American Resources Corp (AREC) 2020 Q3 法說會逐字稿

Greetings and welcome to the American Resources Corporation Q3 2020 quarterly business update. (Operator Instructions) 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. Thank you. You may begin.

Thank you, Doug. Good morning, everyone. And on behalf of American Resources, I'd like to welcome everyone on the line to our third quarter of 2020 conference call. With us today from management, we have Mark Jensen, Chairman and CEO; Kirk Taylor, our Chief Financial Officer; and Tom Sauve, our President.

Before we kick it off, I'd like to remind you of our normal customary 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 subjects to risks, uncertainties, and other factors which cause actual results to differ materially from the results discussed in the forward-looking statement.

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.

With that said, I'd like to introduce Mark Jensen, Chairman and CEO of American Resources Corporation.

Excellent. Thanks Mark, and thanks, everyone, for dialing in and joining us. We're excited to tell -- provide an update on where we're at as a business, what we've accomplished over the last year, and where we're taking the business over the next five years. This has been a crazy year. It's been a year that everybody has had to adapt and that is no different than what we've had to do with the business to continue to execute upon our business plan and our goals as an operation.

To put a bluntly, we've survived the third downturn in our industry on the carbon operation side of our business. It's been -- over the last five years you've seen many different cycles and many different changes. What we've been able to do as a business and due to our corporate structure is we've been able to navigate that, not only navigate it, but also expand our business during (inaudible). And it's been an opportunity for us to showcase what our business model is all about, how we're different than the rest of the industry, and how we can continue to drive our business forward for many years to come.

What I'd like to do is start off by going through a quick update on the carbon operations of our business, which has been -- will be the primary driver of revenue over the next three years. As you can see over the last -- during -- at the beginning of COVID and due to some of the trade negotiations taking place with China and volatility in the market, we took that opportunity to idle our operations from a carbon production standpoint. What that's enabled us to do is navigate this downturn and remain flexible and nimble during it. Where a lot of our competition has struggled and you'll see it in the third quarter results that are coming out that the market has downsized, the market has contracted, steel mills had to close. We had to keep our people safe.

And so enabling during this period of time to idle our operations not only gave us the ability to create a safer environment for our workforce and create policies and procedures to manage through it over the next few years, but also make our business better, and further refine our operations, look at all aspects of our operations to say how can we cut costs here, how can we be more nimble, and how can we set up processes and procedures to ramp up our operations over the next five years in the most efficient format possible.

And we're extremely proud to see the success that we've had over the last nine months. We've thrived as a business. We've set up procedures and we put a gameplan to ramp up our operations in a very efficient format to drive home the focus of our business is to be the lowest cost producer in the industry.

To provide a little bit of visibility on what we've mentioned at Perry County, it was an operation we acquired in September of last year. It was a very inefficient operation at the time. It was bogged down by significant costs and it needed change and we brought that to the table. Our team has put a huge amount of emphasis in not only refining it to make it a really low-cost operation, but to make it a safe operation. And this operation is going to be a state-of-the-art. We're extremely proud of where we're at.

We've provided guidance that we will be looking to restart the operation in the fourth quarter and we're on track to do that, not only on track to do that but ramp it up quickly. We've had great conversations with the customer base that have historically bought this product. The product is proven, the quality is proven, and what was really needed from a customer base perspective was clarity and confidence that we could operate it in efficient format.

We put a huge emphasis into the processing facility. The processing facility is being upgraded continually as we speak since we bought. We're making significant changes to make sure that we can run efficiently, effectively, and safely to produce all qualities of products that our customers are looking for. Anything from PCI products for the steel making process to the industrial [silvers] to the mini silver and to make sure that it's at a quality that they want, so we can deliver it when they need it.

Also on the deep mine, we've made significant changes there. We've just completed our [SEAL] project which we're extremely excited about. We'll make the operation significantly lower cost by cutting off about, killing off the old legacy mines that weren't active anymore. And also, we'll make it a significantly safer place for our people to work, so they can focus on extracting carbon and expanding our production as we continually ramp up the operation to achieve the desired goals that we're looking to hit in 2021, but also looking at it from 2022 and 2023 as we continually expand our production each year out of this Complex.

