several customers, having very productive discussions about expanding our shipments from both the Perry County complex and our McCoy Elkhorn complex. We anticipate bringing this complex online later this quarter or early fourth quarter, and we expect to continue expanding operations and production from this operation over the next 12 to 18 months. During the second quarter, it's not surprising that there were challenges in the labor markets. You can visit any restaurant or commercial industry group out there, and everyone is struggling with the labor side. There are extended unemployment benefits currently in effect. We are not arguing against people needing unemployment benefits, as they’re there for a reason. That being said, as we begin unwinding those benefits, we are starting to witness strong demand for labor returning to the workforce, benefiting us significantly during this growth and expansion phase over the next 12 months. We're starting to see a solid labor force returning, enabling us to expand production over the next 12 to 18 months. Due to staffing issues, we find ourselves effectively a quarter behind. When we ramped up, the hiring process was slower than expected. However, we are sticking to guidance of $35 million to $60 million for this year, and considering the quarter behind and past staffing issues, we are beginning to position ourselves well to generate cash flow from our American Carbon division and grow that cash flow in the coming months and quarters. We're also gaining access to a really good workforce. In our American Metals division, we’ve focused heavily on building out our American Rare Earth division team and also building inventory on the American metal side. We anticipate continuing to build out these supply channels and are currently interviewing and working with strategic partners to expand this division, aiming to reach approximately $5 million to $10 million in revenue year-over-year over the next few years. It's a robust market, and we see strong demand for metal. Electric arc furnaces are not slowing down; they are actually expanding. The ability to capitalize on this from our existing logistical footprint is substantial. Our American Rare Earth division has been developing exciting advancements over the past several years. A year ago, we hadn't even announced this division. We have been building it out, and over the last three to four quarters, we have defined our technology base, processes, and partnerships. We've developed, acquired, and invested in some of the strongest technologies in the space, refining our capture process and purification technology chain. Our goal with this technology chain is not just to produce or mine Rare Earth elements but to produce purified and isolated Rare Earth elements in an environmentally sustainable way that can actually be executed cost-effectively in the United States without subsidies. That said, with subsidies, it is an additional propulsion behind our division, and significant tax discussions are happening around the current infrastructure bill that will further enable that. Our Rare Earth division represents a strategic opportunity for us as a low-cost sustainable supplier to the domestic supply chain, positioning us as one of the few companies in the U.S. capable of producing and purifying Rare Earth elements. With the passing of the infrastructure bill and significant funding for clean energy technologies supply chains, we are poised to align with national priorities. You may read about the need for Rare Earth elements daily, but seldom do you hear about the supporting technologies for processing and purification. We have those. We have been developing this in collaboration with Purdue University for capture, Penn State University for processing, and Texas Tech with technologies from Ohio University. We believe this technology process chain, when bundled together, will showcase in the next 12 months a viable plan for the U.S. to secure a domestic supply chain cost-effectively. The U.S. needs to lead the way in innovation in this space. We cannot rely on solvent-based extraction or liquid-to-liquid methods. We need to focus on new technologies and investments that can develop the supply chain cost-effectively. Ultimately, when China drops their prices—which we anticipate—they will aim to control the market, but we will succeed. Our business model, feedstocks, and supply chain will enable us to do so, and we will showcase that quickly. Market demand for these materials is continuously growing, especially for electric vehicles, windmills, and electric motors—the components for these are critical. The capacity to produce, purify, and isolate Rare Earth elements or critical elements domestically and cost-effectively will be a game changer. We have confidence in the success of our technologies, and you will hear more from us over the next two to three months as we demonstrate that our results will validate our approach. Our processing and purification methods eliminate the need to rely on China during the final steps of Rare Earth elements processing and purification. Currently, it is not being done in the U.S. at all, and we believe there are no competing technologies against ours. Our electrolysis technology is currently in the build phase of our two-kilowatt mobile electrolysis facility, where we have designed and built a one-meter cell with our partners at Texas Tech to process fly ash through beneficial byproduct economics. When talking about Rare Earth elements, the ability to produce them cost-effectively is crucial. Rare Earth elements are not rare, but monetizing the process is where we excel, and our electrolysis technology allows us to do that. We can purify fly ash to sell to the concrete market, which is in high demand due to infrastructure needs, while making money in the process. This is a rare scenario—creating profit while building our feedstocks. We can accomplish this by selling the fly ash, producing hydrogen to sell back to