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  • Warrior Met Coal shares: 39.1% upside potential amid rumours of union settlement
Max Manturov

Max Manturov

Head of investment research regulated by CySec 11.02.2022

Warrior Met Coal shares: 39.1% upside potential amid rumours of union settlement

Ticker: HCC.US
Entry price: $28.75
Target price: $40
Growth Potential: 39.1%
Time Horizon: 2-3 months
Risk: High
Position size: 2%

The Company

Warrior Met Coal is a metallurgical coal producer in Alabama that operates two mines (Mine 4 and Mine 7) and has the potential to develop a third (Blue Creek). It produces two types of coking coal - High Vol-A and Mid-Vol.

What's the idea?

To capitalise on rumours of a resolution of the company's conflict with the UMWA union in the next 2-3 months.

The Warrior Met 2021-2022 strike is an ongoing strike by workers in Alabama, USA. Started on the 1st of April 2021, the United Mine Workers of America (UMWA) is on strike against Warrior Met Coal Inc, which was formed after the bankruptcy of Walter Energy and operates coal mining operations in the state.

The strike is because the union and the company have been unable to agree on a labour contract for the approximately 1100 union members working at Warrior Met.

It is clear that unions have become much weaker over recent decades and we are now seeing this trend develop.

The impact on the HCC is less obvious. The risk is that without enough workers, they will not be able to meet the production requirements in their supply contracts, which could be detrimental to overall sales and marketing efforts. However, when Warrior Met was formed after the Walter Energy bankruptcy, UMWA's revised collective agreement allowed for "a certain number of salaried workers", which in turn allowed the company to hire additional salaried staff during the strike to maintain sufficient production levels.

Warrior should definitely 'win' the strike, as quite a number of unionised workers are now returning to work - something management talked about during the earnings calls.


Buy Warrior Met Coal shares >>

Why do we like HCC?

Reason 1. Rumours of conflict resolution

There are rumours that Warrior Met and UMWA will resume talks "in February or March".

The bottom line is that relations are beginning to thaw again and the likelihood of the strike being resolved is moving in a positive direction.

Reason 2. Special dividend

1/Dividend yield - this company has a history of declaring special dividends and we expect 2022 to be no exception.

2/ The company's cash flow is cheaper than its competitors:

The company is able to produce and sell 7 million tonnes of coal a year, at a cost of $90/tonne, but due to the long-term strike, HCC has not reached full production capacity. For 2021, management expects deliveries in the range of 5.5-6.6 million tonnes of coal. For this reason, revenues, and hence all other indicators from the previous year, are sagging relative to competitors. Revenue for 2021 is expected to be the same as in 2020.

On the 19th of November 2021, the company issued $350 million in notes, thereby increasing its debt level to $700 million.

  1. Because of the conflict with the union, many big investors are staying away from the stock despite the rising price of the underlying asset, coking coal
  2. Before the strike, at a coal price of $200, the share price was over $30
  3. Now the coal price is steadily holding above $400 and the stock is below $30 - the strike, in our view, is the main deterrent .

The real driver is today's coking coal prices.

Australian coking coal futures for Q1 2022 are now firmly above $400/tonne.

Coking coal spot prices are twice as high as in previous periods of high stock prices. The resolution of the strike is expected to lead to new record highs for HCC's share price. The news will be a positive catalyst due to higher volume assumptions, lower costs per tonne (due to higher volumes) and significantly higher net profit and FCF due to the excess profits that coking coal producers are enjoying at the moment.

The decision will instantly raise the valuation of the stock and remove a significant risk that is preventing some large investors from buying Warrior Met stock. We do not know 100% whether the decision will actually be made, but in our view the risk/reward ratio justifies a 3-month position in this stock. Even without a catalyst in the form of a strike decision, HCC's fundamentals continue to improve as coking coal spot prices continue to rise.

Recommendations for investment houses:

B. Riley - $36.00

BMO Capital Markets - $30.00

Risks

If management does not reach an agreement with the union, the company may never reach its maximum productivity, which would negatively affect the value of the company.

How to take advantage of the idea?

  1. Buy Warrior Met Coal shares at $28.75.
  2. Allocate no more than 2% of your portfolio to buying. You can use our analysts' recommendations to create a balanced portfolio.
  3. Sell when the price reaches $40.

How to Buy Warrior Met Coal Shares?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type HCC.US (Warrior Met Coal ticker in the NYSE) in the search box, and select Warrior Met Coal in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type HCC.US (Warrior Met Coal ticker in the NYSE) and select Warrior Met Coal in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.


Buy Warrior Met Coal Shares >>


*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Europe Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance Europe Ltd. do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance Europe Ltd. and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.

  • Sources of information

    http://investors.warriormetcoal.com/

    https://www.wbrc.com/video/2021/06/08/warrior-met-coal-strike-tension/

    https://www.bloomberg.com/

    http://investors.warriormetcoal.com/news-releases/2021/11-19-2021-214610423

    https://www.barchart.com/futures/quotes/U7*0/futures-prices

  • Recommendation evaluation methodology according to Market Research Terms of Use
    Freedom Finance analysts perform a three-stage analysis. They select a promising industry based on the latest news, statistics and industry-specific metrics. They assess the supply and demand situation and its future development dynamics. Industry’s investment attractiveness is mostly affected by the forecasted market growth rates; total addressable market, player concentration level and likeliness of a monopoly formation, as well as the level of regulation by various entities or associations.

    The assessment is followed by the comparative analysis based on the selected sample. The sample comprises companies with a market capitalization of over USD 1 billion, but there is space for exceptions (when the suitable level of liquidity for company’s securities is available on the stock exchange). The selected companies (peers) are being compared against each other based on multipliers (EV/S, EV/EBITDA, PE, P/FCF, P/B), revenue growth rates, marginality and profitability (operating income margin, net income margin, ROE, ROA), and business performance.

    Having completed the comparative analysis, the analysts carry out a more in-depth research of the news about the selected company. They review company’s development policy, information about its current and potential mergers and acquisitions (M&A activity), and assess the efficiency of company's inorganic growth and other news about it over the past year. The main objective at this stage is to identify the growth drivers and evaluate their stability, as well as the extent of impact they have on the business.

    Based on all the data collected, the analysts determine the weighted forecasted figures of company’s growth rates and proposed business marginality, which are used to calculate the company’s multiplier-based estimated value. The said value enables setting the stock price target and stock value growth potential.

    The expected timing of the idea implementation is set depending on the current market situation, volatility level and available forecasting horizon for industry and company development. The forecasting period is normally set between 3 and 12 months.