S-1/A 1 d501786ds1a.htm AMENDMENT NO. 2 TO FORM S-1 Amendment No. 2 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on April 3, 2017

Registration No. 333-216499

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Warrior Met Coal, LLC

to be converted as described herein into a corporation named

Warrior Met Coal, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   1220   81-0706839

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

16243 Highway 216

Brookwood, AL 35444

(205) 554-6150

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Dale W. Boyles

Chief Financial Officer

Warrior Met Coal, LLC

16243 Highway 216

Brookwood, AL 35444

(205) 554-6150

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Rosa Testani

Daniel Fisher

Shar Ahmed

Akin Gump Strauss Hauer & Feld LLP

One Bryant Park

Bank of America Tower

New York, New York 10036

(212) 872-8115

 

Daniel Bursky

Andrew Barkan

Fried, Frank, Harris, Shriver & Jacobson LLP

One New York Plaza

New York, New York 10004

(212) 859-8000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐      Accelerated filer  
Non-accelerated filer  ☒   (Do not check if a smaller reporting company)    Smaller reporting company  


Table of Contents

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share(2)

 

Proposed Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common stock, par value $0.01 per share

  19,166,667   $19.00   $364,166,673   $42,207

 

 

(1) Includes 2,500,000 additional shares of common stock that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act.
(3) The Registrant previously paid $11,590 of the total registration fee in connection with the filing of this Registration Statement on March 7, 2017. Concurrently with the filing of this Amendment No. 2 to the Registration Statement, the Registrant has transmitted $30,617, representing the additional registration fee.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

EXPLANATORY NOTE

Warrior Met Coal, LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the effectiveness of this registration statement, Warrior Met Coal, LLC will be converted into a Delaware corporation pursuant to a statutory conversion, which we refer to as the “corporate conversion” and be renamed Warrior Met Coal, Inc. as described in the section “Corporate Conversion” of the accompanying prospectus. As a result of the corporate conversion, the members of Warrior Met Coal, LLC will become holders of shares of common stock of Warrior Met Coal, Inc. Except as disclosed in the accompanying prospectus, the audited financial statements and related notes thereto and selected consolidated and combined historical financial data and other financial information included in this registration statement are those of Warrior Met Coal, LLC and its subsidiaries and its predecessor and do not give effect to the corporate conversion. Shares of common stock of Warrior Met Coal, Inc. are being offered by the accompanying prospectus.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell the securities described herein until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell such securities and it is not soliciting an offer to buy such securities in any state where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 3, 2017

16,666,667 Shares

 

 

LOGO

Warrior Met Coal, Inc.

Common Stock

 

 

This is the initial public offering of shares of common stock of Warrior Met Coal, Inc. All of the 16,666,667 shares of common stock are being offered by the selling stockholders identified in this prospectus. We will not receive any of the proceeds from the shares of common stock being sold in this offering.

Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price will be between $17.00 and $19.00 per share. We have been approved to list our common stock on the New York Stock Exchange under the symbol “HCC.”

The underwriters may also purchase up to 2,500,000 additional shares from the selling stockholders at the initial public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” on page 20.

 

     Price to
Public
     Underwriting
Discounts and
Commissions(1)
     Proceeds to
Selling
Stockholders
 

Per Share

   $                   $                   $               

Total

   $                   $                   $               

 

(1) See “Underwriting” for additional information regarding underwriting compensation.

Neither the Securities and Exchange Commission, any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about             , 2017.

 

Credit Suisse   Citigroup   Morgan Stanley

BMO Capital Markets

    RBC Capital Markets
Apollo Global Securities   Clarksons Platou Securities   KKR

The date of this prospectus is             , 2017.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     20  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     52  

USE OF PROCEEDS

     54  

DIVIDEND POLICY

     54  

CORPORATE CONVERSION

     55  

CAPITALIZATION

     56  

DILUTION

     57  

SELECTED CONSOLIDATED AND COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA

     59  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     62  

INDUSTRY OVERVIEW

     87  

BUSINESS

     96  

MANAGEMENT

     118  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     137  

PRINCIPAL AND SELLING STOCKHOLDERS

     141  

DESCRIPTION OF OUR CAPITAL STOCK

     148  

DESCRIPTION OF CERTAIN INDEBTEDNESS

     153  

SHARES ELIGIBLE FOR FUTURE SALE

     154  

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     156  

UNDERWRITING

     160  

LEGAL MATTERS

     169  

EXPERTS

     169  

WHERE YOU CAN FIND MORE INFORMATION

     169  

INDEX TO FINANCIAL STATEMENTS

     F-1  

APPENDIX A: GLOSSARY OF SELECTED TERMS

     A-1  

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on behalf of us or to which we have referred you. Neither we, the selling stockholders nor the underwriters have authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we, the selling stockholders nor the underwriters are making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. The information in any free writing prospectus that we may provide to you in connection with this offering is accurate only as of the date of such free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

Industry and Market Data

The data included in this prospectus regarding the metallurgical (“met”) coal industry, including descriptions of trends in the market, as well as our position within the industry, is based on a variety of sources,

 

i


Table of Contents

including independent industry publications, government publications and other published independent sources, including Wood Mackenzie, the Energy and Minerals Field Institute and the World Coal Association, none of which are affiliated with us, as well as information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in our industry. Although we have not independently verified the accuracy or completeness of the third-party information included in this prospectus, based on management’s knowledge and experience, we believe that the third-party sources are reliable and that the third-party information included in this prospectus or in our estimates is accurate and complete. See “Industry Overview” for additional information regarding the met coal industry.

Statements made by Wood Mackenzie included in this prospectus with respect to our competitive position in 2017 are based upon “Operating Margin” and “Total Cash Cost,” as each such term is defined by Wood Mackenzie. “Operating Margin” is defined by Wood Mackenzie as gross revenue less Total Cash Cost. “Total Cash Cost” is defined by Wood Mackenzie as the sum of the direct cash costs associated with the mining, processing and transport of the marketable product, general and administration overhead costs directly related to mine production and royalty, levies and other indirect taxes (excluding profit related taxes).

Coal Reserve Information

The estimates of our proven and probable reserves as of December 31, 2016 included in this prospectus (i) for our Mine No. 4 and Mine No. 7 were prepared by Marshall Miller & Associates, Inc., an independent mining and geological consulting firm (“Marshall Miller”), (ii) for our Blue Creek Energy Mine (as defined below) were prepared by Norwest Corporation, an independent international mining consulting firm (“Norwest”), and (iii) for our other mining properties described in this prospectus were prepared by McGehee Engineering Corp., an independent mining and geological consulting firm (“McGehee”). The estimates of our proven and probable reserves are based on engineering, economic and geologic data, coal ownership information and current and proposed mine plans. Our proven and probable coal reserves are reported as “recoverable coal reserves,” which is the portion of the coal that could be economically and legally extracted or produced at the time of the reserve determination, taking into account mining recovery and preparation plant yield. These estimates are periodically updated to reflect past coal production, new drilling information and other geologic or mining data. Acquisitions or dispositions of coal properties will also change these estimates. Changes in mining methods may increase or decrease the recovery basis for a coal seam, as will changes in preparation plant processes.

“Reserves” are defined by the Security and Exchange Commission’s (the “SEC”) Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Industry Guide 7 divides reserves between “proven (measured) reserves” and “probable (indicated) reserves,” which are defined as follows:

 

    “Proven (Measured) Reserves.” Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

 

    “Probable (Indicated) Reserves.” Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.

Please read “Business—Estimated Recoverable Coal Reserves” for additional information regarding our reserves.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary contains basic information about us and this offering. Because it is a summary, it does not contain all the information that you should consider before investing in our common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited combined and consolidated Predecessor and Successor financial statements and the accompanying notes thereto and our unaudited pro forma condensed combined financial statements and the accompanying notes thereto included elsewhere in this prospectus.

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will complete a corporate conversion pursuant to which Warrior Met Coal, LLC will be converted into a Delaware corporation and be renamed Warrior Met Coal, Inc. as described under “Corporate Conversion.” We refer to this transaction herein as the “corporate conversion.” Except as otherwise indicated or required by the context, all references in this prospectus to the “Company,” “we,” “us,” “our” or “Successor” relate to (1) Warrior Met Coal, LLC, a Delaware limited liability company, and its subsidiaries for periods beginning as of April 1, 2016 and ending immediately before the completion of our corporate conversion, and (2) Warrior Met Coal, Inc., a Delaware corporation, and its subsidiaries for periods beginning with the completion of our corporate conversion and thereafter. References in this prospectus to the “Predecessor” refer to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter Energy, Inc., a Delaware corporation (“Walter Energy”), in the Asset Acquisition on March 31, 2016, as further described below under “—Corporate History and Structure—Walter Energy Restructuring.” The Predecessor periods included in this prospectus begin as of January 1, 2015 and end as of March 31, 2016. References in this prospectus to “selling stockholders” refer to those entities identified as selling stockholders in “Principal and Selling Stockholders.” “Met coal,” “hard coking coal” or “coking coal” as used in this prospectus means metallurgical coal. We have provided definitions for some of the other industry terms used in this prospectus in the “Glossary of Selected Terms” included elsewhere in this prospectus as Appendix A.

Warrior Met Coal, Inc.

Our Business

We are a large scale, low-cost U.S.-based producer and exporter of premium met coal operating two highly productive underground mines in Alabama, Mine No. 4 and Mine No. 7, that have an estimated annual production capacity of 7.3 million metric tons of coal. According to Wood Mackenzie, in 2017, we are expected to be the largest seaborne met coal supplier in the Atlantic Basin, and a top ten supplier to the global seaborne met coal market. As of December 31, 2016, based on a reserve report prepared by Marshall Miller, our two operating mines had approximately 107.8 million metric tons of recoverable reserves and, based on a reserve report prepared by Norwest, our undeveloped Blue Creek Energy Mine (as discussed below) contained 103.0 million metric tons of recoverable reserves. The premium hard coking coal (“HCC”) we produce at Mine No. 4 and Mine No. 7 is of a similar quality to coal referred to as the “benchmark HCC” produced in Australia, which is used to set quarterly pricing for the met coal industry.

Our operations are high margin when compared to our competitors. According to Wood Mackenzie, in 2017 our overall operations are expected to be positioned in the first quartile (18th percentile) based on “Operating Margin” as defined by Wood Mackenzie, among mines operated by U.S. seaborne met coal exporters. In addition, according to Wood Mackenzie, in 2017 our overall operations are expected to be positioned in the second quartile (33rd percentile) based on Operating Margin, among all mines operating in the global seaborne met coal market.

 



 

1


Table of Contents

We believe our high margin operations relative to our competitors are a direct result of a combination of factors, notably our (1) highly productive mining operations, (2) high-quality coal products, (3) close proximity and efficient access to the Port of Mobile, Alabama and (4) seaborne freight advantage to reaching our primary end markets:

 

    We employ a highly efficient longwall mining method with development support from continuous miners at both of our operating mines. This mining method, together with a redesigned flexible mine plan developed and implemented around the time of the Asset Acquisition (as defined below), new logistics contracts and a new initial Collective Bargaining Agreement (“CBA”) with the United Mine Workers of America (“UMWA”), has enabled us to structurally reduce the operating costs at our Mine No. 4 and Mine No. 7, while also increasing our ability to adjust our cost structure with respect to the HCC benchmark price. We believe the step-down in costs and greater variability in our cost structure relative to Walter Energy equip our operations to endure adverse price environments and generate strong cash flows in favorable price environments.

 

    Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and low-to-medium volatility. These qualities make our coal ideally suited as a coking coal for the manufacture of steel. As a result of our high quality coal, our realized price has historically been in line with or at a slight discount to the HCC benchmark, which helps drive our high operating margins.

 

    Our two operating mines are located approximately 300 miles from our export terminal at the Port of Mobile, Alabama, which we believe to be the shortest mine-to-port distance of any U.S.-based met coal producer. Our low cost, flexible and efficient rail and barge network underpins our cost advantage and dependable access to the seaborne markets. Furthermore, in the event of lower coal prices, we have a variable transportation cost structure that results in lower cash requirements.

 

    We sell our coal to a diversified customer base of blast furnace steel producers, primarily located in Europe and South America. We enjoy a shipping time and distance advantage serving customers throughout the Atlantic Basin relative to competitors located in Australia and Western Canada.