utilities, and extracting Rare Earth elements to transport them to our chromatography facility for processing and purification. Our chromatography facility, currently in its final stages of site selection and moving into the design phase, aims to be operational in early 2022. This facility is designed to be the first commercial scale facility producing purified and isolated Rare Earth elements. Our chromatography team's experience and leadership are exceptional. We are continuously building out our distribution and aggregation channels for end-of-life products, backed by $30 million of cash on our books and the growth of our American Carbon division on a cash flow-positive basis this year, allowing us to invest in distribution partnerships on both the upstream and downstream components. We are sourcing waste products, such as lithium-ion batteries for recycling, and permanent magnets; we have already announced a distribution arrangement with one of the large wind farms in Indiana. If you find yourself in the area between Indianapolis and Chicago, you can see these wind farms—we have access to pick up these generators, extract the magnets, recycle them, and produce purified Rare Earth elements with a 36% concentrate. No other company is looking at feedstocks with that level of concentrate and is capable of acquiring, dissolving, purchasing, and purifying them cost-effectively. We can do this today, utilizing our electrolysis technology and our chromatography facility. The market for end-of-life products and recycled materials is growing exponentially, with over $3 billion of permanent magnets going to landfills in the U.S. alone annually. This represents a substantial market opportunity for our chromatography facility to recycle these materials and produce purified Rare Earth elements for new permanent magnets. The growth of permanent magnets is not slowing down, expanding at double-digit rates each year. Currently, over 90% of Rare Earth elements come from China. As we begin recycling these magnets, we can significantly grow this business, working with upstream distribution partners to source these feedstocks for cost-effective recycling. We believe our innovative processes will have a meaningful impact on the domestic Rare Earth supply chain. This confidence is backed by the science—our technology partners have been developing this work for years, supported by our capital investments and the operational processes we are instituting to scale the business year-over-year. We will be starting to showcase our execution over the coming months as we build out our process chain. As we look towards upcoming catalysts, we are excited about where we are positioned. I don't think we've ever been better positioned as a company. We will continue to demonstrate execution of milestones for the American Rare Earth division in processing, purification, and commercialization, as well as showcase our chromatography and electrolysis technologies. There will be continued announcements of key collaborations with sourcing partners for Rare Earth element end-of-life materials and feedstocks. Ultimately, if we can source these products cost-effectively, which we are confident we can because we've already begun doing so, we will be positioned to recycle them and bring them back to market quickly and efficiently. We will continue to announce key appointments in the American Carbon division as we build out and enhance our production teams to effectively mitigate future labor challenges. Forecasting the labor shortage and planning against government competition was something we hadn’t anticipated. However, the strength of the company allows us to overcome that, and we have begun to do so meaningfully, ramping up production in the coming quarters. We are confident in our ability to announce more metallurgical carbon offtake agreements with customers we are already engaged in extensive discussions with regarding favorable pricing. On the monetization front, our equity value initiatives are formalizing a staff target. We’ve secured over $106 million in trust and are very pleased with the level of targets and conversations we are having to drive that process forward and create equity value for our shareholders, even during the post-merger dividend initiative targeting our investors. The value creation initiatives, including the American acquisition opportunity, which we announced, is significant for our shareholders, but ultimately it revolves around execution and proving out contracts—an area where we feel confident. Given our $106 million in trust and the targets we’re pursuing, we are focused on transitioning from old-world industry to new-world opportunities, positioning us to capitalize on cash-flowing opportunities to enhance equity value for all shareholders. We’re working through the destacking process and evaluating a number of high-quality targets that will provide meaningful opportunities for additional asset appreciation for our shareholders. Ultimately, we believe that AREC shareholders will benefit from equity creation that is not currently reflected in market value today. Our Noble License Agreement allows us to sublicense two of our graphene and carbon nanotube patents to Nova, resulting in our ownership of 50% of the company and an operating cash flow sweep of about 50%. Nova is currently progressing through the capital raising process in the public market, and we're very pleased with their progress, as well as their team and opportunities to expand their business. Graphene is an exciting market, and partnering with a company that can drive it to monetization while we focus on our Carbon and Rare Earth divisions is significant for us. We believe these staff and sublicense agreements exemplify our management and board's commitment to enhancing shareholder value while leveraging our skills and capabilities to drive equity value in an efficient manner. I'd now like to turn our call over to Kirk Taylor, our CFO, for additional comments on our financials.

