Renowned value investor Mohnish Pabrai (Trades, Portfolio) made headlines earlier this year when he acquired a big stake in Alpha Metallurgical Resources Inc. (AMR, Financial), a Tennessee-based mining company with operations across Virginia and West Virginia.
According to GuruFocus, Pabrai bought 369,642 shares during the second quarter and added another 12% during the third quarter. The stock was up 5.7% during the second quarter and 58.37% during the third. Because Pabrai bet big on the stock, I would imagine his fund had a phenomenal third quarter.
Pabrai's big purchase of Alpha Metallurgical caught my attention. After looking up its stock price history, I was shocked at the massive rise. As you can tell from the following chart, the stock has done extremely well over the past three years.
It was up a whopping 437% in 2021, 150% in 2022 and another 107% so far in 2023. Even the âMagnificent Sevenâ would pale in comparison to Alpha Metallurgical. Therefore, I decided to dig a little deeper into the company. What I found is extremely interesting.
Business description
According to its most recent 10-K, Alpha Metallurgical Resources âpredominantly produces metallurgical (âmet') coal, which is shipped to domestic and international steel and coke producers." The company âalso produce[s] thermal coal which is primarily sold to the domestic power generation industry.â Its âportfolio of mining operations consists of 15 underground mines, nine surface mines and eight coal preparation plants.â
Met coal accounted for approximately 95% and 92% of AMR's coal revenues for 2022 and 2021, while thermal coal accounted for approximately 5% and 8%.
During 2022, total met coal produced in the U.S. amounted to 67.8 million. Of this, Alpha Metallurgical produced approximately 13.9 million tons with a market share of 21%. Of the 13.9 million tons, 25% is sold in the U.S. and 75% is shipped internationally.
Met coal's rising price
Although I am quite familiar with the global coal market, I know more about thermal coal than met coal. I know global demand for thermal coal is very likely to decline because it is mostly used in coal-powered power plants, which will gradually be replaced by renewable energy power plants such as wind and solar. However, demand for met coal is primarily driven by steel production. Global steel production does not grow very fast and can be very cyclical, but it is not in secular decline like thermal coal. According to Alpha Metallurgical's earning's release presentation, global steel production between 2020 and 2024 is actually projected to increase.
On the supply side, across the globe, environmental regulation for met coal production has become much stricter. This is good news for incumbent players because the barrier to entry is getting higher and higher.
Combining an increasing demand with a constraint supply, of course met coal's price has risen during the past three years, as we can tell from the following chart.
Data source: S&P Global
It is quite interesting that met coal's price has declined consecutively from 2017 to end of 2020. Then it skyrocketed in 2021. Although the price has come down quite a bit since its peak in the fourth quarter of 2021, it is still much higher than the pre-Covid years.
Improving balance sheet and massive share buyback
The substantial rise in met coal prices has dramatically changed Alpha Metallurgical's financial position.
At the end of 2020, the company had only $139 million in cash and cash equilvalents, but $583 million in debt. During 2021 and 2022, the company generated $1.4 billion in free cash flow and paid off almost all the debt. As of the third quarter, Alpha Metallurgical had cash and cash equivalents of $296 million, short-term debt of $3 million and long-term debt of $7 million.
With so much excess cash, Alpha Metallurgical Resources' management team embarked on a massive share repurchase program. In March 2022, the company announced a $150 million share repurchase program. In May of that year, management raised the share repurchase program to $600 million. In November 2022, the board increased the share repurchase program authorization to $1 billion. On Feb. 21, 2023, the board again increased the share repurchase program authorization to $1.2 billion. And finally in November, Alpha Metallurgical announced another $300 million increase in authorization for the share repurchase program, bringing total authorization to $1.5 billion.
As of the latest quarterly results, the company has repurchased $0.94 billion worth of stock. As a result of the stock repurchase program, its dilutive shares outstanding has been reduced from 18.9 million shares at the end of 2021 to 14.1 million shares outstanding as of the third quarter of 2023. With another $460 million shares to be repurchased, its dilutive shares outstanding will continue to decline.
Summary
In conclusion, Pabrai's decision to purchase Alpha Metallurgical Resources' stock is driven by a combination of factors. I am sure he recognized the improving fundamentals of the met coal industry. He also noticed the large amount of excess cash and the massive share repurchase program. Historically, the combination of improving financial conditions and large share repurchase program almost always leads to strong stock performance. This is absolutely the case for Alpha Metallurgical. To Pabrai's credit, the value was hidden in plain sight. I congratulate him for his big bet on a cinch.