To complement our highly efficient, low-cost operations, we have the ability to quickly adjust our production levels in response to market conditions. Our mine plan was redesigned and implemented around the time of the Asset Acquisition, allowing us to maximize profitability and operating cash flow. For example, we operated our mines at reduced levels in the early part of 2016 in response to weak met coal market conditions throughout the first nine months of 2016, during which we produced 2.2 million metric tons of met coal. During the fourth quarter of 2016, we commenced ramping up production in response to the increase in the HCC benchmark price, which resulted in us producing 3.1 million metric tons of met coal for the year ended December 31, 2016. During 2013, when the HCC quarterly benchmark price averaged $159 per metric ton, our two operating mines produced a combined 7.3 million metric tons, which we estimate equals our current capacity. We are increasing our production during 2017 and, given our favorable cost structure, generate significantly higher operating cash flow.

For the year ended December 31, 2015 and the nine months ended December 31, 2016, our coal operations:

 

    generated sales of $514.3 million and $276.6 million, respectively; and

 

    incurred cost of sales of $601.5 million and $244.7 million, respectively.

Our Competitive Strengths

We believe that we have the following competitive strengths:

Exposure to “pure play,” high quality met coal production. Unlike many other mining companies, substantially all of our revenue is derived from the sale of met coal in the global seaborne markets. All of our

 



 

2


Table of Contents

resources are allocated to the mining, transportation and marketing of met coal. The premium HCC we produce at Mine No. 4 and Mine No. 7 is of a similar quality to coal referred to as the “benchmark HCC” produced in Australia, which is used to set quarterly pricing for the met coal industry. Coal from Mine No. 7 is classified as a premium low-volatility HCC and coal from Mine No. 4 is classified as a premium mid-volatility HCC. The combination of low sulfur, low-to-medium ash, low-to-medium volatility, and other characteristics of our coal, as well as our ability to blend them, makes our HCC product an important component within our customers’ overall coking coal requirements. As a result, our realized price has historically been in line with or at a slight discount to the HCC benchmark. Our 2016 average gross realized price was 99% of the HCC benchmark, excluding the effect of tons contracted for sale in prior quarters. This is in significant contrast to other U.S. met coal producers, which we believe sell a relatively higher proportion of lower rank coals to domestic steel producers.

Productive longwall mines with low operating costs. We employ a highly efficient longwall mining method with development support from continuous miners at both of our operating mines. This mining method, combined with a redesigned flexible mine plan implemented around the time of the Asset Acquisition allows us to adjust our production levels in response to market conditions to ensure maximum profitability and operating cash flow, throughout coal-pricing cycles. Around the time of the Asset Acquisition, we were able to structurally reduce the operating and logistical costs associated with Mine No. 4 and Mine No. 7. For the nine months ended December 31, 2016, our two operating mines had an average cash cost of sales free-on-board at the Port of Mobile of $82.84 per metric ton, compared to $112.96 per metric ton for the year ended December 31, 2015. Of note, we achieved this 26.7% reduction in cash cost of sales even though we are still in the process of ramping up production at Mine No. 4 and the second longwall within Mine No. 7. See “—Summary Consolidated and Combined Historical and Pro Forma Financial Data—Non-GAAP Financial Measures—Cash Cost of Sales” for the definition of cash cost of sales and a reconciliation of cash cost of sales to our most directly comparable financial measure calculated and presented in accordance with GAAP. These cost reductions were driven in large part by structurally sustainable changes to our overall operations we implemented around the time of the Asset Acquisition, in particular our new flexible mine plan, new initial CBA with the UMWA, and reduced rail, barge and port costs. According to Wood Mackenzie, in 2017, our overall operations are expected to be positioned in the first quartile (18th percentile) based on Operating Margin, among mines operated by U.S. seaborne met coal exporters. In addition, according to Wood Mackenzie, in 2017, our overall operations are expected to be positioned in the second quartile (33rd percentile) based on Operating Margin among all mines operating in the global seaborne met coal market.

Largest seaborne met coal supplier based in the Atlantic Basin with diverse customer base and significant reserve base. According to Wood Mackenzie, in 2017, we are expected to be the largest seaborne supplier of met coal based in the Atlantic Basin. Our location provides us with a significant freight advantage in serving our European and South American customers relative to competitors located in Australia and Western Canada whose coal must be shipped significantly longer distances. This advantage results in a higher margin for our met coal. We have a diverse customer base and have supplied many of our top customers continuously over the last decade. Our ability to serve customers in the Atlantic Basin is supported, as of December 31, 2016, based on a reserve report prepared by Marshall Miller, by approximately 107.8 million metric tons of recoverable coal reserves at our two operating mines. Together, these reserves provide an implied mine life of approximately 15 years at our historical operating rates. We have additional significant embedded growth potential that can be developed at our operating mines and at our undeveloped Blue Creek Energy Mine in a supportive met coal pricing environment. In particular, our undeveloped Blue Creek Energy Mine in Tuscaloosa County, Alabama contains, based on a reserve report prepared by Norwest, an additional 103.0 million metric tons of high-quality met coal recoverable reserves. Management is evaluating the future development of this new mine.

Significant logistical advantage and secure infrastructure access to reach the seaborne market. Our two operating mines are located approximately 300 miles from our export terminal capacity in Mobile, Alabama and have multiple alternative transportation routes to move our coal to port. These alternatives include direct rail

 



 

3


Table of Contents

access at the mine sites and a wholly owned barge load-out facility, enabling us to utilize the lowest cost option between the two at any given point in time. Around the time of the Asset Acquisition, we successfully negotiated a reduction in rail, barge and port costs. In addition, we have a contract with the Port of Mobile, Alabama, that provides us up to 8.0 million metric tons of annual port capacity through July 2026 for our coal at very competitive rates. The total annual capacity of the McDuffie Coal Terminal at the Port of Mobile, Alabama is approximately 27.2 million metric tons and this coal terminal is presently utilized for all of our coal exports. Our proximity to port contrasts with the approximately 400-mile distances for major Central Appalachian met coal producers to access their nearest port, the Port of Hampton Roads, Virginia. Our proximity to port and the flexibility of our logistics networks underpin our logistical cost advantage compared to other U.S. met coal producers. According to Wood Mackenzie, our operating mines are expected to be in the first quartile (10th percentile) for transportation costs from mine to port in the United States in 2017, contributing to our competitive cost advantage relative to other U.S. exporters who collectively comprise the vast majority of met coal produced in the Atlantic Basin.

Strong leverage to met coal prices with strong operating cash flow generation. Our overall operations have robust operating margins, require modest sustaining capital expenditures and are expected to generate significant operating cash flows in a range of met coal price environments. We acquired our operations in the Asset Acquisition on a debt-free basis and with minimal legacy liabilities and, as a result, we have a strong balance sheet and currently have minimal interest expense. We expect our operating cash flows to benefit from a low effective tax rate, predominantly driven by significant net operating loss carryforwards (“NOLs”) that were acquired in connection with the Asset Acquisition.

Our new initial CBA, combined with our flexible rail, port and barge logistics and our royalty structure, results in a highly variable operating cost profile that allows our cash cost of sales to move with changes in the price we realize for our coal. Approximately two-thirds of our cash cost of sales relate to the cost of production at our mines, while the remaining one-third relates to our logistics costs from mine to port as well as royalties. Our logistics costs are structured to reduce cash requirements in lower HCC benchmark price environments and to increase cash requirements within a range with higher HCC benchmark prices. Our royalties are calculated as a percentage of the price we realize and therefore increase or decrease with changes in the HCC benchmark. Our new initial CBA includes a variable element that pays bonus incentives and hourly wage increases tied to HCC benchmark prices. In addition, we can adjust our usage of continuous miner units in response to HCC benchmark pricing. Continuous miner units develop panels for mining by longwall units and operate at a higher cost than longwall units. By running additional continuous miner units in higher met coal price environments, we are able to develop extra panels (also known as “float”) that will enable us to idle continuous miner units in lower met coal price environments, while continuing to run our lower cost longwall units. Our variable cost structure dramatically lowers our cash cost of sales if our realized price falls, while being effectively capped in higher price environments allowing us to generate significant operating cash flow. The following table presents our illustrative run rate cash cost of sales free-on-board at the Port of Mobile:

 

HCC benchmark ($ per metric ton)

   $ 100      $ 120      $ 150      $ 175      $ 200  

Illustrative cash cost of sales (free-on-board port) ($ per metric ton)

   $ 80      $ 92      $ 97      $ 101      $ 104  

Dynamic mine plan allows flexibility to quickly adjust production. Our lean organization and dynamic mine plan allow us to quickly ramp up or ramp down production in response to market conditions with minimal one-time costs associated with the change in production levels. During the year ended December 31, 2016, when the HCC benchmark averaged $114.25 per metric ton but had a low of $81 per metric ton in the first quarter of 2016, we produced 3.1 million metric tons of met coal compared to 4.9 million metric tons for the year ended December 31, 2015, when the HCC benchmark averaged $102.13 per metric ton (with a low of $89 per metric ton in the fourth quarter of 2015). Similarly, in the fourth quarter of 2016, in response to the substantial increase in met coal prices, we rapidly restarted our Mine No. 4 and ramped up production at the second longwall within

 



 

4


Table of Contents

Mine No. 7 to increase our production rates. Our production in the fourth quarter of 2016 was 0.9 million metric tons, when the HCC benchmark was $200 per metric ton versus 0.6 million metric tons in the fourth quarter of 2015, when the HCC benchmark was $89 per metric ton. On an annual basis, we believe we can ramp up production to 7.3 million metric tons, which was our historical high production level set in 2013.

Highly experienced leadership team with proven commitment to safety and operational excellence. Our Chief Executive Officer (“CEO”), Walter J. Scheller, III, is the former CEO of Walter Energy and has six years of direct experience managing Mine No. 4 and Mine No. 7, and over 30 years of experience in longwall coal mining. Furthermore, following the Asset Acquisition, we hired several key personnel with extensive direct operational experience in met coal longwall mining, including our Chief Operating Officer, Jack Richardson, and our Chairman, Stephen D. Williams. We have a strong record of operating safe mines and are committed to environmental excellence. Our dedication to safety is at the core of all of our overall operations as we work to further reduce workplace incidents by focusing on policy awareness and accident prevention. Our continued emphasis on enhancing our safety performance has resulted in zero fatal incidents as well as non-fatal days lost incidence rates of 3.73 at Mine No. 4 and 3.27 at Mine No. 7 for the year ended December 31, 2016, which are considerably lower than the 2016 national average incident rate for all underground coal mines in the United States of 4.99 non-fatal days lost per site.

Our Business Strategies

Our objective is to increase stockholder value through our continued focus on asset optimization and cost management to drive profitability and cash flow generation. Our key strategies to achieve this objective are described below:

Maximize profitable production. In the year ended December 31, 2016, we produced 3.1 million metric tons of met coal, predominantly from Mine No. 7, as we temporarily idled our Mine No. 4 in early 2016. We have the flexibility in our new initial CBA to increase annual production with relatively modest incremental capital expenditures. We operated at an annual combined production level of 7.3 million metric tons from Mine No. 4 and Mine No. 7 as recently as 2013. Based on our management’s operational experience, we are confident in our ability to produce at or close to this capacity in a safe and efficient manner, and with a comparable cost profile to our current costs, should market conditions warrant.

Maintain and further improve our low-cost operating cost profile. While we have already achieved significant structural cost reductions at our two operating mines around the time of the Asset Acquisition, we see further opportunities to reduce our costs over time. Our new initial CBA with the UMWA has been structured to support these ongoing cost optimization initiatives. For example, in our new initial CBA, we have additional flexibility in our operating days and alternative work schedules that were previously optional and more expensive under the Walter Energy collective bargaining agreement. All contractually guaranteed wage increases and bonus incentives are tied to HCC benchmark prices. Additionally, the new initial CBA enables us to contract out work under certain circumstances. We believe this type of structural incentive provision and workforce flexibility in the new initial CBA is helpful to further align our organization with operational excellence and to increase the proportion of our costs that vary in response to changes in the HCC benchmark price.