Kirk Taylor, CFO

Thanks, Mark. Thanks again for everyone's time this afternoon. Q2 saw a resumption of coal sales with very strong pricing, as well as royalty income from strategic partnerships we've developed over the past year—another example of us driving value by capitalizing on the strong market demand for our portfolio products. During the second quarter, we further strengthened our balance sheet by raising $30 million of equity capital. As a result, our balance sheet and cash position are very stable and strong, positioning us to capitalize on the opportunities in front of us. Currently, our amortizing debt balance is approximately $19.3 million, with $13 million as convertible notes. $2.7 million of that is in the form of an outstanding PPP loan, which we are working with the SBA to secure forgiveness for. The remaining debt is held by long-term partners who support our growth trajectory. Currently, there are 16,063,483 shares outstanding, all Class A common shares. We maintain a clean capital structure policy for the second half of the year. At the end of Q2, our cash on hand was approximately $28.1 million—this is the highest capital position we've ever had to execute our growth plans. During the quarter, we reinvested in operations and efficiencies, investing just over $700,000 in processing equipment for both our carbon and Rare Earth critical elements divisions. We're collaborating with our university and technology partners to equip them with the resources to materialize our vision for our critical element division. Our company, balance sheet, customers, and current capital structure are at the strongest point we've ever experienced, enabling us to be flexible, nimble, and innovative as we pursue growth across all divisions, taking advantage of the opportunities presented in the second half of the year. With that, I’d like to turn it back over to the moderator to start the Q&A portion of this call.

Operator, Operator

Thank you. We will now be conducting the question and answer session. Our first question comes from the line of Steven Segal with KBB. Please proceed with your question.

Steven Segal, Analyst

Hi, can you give us an update on the fly ash stamping program and any preliminary results you've attained with that so far?

Mark Jensen, Chairman and CEO

Yes, hi Steve. Thanks for your question. Our fly ash is processed utilizing our electrolysis technology, which was acquired from Ohio and further developed by Texas Tech. We sponsored research at Texas Tech to build out our one-meter cell, a unique design enabling us to take this to a commercial stage. We conducted an extensive fly ash sampling program—not just sampling but processing and taking that fly ash down to Texas Tech while we build our two-kilowatt facility, which will be a mobile unit able to go to different sites. The purpose is to run tests in the bench-scale labs and then demonstrate the high-quality fly ash, allowing our mobile facility to be deployed to those operations, ultimately creating permanent facilities there. It's going extremely well. The one-meter cell is in the final stages of development, and they have already begun working on the build side. We've had phenomenal preliminary results on extracting Rare Earth elements and also decarbonizing the fly ash. There are over a billion tons of fly ash sitting in landfills throughout the country—this is not only a national issue but a billion tons worldwide, which is exponential. The demand for fly ash as a concrete binder in Portland cement is considerable. The ability to monetize that entire process is going very well, and we've had excellent initial results, pulling out very high concentrations of Rare Earth elements from the fly ash samples we've processed to date. We will continue running the sampling program to ensure we maintain these results as we build this mobile facility; we expect to have three to four locations where we can deploy it for commercial scale testing. Overall, we are exceedingly pleased with the progress and success we've had.

Steven Segal, Analyst

Thank you.

Mark Jensen, Chairman and CEO

Thanks, Steve. I appreciate you.

Operator, Operator

The next question comes from the line of Kyle Elgar, a private investor. Please proceed with your questions.

Kyle Elgar, Investor

Yes, hey, thanks guys, do you got me?

Mark Jensen, Chairman and CEO

Yes, we do. Hi, how you doing?

Kyle Elgar, Investor

Good. Good. How are you guys? I appreciate the call. Just hoping you could provide a little color. I know you talk a lot about the Rare Earth elements. I understand this is crucial to the story. But regarding the net carbon guidance on revenue guidance, I want to ensure I heard a couple of things correctly. Should we expect that to be more backloaded towards Q4? And regarding profitability, did I understand correctly that you expect to be profitable for the balance of the year? Is that correct? Or is that solely for the American Carbon division and not the company as a whole?

