RBC Capital analysts this week lowered their price target for Warrior Met Coal (HCC) as costs balloon at the steelmaking coal company’s Blue Creek mine project. The analysts dropped their price target from $74 to $64 after the company announced plans to spend $335 million to $390 million this year on developing the mine and other discretionary expenditures. This figure was 32% higher than what the RBC analysts had expected and 24% above consensus expectations.
For the fourth quarter, the analysts were expecting the company to spend $152 million in capex, mostly on the mine expansion, while a consensus estimated $149 million. The actual price tag for capex and mine development that the company reported last week was $182.5 million. The company cited a decline in free cash flow of $34 million in the fourth quarter compared to the same period in 2022, primarily due to capital expenditures at Blue Creek, located in Alabama.
Scheduled to begin commercial operations in 2026, Blue Creek has a reserve base of 69.8 million short tons of recoverable reserves and 49.5 million short tons of coal resources, making it one of the largest untouched metallurgical coal reserves in North America, according to the company. Originally estimated to cost $700 million, additional scope for transportation and logistics added $120 to $130 million to the price tag, with inflation of 25% to 35% pushing the estimate to around $1 billion.
“Inflationary costs in the mining sector continue to persist and pressure cost structures for labor, supplies, materials, and equipment purchases,” said Warrior Chief Financial Officer Dale Boyles in a company conference call discussing its most recent financial results. “These additional costs are expected to drive up our cost per short ton in 2024.”
One of the factors influencing the company’s capex expectations for 2024 is the need to hire 250 new employees to fill gaps at existing mines and ramp up Blue Creek later in the year, Boyles added. Despite its increased spending, Warrior Met Coal’s fourth quarter net income rose to $128.876 million from $99.654 million in the year-ago quarter, boosted by higher production, sales, and prices for steelmaking coal.
Prices for metallurgical coal, used to make steel, have been higher due to lower supply from miners because of mine changes, maintenance, geological faulting, and a mining suspension after a fatality at a BHP Group Ltd. (BHP) mine, according to S&P Global Commodity Insights.
Despite the lowered price target, the RBC analysts maintained their Sector Perform rating on Warrior Met Coal, stating, “We think Warrior remains well-positioned to continue generating strong FCF as met coal prices remain elevated while balancing Blue Creek growth with shareholder returns.”
In conclusion, Warrior Met Coal faces rising costs at its Blue Creek mine project, but remains optimistic about its future prospects in the steelmaking coal market. The company’s strategic investments and focus on generating strong free cash flow position it well to navigate challenges in the mining sector and capitalize on the current high prices for metallurgical coal.