Broaden our marketing reach and potentially increase the realized prices we achieve for our coal. We have implemented a strategy to improve both our sales and marketing focus, with a goal of achieving better pricing relative to the HCC benchmark price, which includes: (i) using a combination of benchmark and index pricing with our contract customers; (ii) opportunistic selling into the spot met coal market; and (iii) selected instances of entering into longer term fixed price contracts. Each of these elements is intended to further embed our coal product among a broader group of steel customers. Traditionally, we have predominantly marketed our coal to European and South American buyers. However, we expect to increase our focus on Asian customers, in

 



 

5


Table of Contents

particular, Japanese steel mills, some of which have expressed a desire to diversify their supply of premium HCC away from Australian coals. In the near term, our target geographic customer mix is 60% in Europe, 30% in South America and 10% in Asia. We have an arrangement with Xcoal Energy & Resource (“Xcoal”) to serve as Xcoal’s exclusive and strategic partner for exports of low volatility HCC. Under this arrangement, Xcoal takes title to and markets coal that we would historically have sold on the spot market, in an amount of up to 10% of our sales. While the volumes being sold through this arrangement with Xcoal are relatively limited, we are positioned to potentially benefit from Xcoal’s expertise and relationships across all coal that we sell. To that end, we also have an incentive-based arrangement with Xcoal to cover other tonnage, in the event Xcoal is able to offer us a higher realized price relative to the HCC benchmark than we have previously achieved.

Rigorously evaluate our organic and inorganic growth pipeline, including the high-quality Blue Creek Energy Mine. We are continuously analyzing new opportunities to expand our business, but would require any mine openings or asset acquisitions to be highly strategic and additive to our existing high-quality met coal portfolio and result in a strong balance sheet on a pro forma basis. In particular, we own the undeveloped Blue Creek Energy Mine, which, based on a reserve report prepared by Norwest, had 103.0 million metric tons of high quality met coal recoverable reserves as of December 31, 2016. We believe that the Blue Creek Energy Mine is a large block of high quality coal reserves that could support a new longwall operation with a mine life of greater than 30 years. As such, management is evaluating additional leases for this site as well as considering approving additional engineering work to further evaluate this opportunity. Should we decide to develop it in the future, we expect that the Blue Creek Energy Mine would significantly increase our annual production.

Met Coal Industry Overview

Met coal or coking coal is an essential ingredient in the production of steel using blast furnaces. According to Wood Mackenzie, approximately 74.2% of the world’s steel production in 2016, or 1,211 million metric tons, was estimated to be manufactured using blast furnaces. Three major types of met coal are produced globally with varying characteristics: HCC, semi soft coking coal (“SSCC”) and pulverized coal for injection (“PCI”). Unlike SSCC and PCI, HCC currently has no substitutes and must be used in the production of steel by the blast furnace method. Furthermore, the physical properties of individual HCC seams have a significant impact on their suitability and value in use for blast furnace steel production. In particular, HCC that exhibits low volatile matter and limited swell is required for blending with coal containing less desirable qualities.

Global steel production is estimated to be 1,633 million metric tons in 2016, which is a 0.4% increase from 2015 and a 6.0% increase from 2011. Future growth in global steel demand and production will be largely driven by infrastructure investment and urbanization in developing markets, particularly China and India which are expected to account for 50.0% and 5.9% of global steel production in 2016, respectively, according to Wood Mackenzie. Global steel consumption and production will also be impacted by infrastructure improvement in developed countries, in particular the United States. Steel production in the United States was 78.4 million metric tons in 2016, representing a 0.6% decrease from 2015 and an 11.6% decrease from recent peak production in 2012. Approximately 33.4% of 2016 steel production in the United States, or 26.2 million metric tons, was manufactured using blast furnaces. Further, Wood Mackenzie forecasts global steel production to grow from current levels to 1,693 million metric tons in 2020, a 3.7% increase.

Met coal, and in particular HCC, is a scarce commodity with large scale mineable deposits limited to specific geographic regions located in the Eastern United States, Western Canada, Eastern Australia, Russia, China, Mozambique and Mongolia. Collectively, these countries are expected to represent 95.7% of global met coal production in 2016 according to Wood Mackenzie. Global met coal production is estimated to be 1,070 million metric tons in 2016, of which only 597 million metric tons, or 55.8%, was classified as HCC, according to Wood Mackenzie. Of this amount, Wood Mackenzie estimates that 192 million metric tons of HCC were traded on the seaborne market. Costs of production for met coal are driven by mine fundamentals and input

 



 

6


Table of Contents

costs such as labor, fuel and local currency. As mines age, mining costs tend to rise, driven by deeper open cut operations with higher strip ratios and greater distance from shafts and ramps to production areas underground. According to Wood Mackenzie, “Total Cash Cost” (as defined by Wood Mackenzie) of met coal production in Australia has risen by an estimated 15% from 2009 to 2017, when measured in local currency. In recent years, many producers responded to low prices by taking action to reduce costs and capital expenditures. As evidenced by recent mine closures, we believe that many producers will be unable to maintain costs at that level due to deferral of investment in aging equipment and infrastructure, and therefore we expect the marginal cost of production to increase over time.

Met coal trades in a global seaborne market and in domestic markets in areas of China and the United States where coal mines are located closer to regional suppliers than ocean ports. According to Wood Mackenzie, seaborne trade of met coal is expected to be 278 million metric tons in 2016. The United States is an important met coal supplier to the seaborne export market, and is the second largest supplier behind Australia. For 2016, Wood Mackenzie estimates these two countries were responsible for 11.7% and 66.6% of global seaborne met coal exports, respectively.

Over the last several years, significant oversupply in the market depressed prices, resulting in mine closures and production curtailments. The United States, with a relatively larger number of high-cost mines, experienced significant contraction in met coal production, from 82.9 million metric tons of production in 2012 to an expected 54.8 million metric tons in 2016, a 33.9% reduction.

Prices for met coal are generally set in the seaborne market, primarily driven by Japanese and Chinese import demand and Australian supply. Chinese import demand depends in part on Chinese steel production and domestic coal production. Of note, China is the largest met coal producer and consumer in the world, consuming over 99% of its 2016 production of 663 million metric tons of met coal domestically. However, due to the lower quality coal that is produced domestically and the distance of Chinese mines relative to the location of coastal steel mills, according to Wood Mackenzie, the Chinese domestic met coal market has a structural need for at least 30 million metric tons of premium benchmark quality HCC. Wood Mackenzie believes that this shortfall will be filled predominantly through the seaborne market, providing sustained demand support in the global seaborne market for premium quality HCC.

A quarterly benchmark HCC price is set between major Australian suppliers and major Japanese steel mill customers, and that price serves as a reference for most met coal, with adjustments for quality differences; there is also a spot market in which smaller volumes transact. Met coal prices have been highly volatile in the last decade due to seaborne supply disruptions, and more recently Chinese restrictions on domestic coal production. In 2008, benchmark coking coal prices reached $298 per metric ton in response to flooding in Australia’s producing regions, falling to $129 per metric ton in 2009. In 2011, benchmark prices reached $330 per metric ton as a result of flooding in Australia, falling back to $81 per metric ton five years later in early 2016.

In response to lower prices in 2015 and the first nine months of 2016, higher cost producers decreased or discontinued production, and we believe that they have been unable to respond quickly to higher prices due to the significant financial and regulatory burden associated with mine reopening, particularly in the United States. Additionally, Australian and Canadian mines are operating near capacity and would require significant capital investment to materially increase output. The lack of supply response was evident in late 2016, when in response to Chinese policy action, industry consolidation, and flooding in Chinese producing regions, the market saw a significant tightening in the global seaborne supply and demand balance, resulting in a corresponding increase in prices, with prices in the spot market increasing above $300 per metric ton in late 2016 and the first quarter 2017 benchmark contract price being set at $285 per metric ton. As of March 21, 2017, the spot market price was $153.30 per metric ton.

 



 

7


Table of Contents

Some of the factors that caused the recent rise in spot market pricing to above $300 per metric ton have eased, resulting in a decline in spot market prices to $153.30 per metric ton as of March 21, 2017. We believe this decline has been driven by (i) the temporary relaxation by the Chinese government of policies that were aimed to reduce domestic coal production and (ii) the resumption of production at Australian mines that had faced supply disruptions. Notwithstanding the recent pullback, spot market prices remain more than approximately 89% higher than the first quarter 2016 benchmark HCC settlement price of $81 per metric ton. The second quarter 2017 benchmark is expected to be set in April 2017.

Over the long term, price levels between supply shock-induced spikes have been influenced by the marginal cost of production, which we expect to rise in coming years. According to Wood Mackenzie, in 2017, the Total Cash Cost of production for a mine at the 90th percentile of the global seaborne met coal cost curve is expected to be $93.34 per metric ton.

Risk Factors

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk Factors” beginning on page 20. These risks include, but are not limited to:

 

    Our business may suffer as a result of a substantial or extended decline in met coal pricing, demand and other factors beyond our control, which could negatively affect our operating results and cash flows.

 

    Met coal mining involves many hazards and operating risks and is dependent upon many factors and conditions beyond our control, which may cause our profitability and our financial position to decline.

 

    Significant competition, as well as changes in foreign markets or economics, could harm our sales, profitability and cash flows.

 

    Extensive environmental, health and safety laws and regulations impose significant costs on our operations and future regulations could increase those costs, limit our ability to produce or adversely affect the demand for our products.

Recent Developments

On March 31, 2017, our board of managers declared a cash distribution payable to holders of our Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $190.0 million (the “Special Distribution”). The Special Distribution was funded with available cash on hand and was paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017. The Special Distribution does not apply to the shares of common stock to be sold in this offering.

On March 24, 2017, we entered into Amendment No. 2 (the “Second Amendment”) to our Asset-Based Revolving Credit Agreement, dated as of April 1, 2016, by and among the Company and certain of its subsidiaries, as borrowers, the guarantors party thereto, Citibank, N.A., as administrative agent, and the other lenders party thereto (as amended, the “ABL Facility”) to modify certain terms relating to the restricted payment covenant, which provides the Company with improved flexibility to pay dividends, including the Special Distribution.

Corporate History and Structure

Walter Energy Restructuring

Warrior Met Coal, LLC was formed on September 3, 2015 by certain lenders under Walter Energy’s 2011 Credit Agreement, dated as of April 1, 2011 (the “2011 Credit Agreement”), and the noteholders under Walter

 



 

8


Table of Contents

Energy’s 9.50% Senior Secured Notes due 2019 (such lenders and noteholders, collectively, “Walter Energy’s First Lien Lenders”) in connection with the acquisition by the Company of certain core assets of Walter Energy and certain of its wholly owned subsidiaries (the “Walter Energy Debtors”) related to their Alabama mining operations. The acquisition was accomplished through a credit bid of the first lien obligations of the Walter Energy Debtors pursuant to section 363 of the U.S. Bankruptcy Code and an order by the Bankruptcy Court (I) Approving the Sale of the Acquired Assets Free and Clear of Claims, Liens, Interests and Encumbrances; (II) Approving the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; and (III) Granting Related Relief (Case No. 15-02741, Docket No. 1584) (the “Sale Order” and the transactions contemplated thereunder, the “Asset Acquisition”). Prior to the closing of the Asset Acquisition, the Company had no operations and nominal assets. The Asset Acquisition closed on March 31, 2016.

Upon closing of the Asset Acquisition and in exchange for a portion of the outstanding first lien obligations of the Walter Energy Debtors, Walter Energy’s First Lien Lenders were entitled to receive, on a pro rata basis, a distribution of Class A Units in Warrior Met Coal, LLC. As of the date of this prospectus, there continue to be certain unfunded revolving loans under the 2011 Credit Agreement in the form of outstanding undrawn letters of credit arising under the first lien obligations of the Walter Energy Debtors. To the extent such letters of credit are drawn, including following the closing of this offering, the revolving lenders are entitled to an additional distribution of our equity interests. The maximum amount of equity that could be distributed on account of outstanding, but undrawn, letters of credit is less than 0.1% of our outstanding equity before giving effect to this offering.

In connection with the Asset Acquisition, we conducted rights offerings to Walter Energy’s First Lien Lenders and certain qualified unsecured creditors to purchase newly issued Class B Units of Warrior Met Coal, LLC, which diluted the Class A Units on a pro rata basis (the “Rights Offerings”). Proceeds from the Rights Offerings were used to pay certain costs associated with the Asset Acquisition and for general working capital purposes.

The transactions described above are collectively referred to as the “Walter Energy Restructuring.”

Post-IPO Corporate Structure

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will complete a corporate conversion pursuant to which Warrior Met Coal, LLC will be converted into a Delaware corporation and be renamed Warrior Met Coal, Inc. as described under “Corporate Conversion.”