Mark Jensen, Chairman and CEO

Yes, that's a good question. As mining for net carbon works, you bring on a new section or mine, and the growth is relatively quantity-based. For example, regarding our current Carnegie complex, once we bring Carnegie 1 online, it should ramp up to about $30 million in revenue just from that one mine. As we bring it online, the revenue will step up pretty quickly. With Perry County, we have one walking super section running, and our second walking super section is in the final stages of development, similar revenue growth patterns. There will be growth in the third quarter, and we expect significant growth from McCoy complex coming online in the fourth quarter. By the end of the fourth quarter, we'll be in a really strong position. From the free cash flow perspective, we anticipate profitability in the fourth quarter and the second half of the third quarter. This is based on some investments we’re making in the complex. Having available capital, we've invested heavily in our processing facilities and across all divisions. The Rare Earth component focuses on commercializing technologies, which includes capital development costs. Once those facilities are up and running, we anticipate covering costs profitably. It's not a labor-intensive business to develop. I believe the American Carbon division will prove profitable, but I do not believe the entire business should require substantial additional capital. We expect to build our cash balance by the end of this year and continue that growth.

Kyle Elgar, Investor

Awesome. Thanks so much, guys. I appreciate it.

Mark Jensen, Chairman and CEO

We appreciate you.

Operator, Operator

Our next question comes from Mike Sibley, a private investor. Please proceed with your question.

Mike Sibley, Investor

Yes, Mark. Great call! Mike from Valparaiso, Indiana. The wind turbines are making a big impact. My question is your projection on who would lead U.S. manufacturing in the EV electric vehicle market in the next two to three years? Who do you foresee taking the lead in the U.S.?

Mark Jensen, Chairman and CEO

That's a good question, Mike. If you look at the automotive sector as a whole, every major automotive company has announced an EV program with substantial build-outs targeted for 2030 or 2035, some even beyond that. Demand is growing upstream and downstream. Upstream concerns sourcing the feedstocks like fly ash, recycled permanent magnets, and lithium-ion batteries. Downstream focus is on building a domestic supply chain to facilitate that. Currently, automotive companies are acquiring electric motors produced with electric magnets sourced overseas. We're having promising discussions with certain automotive companies about building that supply chain domestically. The tax bill discussed would incentivize domestic Rare Earth magnet production by offering significant subsidies. Companies may be expected to pay a higher value for Rare Earth elements for use in their magnets, further integrating the supply chain. At the end of the day, many automakers are becoming conscious of the environmental footprints of their materials. They aim to use domestic sources instead of those from China, focusing on environmentally sustainable methods. Ultimately, it's hard to predict which manufacturer will lead, but all seem to be accelerating efforts towards the 2030 to 2035 timeframe.

Mike Sibley, Investor

Good. Excellent. Thank you.

Mark Jensen, Chairman and CEO

And thank you. You are welcome to visit our operations in Valparaiso, as there are exciting things to see around this region in the near future.

Mike Sibley, Investor

Yes, thanks for the invitation. I'll take you up on that.

Operator, Operator

Thank you. We have reached the end of the question and answer session. I will now turn the call back over to Mark Jensen for closing remarks.

Mark Jensen, Chairman and CEO

I want to thank you all for taking the time out of your day to let us update you on the progress of our business. We have never been more excited about our position than we are today, not just for the American Carbon division, but also for the American Metals division and the American Rare Earth division. We have the opportunity to showcase a business model that is not only repurposing and disrupting legacy industries but is also innovating for the future. None of this happens without a team, and we will continue to build out that team with strong professionals both on-site and in Kentucky, Indiana, West Virginia, and our Wyoming County complex. We are very thankful for all our shareholders; we are shareholders-first. The management team has never sold shares; we continue to invest in the company. We’re excited about our future and know that at the end of the day, every investor has the opportunity to evaluate any company. However, I can promise you that our management team is committed to driving value for all our shareholders and growing this business to showcase that the United States can compete on technology to produce elements and net carbon cost-effectively. Thank you for your time, and we look forward to providing additional updates on our business growth and success.

Operator, Operator

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