As we stated on the other carbon operations, we are always evaluating our McCoy Elkhorn Complex. We discussed publicly that we will be looking to restart this Complex in 2021, but we believe we can continually ramp up our production and double our revenue every year from an existing asset base that we have from -- that we've acquired over the years being one of the largest owners of mining infrastructure in Eastern Kentucky today. Not only one of the largest owners but also one of the longest standing operators in the region given all the [bankers] and that gives us an opportunity to not only expand our business in the carbon side but also discuss our other business conditions that we launched this year which we're extremely excited to talk about.

American Metals, we launched this business in February of last year. This is a business where we can now officially say, I believe we're the only -- one of the only producers in the space that can supply raw materials to new steel production as well as recycled steel production. This is a business that we've grown 30% quarter over quarter and we anticipate continuing to grow this business as not only we expand our ability to consolidate, aggregate, and process steel to ship to the recycling arc -- electric arc furnace marketplace, but also as we expand our distribution platforms that we're able to offer that.

We can ship recycled steel or steel to be recycled from truck today. We can ship it via rail and very quickly as we stated, we've come to terms to ship it via the barge, so we can access all distribution points to expand our business and continually ramp up and provide our customers what they want at the lowest cost point that they needed that. It's a business that we're confident we'll be able to expand over the coming years. There's a great market for it.

One of the largest steel companies in the -- and the electric arc furnace companies in the world, new [records] is just an outside groundbreaking in Kentucky of I believe their third facility in the region. So we're excited about this business line. We know it's a piece of business line that we can grow and grow it at very attractive margins.

The third business line I'd like to discuss is American Rare Earth. We disclosed this subsidiary approximately 30 days ago. It's been -- we formulated this subsidiary a few quarters before this. It's an exciting piece of business for us. It's going to change the world of how we access critical elements today, not only in the domestic market but also in the world market. We are confident that we will be able to sell concentrate in the coming year and just start generating revenue from the subsidiary.

The important aspect of this is our ability to scale it and grow it. By working with the scientific community, we can access not only all of our deposits that that we possess today from acid mine drainage which we define as AMD to advance acid mine drainage which we trademarked which is actually -- is taking it to the next level of stimulating acid mine drainage and stimulating (inaudible) to pull forward not only the environmental remediation that needs to take place, but also the ability to extract critical elements out of that -- out of the concentrate that we can develop through our sediment pond systems that we're designing with the scientific community today.

And also then the third side which is mineral spirals actually utilizing our existing processing facilities to extract critical elements. We are working with not only the existing legacy technologies that have been developed, but also working with the scientific communities, develop new technologies to continually drive down costs and focus on generating highly sustainable profit margins from the American Rare Earth's (inaudible).

We're excited that we were able to announce this. We're excited about what it means to our country being a domestic producer. Our goal within the next few years is to build our own processing facility to take it down to the element level. And we're confident we can do that by working with local universities in the region that are already doing this today in Pennsylvania that are doing this today in West Virginia and working with them to develop those technologies to refine those technologies.

And for -- we've developed and through COVID, we've been able to not only adapt our business but drive our business forward. We've survived the downturn that many producers struggled during. We didn't downsize our business during this period of time. We expanded it. We expanded our business to take advantage of the asset base that we've acquired over the last five years. To take this asset base and not only monetize it from a carbon-base perspective, which is what the legacy industry focused on, but also monetizing it through our other two division lines that we've already -- that we just discussed.

The ability to continue to drive this business forward and continue to innovate and adapt and be nimble is the key to success in our business. We have set up procedures and processes that keep our cost structure low as we ramp up. We don't need to replicate the system every single time. We can continue to take our business and grow it and expand it just layering in our current processes and current principles as we do expand our production base from all three of our business lines and all three of our divisions.

We believe that our acid base and our business has never been better positioned to take advantage of the current market opportunity. We are confident in the growth of infrastructure. We're confident in the growth of the critical elements division and we know that the electric arc furnace market is one that's going to be continually expanding at a very aggressive rate. We're excited to work with our customer base, provide them the products when they need it and expand our revenue base and put cash flows to the bottom line so that our investors can benefit from the hard work and effort that our teams put to work but also the loyalty that our investor base has provided us.