Upon completion of the corporate conversion and this offering, investment funds managed, advised or sub-advised by Apollo Global Management LLC (“Apollo”) or its affiliates (such funds, the “Apollo Funds”) will own approximately 18.9% of our outstanding shares of common stock (or 17.2% if the underwriters’ option to acquire additional shares of common stock is exercised in full), investment funds managed, advised or sub-advised by GSO Capital Partners LP (“GSO”) or its affiliates (such funds, the “GSO Funds”) will own approximately 12.2% of our outstanding shares of common stock (or 11.1% if the underwriters’ option to acquire additional shares of common stock is exercised in full), investment funds managed, advised or sub-advised by KKR & Co. L.L.P. (“KKR”) or its affiliates (such funds, the “KKR Funds”) will own approximately 7.6% of our outstanding shares of common stock (or 6.9% if the underwriters’ option to acquire additional shares of common stock is exercised in full), and investment funds managed, advised or sub-advised by Franklin Mutual Advisers, LLC (“Franklin Mutual”) or its affiliates (such funds, the “Franklin Funds” and, together with the Apollo Funds, the GSO Funds and the KKR Funds, the “Principal Stockholders”) will own approximately 8.7% of our outstanding shares of common stock (or 7.9% if the underwriters’ option to acquire additional shares of common stock is exercised in full).

 



 

9


Table of Contents

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in The Jumpstart our Business Startups Act (the “JOBS Act”). For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. These provisions include:

 

    the presentation of only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in an initial public offering registration statement;

 

    an exemption to provide less than five years of selected financial data in an initial public offering registration statement;

 

    an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and

 

    reduced disclosure about the company’s executive compensation arrangements.

An emerging growth company is also exempt from Section 404(b) of The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which requires that the independent registered public accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of internal control over financial reporting, and from Sections 14A(a) and (b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which require stockholder approval of executive compensation and golden parachutes.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We have elected to take advantage of all of the applicable JOBS Act provisions, except that we will elect to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards. This election is irrevocable.

Accordingly, the information that we provide you may be different than what you may receive from other public companies in which you hold equity interests.

We may take advantage of these provisions until we are no longer an emerging growth company, which will occur upon the earliest of:

 

    the last day of the fiscal year following the fifth anniversary of this offering;

 

    the last day of the fiscal year in which we have more than $1 billion in annual revenue;

 

    the date on which we issue more than $1 billion in non-convertible debt securities over a three-year period; or

 

    as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

 



 

10


Table of Contents

For more information, please see “Risk Factors—For so long as we are an “emerging growth company” we will not be required to comply with certain disclosure requirements that are applicable to other public companies and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.”

Our Offices

Our principal executive offices are located at 16243 Highway 216, Brookwood, Alabama 35444, and our telephone number at that address is (205) 554-6150. Our website address is www.warriormetcoal.com. Information contained on our website is not incorporated by reference herein and does not constitute part of this prospectus.

 



 

11


Table of Contents

The Offering

Common stock to be sold in this

    offering

16,666,667 shares (approximately 31.2% of shares outstanding)

Total common stock outstanding

    before and after this offering

53,500,000 shares

 

Over-allotment option

The underwriters have an option to acquire a maximum of 2,500,000 additional shares from the selling stockholders as described in “Underwriting” to cover over-allotments of shares. We will not receive any of the proceeds from the shares of common stock sold pursuant to the over-allotment option.

 

Use of proceeds

We will not receive any proceeds from the sale of our common stock in this offering. All of the proceeds from this offering will be received by the selling stockholders. See “Use of Proceeds.”

 

Dividend policy

While we have not made any cash distribution since our inception, our board of managers declared the Special Distribution on March 31, 2017, payable to the holders of our Class A Units, Class B Units and Class C Units. The Special Distribution was paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017 and does not apply to the shares of our common stock to be sold in this offering.

After completion of this offering, we may pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements and in any preferred stock, business prospects and other factors that our board of directors may deem relevant. Our ability to pay dividends on our common stock is limited by covenants in our ABL Facility, and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy” and “Description of Certain Indebtedness.”

 

NYSE listing symbol

We have been approved to list our shares of common stock on the New York Stock Exchange (the “NYSE“) under the symbol “HCC.”

 

Risk factors

You should carefully read and consider the information beginning on page 20 of this prospectus set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our common stock.

Unless otherwise indicated, all information assumes the following (except as disclosed in the audited financial statements and related notes thereto and selected consolidated and combined historical financial data and other financial information included elsewhere in this prospectus):

 

    the conversion of Warrior Met Coal, LLC from a Delaware limited liability company to a Delaware corporation prior to the effective date of the registration statement of which this prospectus forms a part as occuring as of March 31, 2017, and, in connection therewith

 

  (i) the automatic conversion of 2,500,004 Class B Units of Warrior Met Coal, LLC into 2,500,004 Class A Units of Warrior Met Coal, LLC upon termination of the additional capital commitment, as discussed under “Corporate Conversion,” on a one-for-one basis; and

 



 

12


Table of Contents
  (ii) the subsequent conversion of the 3,774,409 then outstanding Class A Units and 61,897 then outstanding Class C Units of Warrior Met Coal, LLC into an aggregate of 53,500,000 shares of common stock of Warrior Met Coal, Inc., using an approximate 13.9457-to-one conversion ratio;

 

    an initial offering price of $18.00 per share, which is the midpoint of the range set forth on the cover of this prospectus; and

 

    no exercise of the underwriters’ option to purchase up to 2,500,000 additional shares of our common stock to cover over-allotments, if any.

In connection with the corporate conversion, all awards previously granted to employees and directors under our 2016 Equity Plan (as defined below) will convert from Class C Units into shares of our common stock. Therefore, the 53,500,000 shares of our common stock outstanding following the corporate conversion and immediately prior to the closing of this offering includes 863,187 shares of common stock that relate to these awards under our 2016 Equity Plan, of which 805,076 shares are unvested. Vesting of these awards will be subject to various conditions as described under “Management—Executive Compensation—Warrior Met Coal, LLC 2016 Equity Incentive Plan Restricted Unit Award Agreement—Vesting.” There are no other awards currently outstanding under our 2016 Equity Plan and, upon the effectiveness of the 2017 Equity Plan (as defined below) in connection with the consummation of this offering, no further awards will be granted under the 2016 Equity Plan.

In addition unless otherwise indicated, the information relating to our outstanding shares of common stock does not give effect to the 5,944,444 shares of our common stock reserved for issuance under our 2017 Equity Plan for our employees and directors.

 



 

13


Table of Contents

Summary Consolidated and Combined Historical and Pro Forma Financial Data

The following tables set forth our summary consolidated and combined historical and pro forma financial data as of and for each of the periods indicated. The summary consolidated historical financial data as of December 31, 2016 and for the nine months ended December 31, 2016 is derived from the audited consolidated financial statements of the Successor included elsewhere in this prospectus. The summary combined historical financial data as of December 31, 2015 and for the three months ended March 31, 2016 and the year ended December 31, 2015 is derived from the audited combined financial statements of our Predecessor included elsewhere in this prospectus. The term “Successor” refers to (1) Warrior Met Coal, LLC and its subsidiaries for periods beginning as of April 1, 2016 and ending immediately before the completion of our corporate conversion and (2) Warrior Met Coal, Inc. and its subsidiaries for periods beginning with the completion of our corporate conversion and thereafter. The term “Predecessor” refers to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter Energy in the Asset Acquisition on March 31, 2016. The Predecessor periods included in this prospectus begin as of January 1, 2015 and end as of March 31, 2016.

The summary unaudited pro forma statement of operations data for the year ended December 31, 2016 is derived from the unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2016 assumes that the Asset Acquisition, the corporate conversion, this offering and the Special Distribution (collectively, the “Transactions”) occurred as of January 1, 2015. The summary unaudited pro forma balance sheet data as of December 31, 2016 assumes that the declaration of the Special Distribution occurred as of December 31, 2016. The summary unaudited pro forma financial data is based upon available information and certain assumptions that management believes are factually supportable, are reasonable under the circumstances and are directly related to the Transactions. The summary unaudited pro forma financial data is provided for informational purposes only and does not purport to represent what our results of operations or financial position actually would have been if these transactions had occurred at any other date, and such data does not purport to project our results of operations for any future period.

You should read this summary consolidated and combined historical and pro forma financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated and Combined Historical and Pro Forma Financial Data,” the unaudited pro forma condensed combined statements of operations and the audited financial statements and related notes thereto included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results of operations, financial position and cash flows.

 



 

14


Table of Contents
    Historical     Pro Forma  
    Successor     Predecessor     Predecessor/
Successor
 
    For the
nine months
ended
December 31,
2016(1)
    For the
three months
ended
March 31,
2016
    For the year
ended
December 31,
2015
    For the year
ended
December 31,
2016
 
   

(in thousands, except per unit, per share and

per metric ton data)

 

Statements of Operations Data:

         

Revenues:

         

Sales

  $ 276,560     $ 65,154     $ 514,334     $ 341,714  

Other revenues

    21,074       6,229       30,399       27,303  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    297,634       71,383       544,733       369,017  
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Cost of sales (exclusive of items shown separately below)

    244,723       72,297       601,545       315,563  

Cost of other revenues (exclusive of items shown separately below)

    19,367       4,698       27,442       24,065  

Depreciation and depletion

    47,413       28,958       123,633       58,950  

Selling, general and administrative

    20,507       9,008       38,922       29,125  

Other postretirement benefits

    —         6,160       30,899       —    

Restructuring costs

    —         3,418       13,832       3,418  

Asset impairment charges

    —         —         27,986       —    

Transaction and other costs

    13,568       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    345,578       124,539       864,259       431,121  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (47,944     (53,156     (319,526     (62,104

Interest expense, net

    (1,711     (16,562     (51,077     (2,243

Gain on extinguishment of debt

    —         —         26,968       —    

Reorganization items, net

    —         7,920       (7,735     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (49,655     (61,798     (351,370     (64,347

Income tax expense (benefit)

    18       18       (40,789     36  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (49,673   $ (61,816   $ (310,581   $ (64,383
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per unit—basic and diluted(2)

  $ (13.15      

Weighted average units outstanding—basic and diluted(2)

    3,777        

Pro forma net loss per share—basic and diluted(3)

          $ (1.20

Pro forma weighted average shares outstanding—basic and diluted(3)

            53,500  

Supplemental pro forma net loss per share—basic and diluted(4)

  $ (0.93      

Supplemental pro forma weighted average shares outstanding—basic and diluted(4)

    53,500        
 

Statements of Cash Flow Data:

         

Cash provided by (used in):

         

Operating activities

  $ (9,187   $ (40,698   $ (131,818  

Investing activities

  $ (30,884   $ (5,422   $ (64,249  

Financing activities

  $ 192,727     $ (6,240   $ (147,145  
 

Other Financial Data:

       

Depreciation and depletion

  $ 47,413     $ 28,958     $ 123,633     $ 58,950  

Capital expenditures(5)

  $ 11,531     $ 5,422     $ 64,971    

Adjusted EBITDA(6)

  $ 50,089     $ (9,048   $ (145,805   $ 48,428  
 

Sales Data:

       

Metric tons sold

    2,391       777       5,121       3,168  

Average selling price per metric ton

  $ 115.67     $ 83.85     $ 100.44     $ 107.86  

Cash cost of sales (free-on-board port) per metric ton(7)

  $ 82.84     $ 69.74     $ 112.96     $ 79.17  

 



 

15


Table of Contents
     Pro Forma(8)      Historical  
     Successor      Successor     Predecessor  
     December 31,
2016
     December 31, 
2016
    December 31, 
2015
 
            (in thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

   $ 150,045      $ 150,045     $ 79,762  

Working capital(9)

   $ 36,137      $ 226,137     $ 129,558  

Mineral interests, net

   $ 143,231      $ 143,231     $ 5,295  

Property, plant and equipment, net

   $ 496,959      $ 496,959     $ 567,594  

Total assets

   $ 947,631      $ 947,631     $ 802,137  

Long-term debt(10)

   $ 3,725      $ 3,725     $ —    

Total liabilities not subject to compromise

   $ 384,664      $ 194,664     $ 126,720  

Total members’ equity and parent net investment

   $ 562,967      $ 752,967     $ (820,861

 

(1) For the three months ended December 31, 2016, (i) the average HCC quarterly benchmark price per metric ton was $200.00, (ii) our average realized price per metric ton was $169.47, which includes approximately 154,000 carryover metric tons that were priced in the third quarter based on an average HCC quarterly benchmark price per metric ton of $92.00, but for which the revenue was recognized in the fourth quarter, (iii) metric tons sold were 0.9 million, (iv) our revenues were $153.5 million, (v) our Adjusted EBITDA, a non-GAAP financial measure, was $51.3 million, (vi) our cash cost of sales, a non-GAAP financial measure, per metric ton were $88.41 and (vii) our capital expenditures were $3.1 million. For a definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures—Adjusted EBITDA.” For a definition of cash cost of sales and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures—Cash Cost of Sales.”
(2) Does not give effect to the corporate conversion.
(3) See Note 4 to the unaudited pro forma condensed combined statements of operations included elsewhere in this prospectus for additional information regarding the calculation of pro forma basic and diluted net loss per share.
(4) We present certain per share data on a supplemental pro forma basis to the extent that the proceeds from this offering will be deemed to be used to fund the Special Distribution of $190.0 million. For further information on the supplemental pro forma per share data, see Note 26 to our audited financial statements included elsewhere in this prospectus.
(5) Capital expenditures consist of the purchases of property, plant and equipment.
(6) Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures—Adjusted EBITDA.”
(7) Cash cost of sales is a non-GAAP financial measure. For a definition of cash cost of sales and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures—Cash Cost of Sales.”
(8) Reflects only the declaration of the Special Distribution. See Note 26 to our audited financial statements appearing elsewhere in this prospectus for information regarding this unaudited pro forma balance sheet data. Refer to “Capitalization” for the pro forma impact of the payment of the Special Distribution.
(9) Working capital consists of current assets less current liabilities.
(10) Represents a security agreement and the long-term portion of a promissory note assumed in the Asset Acquisition. The agreement was entered into for the purchase of underground mining equipment. The promissory note matures on March 31, 2019, has a fixed interest rate of 4.00% per annum and is secured by the underground mining equipment it was used to purchase.

Non-GAAP Financial Measures

Cash Cost of Sales

Cash cost of sales is based on reported cost of sales and includes items such as freight, royalties, manpower, fuel and other similar production and sales cost items, and may be adjusted for other items that, pursuant to

 



 

16


Table of Contents

accounting principles generally accepted in the United States (“GAAP”), are classified in the Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it free-on-board at the Port of Mobile. Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold.

Cash costs of sales is a financial measure that is not calculated in conformity with GAAP and should be considered supplemental to, and not as a substitute or superior to, financial measures calculated in conformity with GAAP. We believe that this non-GAAP financial measure provides additional insight into our operating performance, and reflects how management analyzes our operating performance and compares that performance against other companies on a consistent basis for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance. We believe that cash costs of sales presents a useful measure of our controllable costs and our operational results by including all costs incurred to produce met coal and sell it free-on-board at the Port of Mobile. Period-to-period comparisons of cash cost of sales are intended to help our management identify and assess additional trends potentially impacting our Company that may not be shown solely by period-to-period comparisons of cost of sales. In addition, we believe that cash costs of sales is a useful measure as some investors and analysts use it to compare us against other companies. However, cash cost of sales may not be comparable to similarly titled measures used by other entities.

The following table presents a reconciliation of cost of sales to cash costs of sales (in thousands):

 

     Historical     Pro Forma  
     Successor     Predecessor     Predecessor/
Successor
 
     For the
nine months
ended
December 31,
2016(3)
    For the
three months
ended
March 31,
2016
    For the year
ended
December 31,
2015
    For the year
ended
December 31,
2016
 

Cost of sales

   $ 244,723     $ 72,297     $ 601,545     $ 315,563  

Mine No. 4 idle costs(1)

     (8,726     (10,173     —         (18,899

VEBA contribution(2)

     (25,000     —         —         (25,000

Other (operating overhead, etc.)

     (12,922     (7,936     (23,077     (20,858
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash cost of sales

   $ 198,075     $ 54,188     $ 578,468     $ 250,806  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents idle costs incurred, such as electricity, insurance and maintenance labor. This mine was idled in early 2016.
(2) We entered into a new initial CBA with the UMWA pursuant to which we agreed to contribute $25.0 million to a Voluntary Employees’ Beneficiary Association (“VEBA”) trust formed and administered by the UMWA.
(3) The following table presents a reconciliation of cost of sales to cash cost of sales for the three months ended December 31, 2016 (in thousands):

 

     Successor  
     For the
three months
ended
December 31,
2016
 

Cost of sales

   $ 85,960  

Other (operating overhead, etc.)

     (9,474
  

 

 

 

Cash cost of sales

   $ 76,486  
  

 

 

 

 



 

17


Table of Contents

Adjusted EBITDA

Adjusted EBITDA is defined as net loss before net interest expense, income tax expense (benefit), depreciation and depletion, net reorganization items, gain on extinguishment of debt, restructuring costs, asset impairment charges, transaction and other costs, Mine No. 4 idle costs, VEBA contributions, non-cash stock compensation expense and non-cash asset retirement obligation accretion.

Adjusted EBITDA is a financial measure that is not calculated in conformity with GAAP and should be considered supplemental to, and not as a substitute or superior to, financial measures calculated in conformity with GAAP. We believe that this non-GAAP financial measure provides additional insights into our operating performance, and it reflects how management analyzes our operating performance and compares that performance against other companies on a consistent basis for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance. We believe Adjusted EBITDA assists management in comparing performance across periods, planning and forecasting future business operations and helping determine levels of operating and capital investments. Period-to-period comparisons of Adjusted EBITDA are intended to help our management identify and assess additional trends potentially impacting our Company that may not be shown solely by period-to-period comparisons of net loss. We also utilize Adjusted EBITDA in certain calculations under our ABL Facility and for purposes of determining executive compensation. In addition, we believe that Adjusted EBITDA is a useful measure as some investors and analysts use Adjusted EBITDA to compare us against other companies. However, Adjusted EBITDA may not be comparable to similarly titled measures used by other entities.

The following table presents a reconciliation of net loss to Adjusted EBITDA (in thousands):

 

    Historical     Pro Forma  
    Successor     Predecessor     Predecessor/
Successor
 
    For the
nine months
ended
December 31,
2016(10)
    For the
three months
ended
March 31,
2016
    For the year
ended
December 31,
2015
    For the year
ended
December 31,
2016
 

Net loss

  $ (49,673   $ (61,816   $ (310,581   $ (64,383

Interest expense, net

    1,711       16,562       51,077       2,243  

Income tax expense (benefit)

    18       18       (40,789     36  

Depreciation and depletion

    47,413       28,958       123,633       58,950  

Reorganization items, net(1)

    —         (7,920     7,735       —    

Gain on extinguishment of debt(2)

    —         —         (26,968     —    

Restructuring costs(3)

    —         3,418       13,832       3,418  

Asset impairment charges(4)

    —         —         27,986       —    

Transaction and other costs(5)

    13,568       —         —         —    

Mine No. 4 idle costs(6)

    8,726       10,173       —         18,899  

VEBA contribution(7)

    25,000       —         —         25,000  

Stock compensation expense(8)

    509       390       4,034       509  

Asset retirement obligation accretion(9)

    2,817       1,169       4,236       3,756  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 50,089     $ (9,048   $ (145,805   $ 48,428  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents expenses and income directly associated with the Predecessor’s Chapter 11 Cases (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).
(2) Represents a portion of the gain on extinguishment of debt that was attributed to the Predecessor.
(3) Represents cost and expenses in connection with workforce reductions at Mine No. 4 and Mine No. 7 and corporate headquarters.

 



 

18


Table of Contents
(4) Represents asset impairment charges associated with the Blue Creek Energy Mine, which was impaired during the fourth quarter of 2015.
(5) Represents costs incurred by the Company in connection with the Asset Acquisition and this offering.
(6) Represents idle costs incurred, such as electricity, insurance and maintenance labor. This mine was idled in early 2016.
(7) We entered into a new initial CBA with the UMWA pursuant to which we agreed to contribute $25.0 million to a VEBA trust formed and administered by the UMWA.
(8) Represents non-cash stock compensation expense associated with equity awards.
(9) Represents non-cash accretion expense associated with our asset retirement obligations.
(10) The following table presents a reconciliation of net income to Adjusted EBITDA for the three months ended December 31, 2016 (in thousands):

 

     Successor  
     For the
three months
ended
December 31,
2016
 

Net income

   $ 29,869  

Interest expense, net

     583  

Income tax expense

     18  

Depreciation and depletion

     16,422  

Transaction and other costs(a)

     3,093  

Stock compensation expense(b)

     384  

Asset retirement obligation accretion(c)

     939  
  

 

 

 

Adjusted EBITDA

   $ 51,308  
  

 

 

 

 

(a) Represents costs incurred by the Company in connection with the Asset Acquisition and this offering.
(b) Represents non-cash stock compensation expense associated with equity awards.
(c) Represents non-cash accretion expense associated with our asset retirement obligations.

 



 

19


Table of Contents

RISK FACTORS

Investing in our common stock involves substantial risks. You should carefully consider each of the following risks and all of the other information set forth in this prospectus before making an investment decision regarding our common stock. Any of the risk factors described herein could significantly and adversely affect our business prospects, financial condition and results of operations. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or not believed by us to be material may also negatively impact us.

Risks Related to Our Business

We were formed for the purpose of purchasing and operating the core assets of Walter Energy’s Alabama mining operations pursuant to section 363 of the U.S. Bankruptcy Code and an order by the Bankruptcy Court and have a limited operating history.

The Asset Acquisition was consummated on March 31, 2016. Therefore, we have a limited performance record and operating history on a standalone basis, and, as a result, limited historical financial information upon which you can evaluate our operating performance, ability to implement and achieve our business strategy or ability to pay dividends, if any, in the future. We cannot assure you that we will be successful in implementing our business strategies or achieving our business objective.

Deterioration in global economic conditions as they relate to the steelmaking industry, as well as generally unfavorable global economic, financial and business conditions, may adversely affect our business, results of operations and cash flows.

Demand for met coal depends on domestic and foreign steel demand. As a result, if economic conditions in the global steelmaking industry deteriorate as they have in past years, the demand for met coal may decrease. In addition, the global financial markets have been experiencing volatility and disruption over the last several years. These markets have experienced, among other things, volatility in security prices, commodities and currencies, diminished liquidity and credit availability, rating downgrades and declining valuations of certain investments. Weaknesses in global economic conditions have had an adverse effect and could have a material adverse effect on the demand for our met coal and, in turn, on our sales, pricing and profitability.

If met coal prices drop to or below levels experienced in 2015 and the first half of 2016 for a prolonged period or if there are further downturns in economic conditions, particularly in developing countries such as China and India, our business, financial condition or results of operations could be adversely affected. While we are focused on cost control and operational efficiencies, there can be no assurance that these actions, or any others we may take, will be sufficient in response to challenging economic and financial conditions. In addition, the recent increase in met coal prices may not be sustainable.

Our business may suffer as a result of a substantial or extended decline in met coal pricing or the failure of any recovery or stabilization of met coal prices to endure, as well as any substantial or extended decline in the demand for met coal and other factors beyond our control, which could negatively affect our operating results and cash flows.

Our profitability depends on the prices at which we sell our met coal, which are largely dependent on prevailing market prices. Market prices for met coal have been low in recent periods and the failure of any price recovery or stabilization to endure will negatively affect our operating cash flows. We have experienced significant price fluctuations in our met coal business, and we expect that such fluctuations will continue. For example, in the first quarter of 2016, the benchmark HCC settlement price fell to $81 per metric ton, while in late 2016 spot market prices passed $300 per metric ton with a first quarter 2017 benchmark HCC settlement price of $285 per metric ton. More recently, the spot market price as of March 21, 2017 was $153.30. Pricing in the global seaborne market is typically negotiated quarterly; however, increasingly the market is moving towards

 

20


Table of Contents

shorter term pricing models, including index-based pricing. Demand for, and therefore the price of, met coal is driven by a variety of factors, including, but not limited to, the following:

 

    the domestic and foreign supply and demand for met coal;

 

    the quantity and quality of met coal available from competitors;

 

    the demand for and price of steel;

 

    adverse weather, climatic and other natural conditions, including natural disasters;

 

    domestic and foreign economic conditions, including slowdowns in domestic and foreign economies and financial markets;

 

    global and regional political events;

 

    domestic and foreign legislative, regulatory and judicial developments, environmental regulatory changes and changes in energy policy and energy conservation measures that could adversely affect the met coal industry; and

 

    capacity, reliability, availability and cost of transportation and port facilities, and the proximity of available met coal to such transportation and port facilities.