We're excited about being transparent, providing over the next 30, 60, 90 days and going forward transparency to our investor base as we continue to grow our business and more importantly as we also continue to create jobs for the local community that desperately needs them. We have a great team. We've created a great base of employee base as we get ready to hire them and not only hire, we've already started doing so, but putting these 92 people to work initially at the Perry County Complex to produce carbon. We're also excited expanding that to over 176 people over the course of the next year as we supply our products to our customer base and have already committed for sales.

We feel very good about where we're at on a contracted sales basis. We secured orders and have contracts and conversations in place with over 60% of the production that we looked to produce next year. That's about where we want to contract out. It gives us flexibility to take advantage of the market. It also gives us flexibility from our production-base perspective.

So as we sit today, we're focused on growth. We understand we have to execute as a team and we have to continue to hit our objectives and communicate those objectives and we're confident we'll be able to do so. We're excited about being able to announce the progress that we achieve over the next year from a business perspective.

I would like to now turn it over to Kirk Taylor, our CFO, so we can talk a little bit about the financial results that we've had over the last quarter.

Thanks, Mark. What a great summary of the opportunity that's in front of all of us right now. Again for the three months ended and the nine months ended September 30, 2020. We took this time to lower our operating costs, but also our holding costs companywide and strengthened our overall balance sheet. Again, this increases our ability to execute as we move forward.

During this time period, like Mark spoke about, we chose to move forward when others in our industry took steps backwards. Again that puts us in a great position over the next 3, 6, 12, 24 months to execute on our plan.

For financial highlights for this quarter, we had an EBITDA of $1.4 million increase over 125% year over year and that was an increase of 163% over the last quarter. On an adjusted basis our EBITDA of $2.8 million was 214% year-over-year increase, again showing that we're increasing our operating efficiencies, but also lowering our holding costs.

We also highlighted how resilient and nimble we can be by developing a diverse revenue stream. So while one of our business lines is closed our carbon mining to streamline it and get it better, we actually built another diversified revenue stream, strengthening our overall business position. We also took efforts to strengthen our balance sheet and our capital structure.

In October, we issued 5.2 million common shares and now that the company a little over $12 million to put on our balance sheet. During that time period, we also had over 2 million warrants convert, which brought in another $2.1 million to our balance sheet. Again, that gives us great financial strength to move forward as we execute on a more streamlined plan.

We have a great base today to go through our phase one growth like Mark outlined for Perry County resources, then in McCoy Elkhorn, then the Wyoming County, while strengthening our American metals and our rare earth business altogether. We have the team in place, we have the streamlined operations in place, and we have the base to move forward efficiently and effectively as the opportunity is in front of us.

With that, I'd like to turn it over to the moderator for our Q&A section.

(Operator Instructions) Heiko Ihle, H.C. Wainwright.

Hey, everybody. Thank you for taking my questions.

Thank you. Thanks for joining.

Today is obviously a pretty big day with the news with the vaccine and everything and your operations have been idle due to COVID. Can you maybe just provide us with some restarting updates? I mean, how long would it take? What would it cost? When would this money need to be spent? Is it right before? Is this like a staggered approach to the spend? If you could just provide some color on that that'd be great.

Yeah, absolutely. Heiko, I appreciate that. That's a great question and excited to give you a good clarity on that, so that everybody can understand what we're doing. How we're achieving it. We are doing it now, so we've spent -- over the last nine months, we've spent a significant amount of resource as well over in the millions of dollars to expand and repair and better position the Perry County Complex. Made significant changes that the deep mine also made significant change with the processing facility.

We've already started hiring back, so we just hired I believe around 11 people at our processing facility. We just had a job fair which was phenomenal in Hazard last week. Had well over 300 applicants applied for it. The processing facility will hire another four guys in the next week or so. At the deep mine, we currently have around 12 people working there today. Our goal at the restart in the next few weeks will be to hire up over to -- around 76 people which we're staggering it every week.