The met coal industry also faces concerns with respect to oversupply from time to time, which could materially adversely affect our financial condition and results of operations. In addition, reductions in the demand for met coal caused by reduced steel production by our customers, increases in the use of substitutes for steel (such as aluminum, composites or plastics) or less expensive substitutes for met coal and the use of steelmaking technologies that use less or no met coal can significantly adversely affect our financial results and impede growth. Our natural gas business is also subject to adverse changes in pricing due to, among other factors, changes in demand and competition from alternative energy sources.

Our customers are continually evaluating alternative steel production technologies which may reduce demand for our product.

Our product is primarily used as HCC for blast furnace steel producers. High-quality HCC commands a significant price premium over other forms of coal because of its value in use in blast furnaces for steel production. High-quality HCC is a scarce commodity and has specific physical and chemical properties which are necessary for efficient blast furnace operation. Alternative technologies are continually being investigated and developed with a view to reducing production costs or for other reasons, such as minimizing environmental or social impact. If competitive technologies emerge or are increasingly utilized that use other materials in place of our product or that diminish the required amount of our product, such as electric arc furnaces or pulverized coal injection processes, demand and price for our met coal might fall. Many of these alternative technologies are designed to use lower quality coals or other sources of carbon instead of higher cost high-quality HCC. While conventional blast furnace technology has been the most economic large-scale steel production technology for a number of years, and while emergent technologies typically take many years to commercialize, there can be no assurance that over the longer term competitive technologies not reliant on HCC could emerge which could reduce demand and price premiums for HCC.

The failure of our customers to honor or renew contracts could adversely affect our business.

A significant portion of the sales of our met coal is to customers with whom we have had a relationship for a long period of time. Typically, our customer contracts are for an annual term or evergreen in nature. The success of our business depends on our ability to retain our current customers, renew our existing customer contracts and solicit new customers. Our ability to do so generally depends on a variety of factors, including the quality and price of our products, our ability to market these products effectively, our ability to deliver on a timely basis and the level of competition that we face. If our customers do not honor contract commitments, or if they terminate agreements or exercise force majeure provisions allowing for the temporary suspension of performance and we are unable to

 

21


Table of Contents

replace the contract, our revenues will be materially and adversely affected. Changes in the met coal industry may cause some of our customers not to renew, extend or enter into new met coal supply agreements or to enter into agreements to purchase fewer metric tons of met coal or on different terms than in the past.

Our met coal supply agreements typically contain force majeure provisions allowing the parties to temporarily suspend performance during specified events beyond their control. Most of our met coal supply agreements also contain provisions requiring us to deliver met coal that satisfies certain quality specifications, such as volatile content, sulfur content, ash content and moisture levels. In addition, many of our met coal supply agreements provide that we price our product on a quarterly basis. These quarterly price agreements are based upon the prevailing benchmark pricing at the time. Some of our annual met coal contracts have shifted to be indexed priced, where prices are determined on or before shipment by averaging the leading spot indexes reported in the market. A significantly lower price could adversely affect our profitability.

Our ability to collect payments from our customers could be impaired and, as a result, our financial position could be materially and adversely affected if their creditworthiness deteriorates, if they declare bankruptcy, or if they fail to honor their contracts with us.

Our ability to receive payment for met coal sold and delivered depends on the continued creditworthiness and financial stability of our customers. If we determine that a customer is not creditworthy or if a customer declares bankruptcy, we may not be required to deliver met coal sold under the customer’s sales contract. If this occurs, we may decide to sell the customer’s met coal on the spot market, which may be at prices lower than the contracted price, or we may be unable to sell the met coal at all. In addition, if customers refuse to accept shipments of our met coal for which they have an existing contractual obligation, our revenues will decrease and we may have to reduce production at our mines until our customers’ contractual obligations are honored. Further, competition with other met coal suppliers could cause us to extend credit to customers on terms that could increase the risk of payment default. Our inability to collect payment from counterparties to our sales contracts may materially adversely affect our business, financial condition, results of operations and cash flows.

A significant reduction of, or loss of, purchases by our largest customers could materially adversely affect our profitability.

For the nine months ended December 31, 2016, we derived approximately 58% of our total sales revenues from our five largest customers. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited number of customers, and it is not possible for us to predict the future level of demand for our met coal that will be generated by our largest customers. We expect to renew, extend or enter into new supply agreements with these and other customers; however, we may be unsuccessful in obtaining such agreements with these customers and these customers may discontinue purchasing met coal from us, reduce the quantity of met coal that they have historically purchased from us or pressure us to reduce the prices that we charge for our met coal due to market, economic or competitive conditions. If any of our major customers were to significantly reduce the quantities of met coal they purchase from us and we are unable to replace these customers with new customers (or we fail to obtain new, additional customers), or if we are otherwise unable to sell met coal to those customers on terms as favorable to us as the terms under our current agreements, our profitability could suffer significantly.

Substantially all of our revenues are derived from the sale of met coal. This lack of diversification of our business could adversely affect our financial condition, results of operations and cash flows.

We rely on the met coal production from our two active met coal mines for substantially all of our revenues. For the nine months ended December 31, 2016 and the year ended December 31, 2015, revenues from the sale of met coal accounted for approximately 92.9% and 94.4%, respectively, of our total revenues. As noted above, demand for met coal depends on domestic and foreign steel demand. At times, the pricing and availability of steel can be volatile due to numerous factors beyond our control. When steel prices are lower, the prices that we charge steelmaking customers for our met coal may decline, which could adversely affect our financial condition,

 

22


Table of Contents

results of operations and cash flows. Since we are heavily dependent on the steelmaking industry, adverse economic conditions in this industry, even in the presence of otherwise favorable economic conditions in the broader coal industry, could have a significantly greater impact on our financial condition and results of operations than if our business were more diversified. In addition, our lack of diversification may make us more susceptible to such adverse economic conditions than our competitors with more diversified operations and/or asset portfolios, such as those that produce thermal coal in addition to met coal.

All of our mining operations are located in Alabama, making us vulnerable to risks associated with having our production concentrated in one geographic area.

All of our mining operations are geographically concentrated in Alabama. As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions in production caused by significant governmental regulation, transportation capacity constraints, constraints on the availability of required equipment, facilities, personnel or services, curtailment of production, extreme weather conditions, natural disasters or interruption of transportation or other events that impact Alabama or its surrounding areas. If any of these factors were to impact Alabama more than other met coal producing regions, our business, financial condition, results of operations and cash flows will be adversely affected relative to other mining companies with operations in unaffected regions or that have a more geographically diversified asset portfolio.

Met coal mining involves many hazards and operating risks, and is dependent upon many factors and conditions beyond our control, which may cause our profitability and financial position to decline.

Our mining operations, including our preparation and transportation infrastructure, are subject to inherent hazards and operating risks that could disrupt operations, decrease production and increase the cost of mining for varying lengths of time. Specifically, underground mining and related processing activities present risks of injury to persons and damage to property and equipment. In addition, met coal mining is dependent upon a number of conditions beyond our control that can disrupt operations and/or affect our costs and production schedules at particular mines. These risks, hazards and conditions include, but are not limited to:

 

    variations in geological conditions, such as the thickness of the met coal seam and amount of rock embedded in the met coal deposit and variations in rock and other natural materials overlying the met coal deposit, that could affect the stability of the roof and the side walls of the mine;

 

    mining, process and equipment or mechanical failures, unexpected maintenance problems and delays in moving longwall equipment;

 

    adverse weather and natural disasters, such as heavy rains or snow, forest fires, flooding and other natural events, including seismic activities, ground failures, rock bursts or structural cave-ins or slides, affecting our operations or transportation to our customers;

 

    railroad delays or derailments;

 

    environmental hazards, such as subsidence and excess water ingress;

 

    delays and difficulties in acquiring, maintaining or renewing necessary permits or mining rights;

 

    availability of adequate skilled employees and other labor relations matters;

 

    security breaches or terroristic acts;

 

    unexpected mine accidents, including rock-falls and explosions caused by the ignition of met coal dust, natural gas or other explosive sources at our mine sites or fires caused by the spontaneous combustion of met coal or similar mining accidents;

 

    competition and/or conflicts with other natural resource extraction activities and production within our operating areas, such as natural gas extraction or oil and gas development; and

 

    other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

 

23


Table of Contents

These risks and conditions could result in damage to or the destruction of our mineral properties, equipment or production facilities, personal injury or death, environmental damage, delays in mining, regulatory investigations, actions and penalties, repair and remediation costs, monetary losses and legal liability. In addition, a significant mine accident could potentially cause a suspension of operations or a complete mine shutdown. Our insurance coverage may not be available or sufficient to fully cover claims that may arise from these risks and conditions.

We have also seen adverse geological conditions in the mines, such as variations in met coal seam thickness, variations in the competency and make-up of the roof strata, fault-related discontinuities in the met coal seam and the potential for ingress of excessive amounts of natural gas or water. Such adverse conditions may increase our cost of sales and reduce our profitability, and may cause us to decide to close a mine. Any of these risks or conditions could have a negative impact on our financial condition, results of operations and cash flows.

In addition, if any of the foregoing changes, conditions or events occurs and is not excusable as a force majeure event, any resulting failure on our part to deliver met coal to the purchaser under our contracts could result in economic penalties, suspension or cancellation of shipments or ultimately termination of the agreement, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The historical and pro forma financial information that we have included in this prospectus may not be representative of the results we would have achieved as a stand-alone public company and may not be a reliable indicator of our future results.

The combined financial statements of our Predecessor and unaudited pro forma financial information that we have included in this prospectus have been presented, in part, on a combined basis and include the historical accounts of the acquired assets and liabilities assumed which were carved out from Walter Energy’s consolidated financial statements using the historical results of operations, cash flows, assets and liabilities of the Predecessor and include allocations of expenses on the basis of the Predecessor’s relative headcount and total assets to that of Walter Energy. As a result, our historical and pro forma financial statements may not necessarily reflect what our financial condition, results of operations or cash flows would have been had we been an independent, stand-alone entity during the periods presented or those that we will achieve in the future.

We have made certain assumptions with respect to the preparation of the pro forma financial information. Such assumptions may not prove to be accurate and, accordingly, the Company’s pro forma financial information may not be indicative of what its results of operations or financial condition actually would have been as an independent public company nor be a reliable indicator of what its results of operations and financial condition actually may be in the future. We urge you to carefully consider the basis on which the historical and pro forma financial information included herein was prepared and presented. For additional information, see “Selected Consolidated and Combined Historical and Pro Forma Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited financial statements and related notes thereto included elsewhere in this prospectus.

If we fail to implement our business strategies successfully, our financial performance could be harmed.

Our future financial performance and success are dependent in large part upon our ability to successfully implement our business strategies described in “Prospectus Summary—Our Business Strategies.” We may not be able to implement our business strategies successfully or achieve the anticipated benefits. If we are unable to do so, our long-term growth, profitability and ability to service any debt we incur in the future may be materially adversely affected. Even if we are able to implement some or all of the key elements of our business plan successfully, our operating results may not improve to the extent we anticipate, or at all. Implementation of our business strategies, including any decision to develop our Blue Creek Energy Mine (as defined below), could

 

24


Table of Contents

also be affected by a number of factors beyond our control, such as global economic conditions, met coal prices, domestic and foreign steel demand, and environmental, health and safety laws and regulations.

A key element of our business strategy involves increasing production at our existing mines and the potential expansion into our Blue Creek Energy Mine recoverable reserves in a cost efficient manner should market conditions warrant such expansion. As we expand our business activities, there will be additional demands on our financial, technical, operational and management resources. These aspects of our strategy are subject to numerous risks and uncertainties, including:

 

    an inability to retain or hire experienced crews and other personnel and other labor relations matters;

 

    a lack of customer demand for our mined met coal;

 

    an inability to secure necessary equipment, raw materials or engineering in a timely manner to successfully execute our expansion plans;

 

    unanticipated delays that could limit or defer the production or expansion of our mining activities and jeopardize our long term relationships with our existing customers and adversely affect our ability to obtain new customers for our mined met coal; and

 

    a lack of available cash or access to sufficient debt or equity financing for investment in our expansion.

Our business is subject to inherent risks, some for which we maintain third party insurance. We may incur losses and be subject to liability claims that could have a material adverse effect on our financial condition, results of operations or cash flows.

We maintain insurance policies that provide limited coverage for some, but not all, potential risks and liabilities associated with our business. We may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. In addition, certain environmental, contamination and pollution risks generally are not fully insurable. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations and cash flows could be materially and adversely affected by losses and liabilities from uninsured or under-insured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments.

We also may incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. We must compensate employees for work-related injuries. If we do not make adequate provision for our workers’ compensation and black lung liabilities, or we are pursued for applicable sanctions, costs and liabilities, our operations and profitability could be adversely affected. Certain of our subsidiaries are responsible for medical and disability benefits for black lung disease under federal law and are insured beginning April 1, 2016 for claims made by or on behalf of any of our employees. As a result of our limited operating history as a stand-alone company, the Department of Labor required us to provide insurance coverage rather than be self-insured for these obligations for a minimum of three years from March 31, 2016.

We are responsible for medical and disability benefits for black lung disease under federal law. We assumed certain historical self-insured back lung liabilities of Walter Energy and its subsidiaries incurred prior to April 1, 2016 in connection with the Asset Acquisition. We are self-insured for these black lung liabilities and have posted certain collateral with Department of Labor as described below. Changes in the estimated claims to be paid or changes in the amount of collateral required by the Department of Labor may have a greater impact on our profitability and cash flows in the future.

We are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) and the Black

 

25


Table of Contents

Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977 (together, the “Black Lung Benefits Act”), each as amended, and are self-insured for black lung related claims asserted by or on behalf of former employees of Walter Energy and its subsidiaries as assumed in the Asset Acquisition for the period prior to April 1, 2016. We perform an annual actuarial evaluation of the overall black lung liabilities as of each December 31st. The calculation is performed using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others. If the number of or severity of successful claims increases, or we are required to accrue or pay additional amounts because the successful claims prove to be more severe than our original assessment, our operating results and cash flows could be negatively impacted. Our self-insurance program for these legacy liabilities is unique to the industry and was specifically negotiated with the Department of Labor requiring us to post $17.5 million in Treasury bills as collateral in addition to maintaining a black lung trust of $4.2 million that was acquired in the Asset Acquisition. For additional information see “Business—Environmental and Regulatory Matters—Workers’ Compensation and Black Lung.” Our estimated total black lung liabilities as of December 31, 2016 were $28.7 million. In future years, the Department of Labor could require us to increase the amount of the collateral which could negatively impact our cash flows.

Defects in title of any real property or leasehold interests in our properties or associated met coal reserves could limit our ability to mine or develop these properties or result in significant unanticipated costs.

All of our mining operations are conducted on properties owned or leased by us. Our right to mine our met coal reserves may be materially adversely affected by defects in title or boundaries or if our property interests are subject to superior property rights of third parties. We do not have title insurance for any of our real property or leasehold interests and, as part of the Asset Acquisition, we did not independently verify title to our leased properties or associated met coal reserves. Any challenge to our title or leasehold interests could delay the mining of the property, result in the loss of some or all of our interest in the property or met coal reserves and increase our costs. In order to conduct our mining operations on properties where these defects exist, we may incur unanticipated costs perfecting title. In addition, if we mine or conduct our operations on property that we do not own or lease, we could incur civil damages or liabilities for such mining operations and be subject to conversion, negligence, trespass, regulatory sanction and penalties. Some leases have minimum production requirements or require us to commence mining operations in a specified term to retain the lease. Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself.

We face uncertainties in estimating our proven and probable met coal reserves, and inaccuracies in our estimates of our met coal reserves could result in decreased profitability from lower than expected revenues or higher than expected costs.

Our future performance depends on, among other things, the accuracy of our estimates of our proven and probable met coal reserves. Reserve estimates are based on a number of sources of information, including engineering, geological, mining and property control maps and data, our operational experience of historical production from similar areas with similar conditions and assumptions governing future pricing and operational costs. We update our estimates of the quantity and quality of proven and probable met coal reserves at least annually to reflect the production of met coal from the reserves, updated geological models and mining recovery data, the tonnage contained in new lease areas acquired and estimated costs of production and sales prices. There are numerous factors and assumptions inherent in estimating met coal quantities, qualities and costs to mine, including many factors beyond our control, such as the following:

 

    geological and mining conditions, including faults in the met coal seam;

 

    historical production from the area compared with production from other producing areas;

 

    the percentage of met coal ultimately recoverable;

 

    the assumed effects of regulations and taxes and other payments to governmental agencies;

 

    our ability to obtain, maintain and renew all required permits;

 

26


Table of Contents
    future improvements in mining technology;

 

    assumptions concerning the timing of the development of the reserves; and

 

    assumptions concerning equipment and operational productivity, future met coal prices, operating costs, including those for critical supplies such as fuel, tires and explosives, capital expenditures and development and reclamation costs.

Each of these factors may vary considerably from the assumptions used in estimating the reserves. As a result, estimates of the quantities and qualities of economically recoverable met coal attributable to any particular group of properties, classifications of reserves based on risk of recovery, estimated cost of production, and estimates of future net cash flows expected from these properties as prepared by different engineers or by the same engineers at different times may vary materially due to changes in the above factors and assumptions. Actual production recovered from identified reserve areas and properties, and revenues and expenditures associated with our mining operations may vary materially from estimates. Any inaccuracy in our estimates related to our reserves could result in decreased profitability from lower than expected revenues and/or higher than expected costs.

Our inability to develop met coal reserves in an economically feasible manner or our inability to acquire additional met coal reserves that are economically recoverable may adversely affect our business.

Our long-term profitability depends in part on our ability to cost-effectively mine and process met coal reserves that possess the quality characteristics desired by our customers. As we mine, our met coal reserves decline. As a result, our future success depends upon our ability to develop or acquire additional met coal reserves that are economically recoverable to replace the reserves that we produce. Coal is economically recoverable when the price at which our met coal can be sold exceeds the costs and expenses of mining and selling such met coal. We may not be able to obtain adequate economically recoverable replacement reserves when we require them and, even if available, such reserves may not be at favorable prices or we may not be capable of mining those reserves at costs that are comparable to our existing met coal reserves. Our ability to develop or acquire met coal reserves in the future may also be limited by the availability of cash from our operations or financing under our existing or future financing arrangements, as well as certain restrictions under such arrangements. If we are unable to develop or acquire replacement reserves, our future production may decrease significantly as existing reserves are depleted and this may have a material adverse impact on our cash flows, financial position and results of operations.

We may be unsuccessful in integrating the operations of any future acquisitions, including acquisitions involving new lines of business, with our existing operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.

From time to time, we may evaluate and acquire assets and businesses that we believe complement our existing assets and business. The assets and businesses we acquire may be dissimilar from our existing lines of business. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including the following:

 

    difficulties in the integration of the assets and operations of the acquired businesses;

 

    inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas;

 

    the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk; and

 

    the diversion of management’s attention from other operations.

Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an

 

27


Table of Contents

acquisition. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, and may lead to increased litigation and regulatory risk. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions. If a new business generates insufficient revenue or if we are unable to efficiently manage our expanded operations, our results of operations may be adversely affected.

Our failure to obtain and renew permits necessary for our mining operations could negatively affect our business.

Mining companies must obtain numerous permits that impose strict regulations on various environmental and operational matters in connection with met coal mining. These include permits issued by various federal, state and local agencies and regulatory bodies. The permitting rules, and the interpretations of these rules, are complex, change frequently and are often subject to discretionary interpretations by the regulators, all of which may make compliance more difficult or impractical, and may possibly preclude the continuance of ongoing operations or the development of future mining operations. The public, including non-governmental organizations, anti-mining groups and individuals, have certain statutory rights to comment upon and submit objections to requested permits and environmental impact statements prepared in connection with applicable regulatory processes, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to challenge the issuance of permits, the validity of environmental impact statements or performance of mining activities. Accordingly, required permits may not be issued or renewed in a timely fashion or at all, or permits issued or renewed may be conditioned in a manner that may restrict our ability to efficiently and economically conduct our mining activities, any of which would materially reduce our production, cash flow and profitability.

If transportation for our met coal is disrupted, unavailable or more expensive for our customers, our ability to sell met coal could suffer.

Transportation costs represent a significant portion of the total cost of met coal to be delivered to our customers and, as a result, the cost of delivery is a factor in a customer’s purchasing decision. Overall price increases in our transportation costs could make our met coal less competitive with the same or alternative products from competitors with lower transportation costs. We typically depend upon overland conveyor, trucks, rail or barges to transport our products. Disruption or delays of any of these transportation services due to weather related problems, which are variable and unpredictable, strikes or lock-outs, accidents, infrastructure damage, governmental regulation, third-party actions, lack of capacity or other events beyond our control could impair our ability to supply our products to our customers and result in lost sales and reduced profitability. In addition, increases in transportation costs resulting from emission control requirements and fluctuations in the price of gasoline and diesel fuel, could make met coal produced in one region of the United States less competitive than met coal produced in other regions of the United States or abroad.

All of our met coal mines are served by only one rail carrier, which increases our vulnerability to these risks, although our access to barge transportation partially mitigates that risk. In addition, the majority of the met coal produced by our underground mining operations is sold to met coal customers who typically arrange and pay for transportation from the state-run docks at the Port of Mobile, Alabama to the point of use. As a result, disruption at the docks, port congestion and delayed met coal shipments may result in demurrage fees to us. If this disruption were to persist over an extended period of time, demurrage costs could significantly impact our profits. In addition, there are limited cost effective alternatives to the port. The cost of securing additional facilities and services of this nature could significantly increase transportation and other costs. An interruption of rail or port services could significantly limit our ability to operate and, to the extent that alternate sources of port and rail services are unavailable or not available on commercially reasonable terms, could increase transportation and port costs significantly. Further, delays of ocean vessels could affect our revenues, costs and relative competitiveness compared to the supply of met coal and other products from our competitors.

 

28


Table of Contents

Any significant downtime of our major pieces of mining equipment could impair our ability to supply met coal to our customers and materially and adversely affect our results of operations and cash flows.

We depend on several major pieces of mining equipment to produce and transport our met coal, including, but not limited to, longwall mining systems, continuous mining units, our preparation plant and blending facilities, and conveyors. Obtaining or repairing these major pieces of mining equipment often involves long lead times. If any of these pieces of equipment or facilities suffer major damage or are destroyed by fire, abnormal wear, flooding, incorrect operation or otherwise, we may be unable to replace or repair them in a timely manner or at a reasonable cost, which would impact our ability to produce and transport met coal and materially and adversely affect our business, results of operations, financial condition and cash flows. Moreover, MSHA and other regulatory agencies sometimes make changes with regards to requirements for pieces of equipment. For example, in 2015, MSHA promulgated a new regulation requiring the implementation of proximity detection devices on all continuous mining machines. Such changes could cause delays if manufacturers and suppliers are unable to make the required changes in compliance with mandated deadlines.

If either our preparation plant or river barge load-out facilities, or those of a third party processing or loading our met coal, suffer extended downtime, including major damage, or are destroyed, our ability to process and deliver met coal to prospective customers would be materially impacted, which would materially adversely affect our business, results of operations, financial condition and cash flows.

Our business is subject to the risk of increases or fluctuations in the cost, and delay in the delivery, of raw materials, mining equipment and purchased components.

Met coal mining consumes large quantities of commodities including steel, copper, rubber products and liquid fuels and requires the use of capital equipment. Some commodities, such as steel, are needed to comply with roof control plans required by regulation. The prices we pay for commodities and capital equipment are strongly impacted by the global market. A rapid or significant increase in the costs of commodities or capital equipment we use in our operations could impact our mining operations costs because we may have a limited ability to negotiate lower prices and, in some cases, may not have a ready substitute.

We use equipment in our met coal mining and transportation operations such as continuous mining units, conveyors, shuttle cars, rail cars, locomotives, roof bolters, shearers and shields. We procure some of this equipment from a concentrated group of suppliers, and obtaining this equipment often involves long lead times. Occasionally, demand for such equipment by mining companies can be high and some types of equipment may be in short supply. Delays in receiving or shortages of this equipment, as well as the raw materials used in the manufacturing of supplies and mining equipment, which, in some cases, do not have ready substitutes, or the cancellation of our supply contracts under which we obtain equipment and other consumables, could limit our ability to obtain these supplies or equipment. In addition, if any of our suppliers experiences an adverse event, or decides to no longer do business with us, we may be unable to obtain sufficient equipment and raw materials in a timely manner or at a reasonable price to allow us to meet our production goals and our revenues may be materially adversely impacted.

We use considerable quantities of steel in the mining process. If the price of steel or other materials increases substantially or if the value of the U.S. dollar declines relative to foreign currencies with respect to certain imported supplies or other products, our operating expenses could increase. Any of the foregoing events could materially and adversely impact our business, financial condition, results of operations and cash flows.