So over the last week we accomplished putting in the field which sealed off a significant amount of the old mine that was no longer productive and no longer was being mined at where we can pull forward our production to make our -- get our guys in a better, safer, more efficient processes. We're spending -- right now, we're spending a few hundred thousand dollars into prep plant this week and next week and at the deep mine, we pretty much have all the equipment that we need to operate. Really, it's just staffing up and finishing. We changed the ventilation plan as part of the field project, which making the mind this week and then within the next few weeks we'll be just finishing the underground works to start putting people back to work. But we're already spending that capital.

We don't have a huge cash spend. The biggest capital spend that we'll have there is just covering their inventory costs as we're putting inventory on the ground. One thing that we think is really important is to have an ample inventory based on the ground, so that our customer base can take product when they want it, when they need it. If they come to us and say they need an extra train and we can do an extra $1 million of business we'll ship them that extra train. And that's wrapping up our revenue base now gives us the ability to do that. Put our inventory on the ground today put -- gives us the nimbleness to provide our customers the best service that they need. But we're spending the capital as we speak.

When you start up a mine, you start it up all at once. You don't slow walk into a production. We're really focusing on just making sure that when we started up here in the next -- during this fourth quarter, hopefully within the next 30 days or maybe sooner that we are starting it up at the lowest cost format that for the industry for that way, we can showcase our cost structure not only through the investment community but also our customer base.

Perfect. Very helpful. I'll get back in queue. Thank you very much.

Thank you.

Tate Sullivan, Maxim Group.

Hi. Thank you for all the comments and thanks for the details on ramping up production. I mean what is you mentioned going full bore and when you started the mine. What is the ideal production ramp timing for the next year from Perry County please and what are the key variables to ramping that up to where you can get to? Thank you.

Yeah. Thanks, Tate. I appreciate you joining.

Thank you.

(inaudible) with that one. So one having the labor force that we have. Two is having the operational footprint of the mine and the prep plant in good condition, which we are doing right now and effectively have. Third is customer base. Making sure that we have a customer base that enables us to run it in a cost effective and efficient method.

And then really let's talk about that for a second because I think it is important. That's why we idled down during COVID. There was a big disruption obviously in the world economy and so a lot of producers continued to produce despite the fact that the customer base was pulling back or slow walking things and so that was hurting them. They were big volume producers and they can't operate in low-cost nimble format like we can.

So we chose to idle down to improve the operations where they kind of ran their operations into the ground by producing at a loss and putting the businesses [that were spot]. What we're excited about as I mentioned on the call is we have about 60% of our production line -- of our forecasting production for next year lined up already today, so as we -- and we're confident and that's really where we like to be contracted out.

Our goal by the end of next year is to be on a run rate of Perry County of over a million tons a year or right out of million tons a year. Our goal to start off will be right around that 400,000 tons to 600,000 tons on an annualized basis within, so looking at anywhere from 40,000 tons to 50,000 tons a month is where we're going to start the operation off at.

For the first couple of months, obviously it'll be a little slower than that will be walking up from 10,000 tons to 30,000 tons, but that's part of the natural ramp. So we'll focus on running it as a super section right off the bat and then expanding to our second super section within the ability to put in a bridge section, which could put us well north of 1.2 million tons a year.

Okay, great. Thanks for all that detail. And then for the detail on rare earth, you mentioned being able to sell rare earth now. What are the steps to make that happen can you (multiple Speakers) for instance?

Yeah. So we are putting in procedures, we're working with the university, a couple -- actually three different universities as we speak that we are working with them, not only on sponsored research but also utilizing their existing technologies. Our university partners are helping us design the streamlined settlement system to be able to develop concentrate and separate out concentrate. Building a hub-and-spoke model where we can develop all these various sites that we have as we put out publicly, we identified the first 10 sites.

Since then we've expanded around 20 sites now that we're currently working on of taking these sites and creating a settlement system where we can settle out the various elements over a period of anywhere from a 3- to 7-pound system to develop a concentrate that we can extract and basically streamline that concentrate, make that concentrate as basically secondly as concentrated as possibly it can be in layman's terms and be able to sell that to third parties who can then process it for the heavy rear of oxides that are present as well as the cobalt and lithium.

What we're focused on in 2021 is selling concentrate is getting to a point where we can sell that concentrate. We're working with them today. Our first site already has a 7-pound settlement system in it, which will be the first site that we sell concentrate from. And what we're doing is we're working with the different chemicals and the different procedures with our partner in the region from the academia side to develop that settlement system to be able to start selling the concentrate which we're confident we'll be able to do this year hopefully within the first six months.

Okay, thank you for a lot of detail, Mark. Have a great rest of the day. Thank you.

Thank you.

Steven Segal, KBB Asset Management.

Hi, Mark. How are you? I was just wondering what are your operating costs. And if they're variable, I guess they are variable and fixed and how would that speak to you about your low-cost competitive advantage you seem to have and the opportunity to grow market share that that affords you within your competition for other contracts?

Absolutely. Cost -- being cost focus is extremely important to us. It's a natural hedge for us, so we're able to survive not only this downturn, but we've survived the other two downturns, not only survived it, but we've thrived during it. We actually -- sometimes we -- I mean some of our highest growth and some of our most attractive growth has been during downturns. And in the prior years, it was about acquiring additional Complexes, which enabled us to be one of the largest owners of mining infrastructure today (inaudible) Kentucky.

This year it's been about adapting. So we launched the American metals [refining] the American rare earth for our critical elements [is defined]. But when we look at costs is there's two forms. There's fixed costs and then there's variable cost. The fixed cost piece of our business is where we absolutely dominate. I don't think there's anybody within the industry. I think there's a Nasdaq-listed public company that has lower cost structure that we have and we're proud of it.

Because one, we're all investors in the company. Every single member of management owns stock in this company today and have invested money into this company today to earn that stock. So we're focused on making sure that our cost structure is important so that our equity values does better, but that's also put us in a position where we can thrive during these downturns. Where you look at the legacy industry and the larger players in our space, they're fixed operating costs, even management overhead represents anywhere from $7 to $11 per ton.

Our will -- over the course of the next year, we'll showcase around $2 or less per ton, which is a huge difference in terms of margin and a huge difference in terms of overall cost structure. But that's why we're able to handle our operations the way they are in today. From a variable perspective, that's extremely important as well. So how we staff our mines and how we set up our procedures and within our mines and the changes that we make to invest into these Complex and the changes -- the capital investors in the last five years will enable us to showcase the cost structure that our industry does not compete at, and we can't -- the industry competitors cannot compete at.

Within the Perry County Complex, we are confident we'll be able to achieve the $51 to $53 per ton because the changes we made at the processing facility as well as how we staff the Complex, we give the men the equipment they need and the resources they need to do their job. But we also believe in staffing appropriately. We're extremely excited to hear the news that we won the Sentinel Safety Award this year for our operations because of how we staff and how we set up our operations in a safe reliable way.

We think an efficiently staffed mine also keeps a mine safe that enables us to also keep our cost structure low and the men and women focus on doing their jobs versus passing the buck off to somebody else that we don't believe in that. So we believe in focusing on cost structure. We believe in focusing on giving the men the resources that they need so their equipment is not breaking down. So they have that spare parts when they need them, so they have the raw materials so they can produce their product when they need it, setting up their procedures the right way.

It's something we pride ourselves on and we're confident that we will be able to execute this year and showcase that cost structure which will be important not only for our investors but also our customers, understanding that we could be a reliable supplier for them for many years to come.

Great. Thank you.

Thanks for the questions, Steve. I appreciate you.

(Operator Instructions) Keith Goodman, Maxim Group.

Hey, guys. Just as a follow-up to Tate's question about production, you said a million tons and I guess 40,000 to 50,000 a month would imply maybe even doing 0.5 million tons throughout the year. What are the expected revenues from that and is there any cash flow from that?

Yeah. Good question. Just to clarify, the million tons that I referenced is where we want to be on the run rate by the end of 2021. So obviously just because the numbers look at it on a straight-line basis wouldn't correlate but starting off around where we -- in the beginning of next year being producing at that -- around that 40,000 tons a month, ramping it up over the course of the year.

In terms of the revenue base, what we said is to put us right around as we ramp up that business, right around that $60 million to $75 million to $80 million in revenue. [This was case, and also to clarify] that we talked about, we talked about this at the Perry County Complex. This is, purely from the Perry County Complex. Should we get the McCoy Elkhorn Complex up and running during the course of the year, obviously those numbers can change. We'd rather talk about that at the time when we make the decision to do so though and that will be very positive news and great news for all of us.

The way that we structured the business though is and if you look at that revenue number based on our production-based number, I mean we anticipate operating in the mid-20% EBITDA margin range. And honestly over the last few months, we've had good debt conversions in our business. We've had our balance sheet cleaned up substantially and we made a significant investment back into the operations to continually streamline and make it more efficient. So hopefully we can overachieve those numbers, but we're confident in our cost structure and we're confident where the markets at today.

We think the market is going to continually improve as well. We're hearing a lot about different infrastructure projects being announced at the city state as well as very shortly I mean if President-elect does what he says he's going to do. He's talked about a very large infrastructure bill. We're not banking on it, but if it happens, we're well situated to ramp up our business quickly and be nimble to be expand our production base and supply the domestic market. Did that answer your question (multiple Speakers) --.

(multiple Speakers) it does. It does. And might as well as while we're talking about the political environment and I understand this is (inaudible) thermal, but there shouldn't be any adverse effects from Biden versus Trump in office, correct?

We are excited to provide the raw materials to the entire steel market. Infrastructure is something that Biden has talked about and said he wants to spend heavily on. Thermal coal can't compete against natural gas let alone alternatives. And so we're thankful that we made the decision as a business and really how we got into the business by focusing on infrastructure was staying away from the thermal side of the business line where our competitors still rely heavily on it.

I think they're going to face challenges. They're not built to operate in a smaller footprint. They're not built to operate on a small revenue base. Where we're at as a business today and where we're going in the future will enable us I think not only to expand and take market share and take the new market share because (inaudible), but also take existing market share because of our cost structure and because of the way our business is set up.

We're focused on the growth side of the business, not the thermal side. We set our business up to be politically agnostic, not because we saw the elections going one way or the other, who really knew who, who really knows right now. So but more importantly we wanted to try to reduce all risk profiles from our business and really focus on where the growth is and where the margin is. And on the metallurgical, the stokers, the industrial stokers, the American metals business line, the margins are fantastic.

The critical element side, I don't think there's a more exciting place to be in the market and I don't think there's more exciting region to be focusing on critical elements than in the reason where we own our assets after that. So we're really from a -- we don't care politically as a business on what takes place we just focus on the markets of where our products and where we can supply those markets efficiently.

Okay, great. Thanks.

Thank you.

There are no further questions in the queue. I'd like to hand the call back to Mark Jensen for closing remarks.

I want to say thank you for everyone joining. We are obviously excited to tell not only what we've accomplished in the past, but what we're accomplishing in the future. As a management team, we are also investors in the company. But more importantly what we understand is we have to execute. We have to achieve the results that we lay out in front of you and hopefully achieve them at even a higher rate than we say we're going to.

But the level of execution is important and that's where we focus. Our day-to-day lives are on making sure that we hit the milestones we want to hit and continually advance the business to not only stay within the high growth areas of the market, but also achieving the little things within our business model. We're excited about where we're at. We don't think there's been a better Business climate for where we're set up as a business today and/or a better opportunity for us to thrive and grow well into the future.

Historically, our businesses have been about buying assets and restructuring those assets, making the really tough decisions to streamline the asset base to make it efficient and make it effective. We've done that. Now it's about focus on growth, ramping up our business and focusing on production and focusing on supplying our customer base the products they need. We're excited about the response of the customer base. We've seen a huge amount of interest in the quality of our product as well as an interest in seeing operators produce in a more streamlined footprint and a more streamlined modern-day focus.

So as we sit today, we're excited about where we're at. We're excited to continue to hit the milestones we set out to achieve. We're excited about the milestones we've accomplished in the past. And we thank you. We look forward to the next year. We look forward to the next few months and we're excited about creating the jobs in the region that desperately need them. So please follow us and feel free to reach out to us. We'd be happy to do private conversations, but we're excited about where we're going and we thank you for being a part of it.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.