Our business may require substantial ongoing capital expenditures, and we may not have access to the capital required to reach full productive capacity at our mines.

Maintaining and expanding mines and related infrastructure is capital intensive. Specifically, the exploration, permitting and development of met coal reserves, mining costs, the maintenance of machinery, facilities and equipment and compliance with applicable laws and regulations require ongoing capital

 

29


Table of Contents

expenditures. While a significant amount of the capital expenditures required at our mines has been spent, we must continue to invest capital to maintain our production. In addition, any decisions to increase production at our existing mines or to develop the high-quality met coal recoverable reserves at our Blue Creek Energy Mine in the future could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates. We cannot assure you that we will be able to maintain our production levels or generate sufficient cash flow, or that we will have access to sufficient financing to continue our production, exploration, permitting and development activities at or above our present levels and on our current or projected timelines, and we may be required to defer all or a portion of our capital expenditures. Our results of operations, business and financial condition may be materially adversely affected if we cannot make such capital expenditures.

To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell equity securities. Using cash from operations will reduce cash available for maintaining or increasing our operations activities. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings, on the other hand, may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control. If cash flow generated by our operations or available borrowings under our bank financing arrangements are insufficient to meet our capital requirements and we are unable to access the capital markets on acceptable terms or at all, we could be forced to curtail the expansion of our existing mines and the development of our properties, which, in turn, could lead to a decline in our production and could materially and adversely affect our business, financial condition and results of operations.

Work stoppages, labor shortages and other labor relations matters may harm our business. Union-represented labor creates an increased risk of work stoppages and higher labor costs.

If we fail to maintain satisfactory labor relations, disputes with the unionized portion of our workforce could affect us adversely. Union-represented labor creates an increased risk of work stoppages and higher labor costs. As of December 31, 2016, 68% of our employees were represented by the UMWA. In connection with the Asset Acquisition, we negotiated a new initial CBA with the UMWA (the “UMWA CBA”), which was ratified by UMWA’s members on February 16, 2016 and has a five-year term. If we are unable to negotiate the renewal of the UMWA CBA before its expiration date, our operations and our profitability could be adversely affected. Future work stoppages, labor union issues or labor disruptions at our mining operations, as well as at the operations of key customers or service providers, could impede our ability to produce and deliver our products, to receive critical equipment and supplies or to collect payment. This may increase our costs or impede our ability to operate one or more of our operations.

We require a skilled workforce to run our business. If we cannot hire qualified people to meet replacement or expansion needs, we may not be able to achieve planned results.

Efficient met coal mining using modern techniques and equipment requires skilled laborers with mining experience and proficiency as well as qualified managers and supervisors. The demand for skilled employees sometimes causes a significant constriction of the labor supply resulting in higher labor costs. When met coal producers compete for skilled miners, recruiting challenges can occur and employee turnover rates can increase, which negatively affect operating efficiency and costs. If a shortage of skilled workers exists and we are unable to train or retain the necessary number of miners, it could adversely affect our productivity, costs and ability to expand production.

Our executive officers and other key personnel are important to our success and the loss of one or more of these individuals could harm our business.

Our executive officers and other key personnel have significant experience in the met coal or other commodity businesses and the loss of certain of these individuals could harm our business. Moreover, there may

 

30


Table of Contents

be a limited number of persons with the requisite experience and skills to serve in our senior management positions. Although we have been successful in attracting qualified individuals for key management and corporate positions in the past, there can be no assurance that we will continue to be successful in attracting and retaining a sufficient number of qualified personnel in the future or that we will be able to do so on acceptable terms. The loss of key management personnel could harm our ability to successfully manage our business functions, prevent us from executing our business strategy and have a material adverse effect on our results of operations and cash flows.

Significant competition, as well as changes in foreign markets or economies, could harm our sales, profitability and cash flows.

We compete with other producers primarily on the basis of price, met coal quality, transportation costs and reliability of delivery. The consolidation of the global met coal industry over the last several years has contributed to increased competition among met coal producers and we cannot assure you that the result of current or further consolidation will not adversely affect us. In addition, some of our global competitors have significantly greater financial resources and/or a broader portfolio of coals than we do, and a number of our competitors have idled production over the last year in light of lower met coal prices in 2015 and the first half of 2016. The production that was idled by our competitors may restart and may affect domestic and foreign met coal supply into the seaborne market and associated prices and impact our ability to retain or attract met coal customers.

Further, potential changes to international trade agreements, trade concessions, foreign currency fluctuations or other political and economic arrangements may benefit met coal producers operating in countries other than the United States. We may be adversely impacted on the basis of price or other factors with companies that in the future may benefit from favorable foreign trade policies or other arrangements. In addition, increases in met coal prices could encourage existing producers to expand capacity or could encourage new producers to enter the market. Overcapacity and increased production within the met coal industry, both domestically and internationally, could materially reduce met coal demand and prices and therefore materially reduce our revenues and profitability. In addition, our ability to ship our met coal to international customers depends on port and transportation capacity. Increased competition within the domestic met coal industry for international sales could result in us not being able to obtain throughput capacity at port facilities, as well as transport capacity, could cause the rates for such services to increase to a point where it is not economically feasible to export our met coal.

The general economic conditions in foreign markets and changes in currency exchange rates are factors outside of our control that may affect international met coal prices. If our competitors’ currencies decline against the U.S. dollar or against our customers’ currencies, those competitors may be able to offer lower prices to our customers. Furthermore, if the currencies of our overseas customers were to significantly decline in value in comparison to the U.S. dollar, on which our sales contracts are based, those customers may seek decreased prices for the met coal that we sell to them. These factors, in addition to adversely affecting the competitiveness of our met coal in international markets, may also negatively impact our collection of trade receivables from our customers and could reduce our profitability or result in lower met coal sales.

Our sales in foreign jurisdictions are subject to risks and uncertainties that may have a negative impact on our profitability.

Substantially all of our met coal sales consist of sales to international customers and we expect that international sales will continue to account for a substantial portion of our revenue. A number of foreign countries in which we sell our met coal implicate additional risks and uncertainties due to the different economic, cultural and political environments. Such risks and uncertainties include, but are not limited to:

 

    longer sales-cycles and time to collection;

 

    tariffs, international trade barriers and export license requirements;

 

31


Table of Contents
    fewer or less certain legal protections for contract rights;

 

    different and changing legal and regulatory requirements;

 

    potential liability under the U.S. Foreign Corrupt Practices Act of 1977, as amended, or comparable foreign regulations;

 

    government currency controls;

 

    fluctuations in foreign currency exchange and interest rates; and

 

    political and economic instability, changes, hostilities and other disruptions, as well as unexpected changes in diplomatic and trade relationships.

Negative developments in any of these factors in the foreign markets into which we sell our met coal could result in a reduction in demand for met coal, the cancellation or delay of orders already placed, difficulty in collecting receivables, higher costs of doing business and/or non-compliance with legal and regulatory requirements, each or any of which could materially adversely impact our cash flows, results of operations and profitability.

In addition, access to international markets may be subject to ongoing interruptions and trade barriers due to policies and tariffs of individual countries, and the actions of certain interest groups to restrict the import or export of certain commodities. Although there are currently no significant trade barriers existing or impending of which we are aware that do, or could, materially affect our access to certain markets, there can be no assurance that our access to these markets will not be restricted in the future. An inability for U.S. met coal suppliers to access international markets would likely result in an oversupply of met coal in the domestic market, resulting in a decrease in prices.

Extensive environmental, health and safety laws and regulations impose significant costs on our operations and future regulations could increase those costs, limit our ability to produce or adversely affect the demand for our products.

Our businesses are subject to numerous federal, state and local laws and regulations with respect to matters such as:

 

    permitting and licensing requirements;

 

    employee health and safety, including occupational and mine health and safety;

 

    workers’ compensation;

 

    black lung disease;

 

    reclamation and restoration of property; and

 

    environmental laws and regulations, including those related to greenhouse gases and climate change, air quality, water quality, stream and surface water quality and protection, management of materials generated by mining operations, the storage, treatment and disposal of wastes, protection of plant and wildlife such as endangered species, protection of wetlands and remediation of contaminated soil and groundwater.

In addition, the coal industry in the U.S. is affected by significant legislation mandating certain benefits for current and retired coal miners. Compliance with these requirements imposes significant costs on us and can result in reduced productivity. Moreover, the possibility exists that new health and safety legislation and/or regulations may be adopted and/or orders may be entered that may materially and adversely affect our mining operations. We must compensate employees for work-related injuries. If we do not make adequate provisions for our workers’ compensation liabilities, it could harm our future operating results. In addition, the erosion through tort liability of the protections we are currently provided by workers’ compensation laws could increase our liability for work-related injuries and materially and adversely affect our operating results.

 

32


Table of Contents

Compliance with applicable federal, state and local laws and regulations may be costly and time-consuming and may delay commencement or interrupt continuation of exploration or production at one or more of our operations. These laws are constantly evolving and may become increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for these laws have not yet been promulgated and in certain instances are undergoing revision. These laws and regulations, particularly new legislative or administrative proposals (or judicial interpretations of existing laws and regulations), could result in substantially increased capital, operating and compliance costs and could have a material adverse effect on our operations and/or, along with analogous foreign laws and regulations, our customers’ ability to use our products.

Due in part to the extensive and comprehensive regulatory requirements, along with changing interpretations of these requirements, violations of applicable federal, state and local laws and regulations occur from time to time in our industry and at our operations. Changes in the law may require an unprecedented compliance effort on our part, could divert management’s attention, and may require significant expenditures. To the extent that these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be detrimentally impacted. We believe that our major North American competitors are confronted by substantially similar conditions and thus do not believe that our relative position with regard to such competitors is materially affected by the impact of safety and environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with safety and environmental laws and regulations, which is a major cost consideration for our operations, may have an adverse effect on our competitive position with regard to foreign producers and operators who may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, applicable state legislation and its production methods.

Our mines are subject to stringent federal and state safety regulations that increase our cost of doing business at active operations and may place restrictions on our methods of operation. In addition, federal, state or local regulatory agencies have the authority to order certain of our mines to be temporarily or permanently closed under certain circumstances, which could materially and adversely affect our ability to meet our customers’ demands.

The Mine Act and the Mine Improvement and New Emergency Response Act of 2006 (the “MINER Act”) impose stringent health and safety standards on mining operations. Regulations that have been adopted under the Mine Act and MINER Act are comprehensive and affect numerous aspects of mining operations, including training of mining personnel, mining procedure, the equipment used in emergency procedures, and other matters. Alabama has a similar program for mine safety and health regulation and enforcement. The various requirements mandated by law or regulation can place restrictions on our methods of operations, and potentially lead to fees and civil penalties for the violation of such requirements, creating a significant effect on operating costs and productivity.

In addition, federal, state or local regulatory agencies have the authority under certain circumstances following significant health and safety incidents, such as fatalities, to order a mine to be temporarily or permanently closed. If this occurred, we may be required to incur capital expenditures to re-open the mine. In the event that these agencies order the closing of our mines, our met coal sales contracts generally permit us to issue force majeure notices, which suspend our obligations to deliver met coal under these contracts; however, our customers may challenge our issuances of force majeure notices. If these challenges are successful, we may have to purchase met coal from third-party sources, if available, to fulfill these obligations or incur capital expenditures to re-open the mines and/or negotiate settlements with the customers, which may include price reductions, the reduction of commitments, and the extension of time for delivery or terminate customers’ contracts. Any of these actions could have a material adverse effect on our business and results of operations.

 

33


Table of Contents

Increased focus by regulatory authorities on the effects of coal mining on the environment and recent regulatory developments related to coal mining operations could make it more difficult or increase our costs to receive new permits or to comply with our existing permits to mine met coal or otherwise adversely affect us.

Regulatory agencies are increasingly focused on the effects of coal mining on the environment, particularly relating to water quality, which has resulted in more rigorous permitting requirements and enforcement efforts. See “Business—Environmental and Regulatory Matters—Clean Water Act” for a detailed discussion of these regulations and programs.

The Surface Mining Control and Reclamation Act of 1977 (“SMCRA”) requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of mining activities. Among other requirements, the SMCRA provides that the applicable regulatory authority may not issue a permit unless the operation has been designed to prevent material damage to the hydrologic balance outside the permit area. In 1983, the Office of Surface Mining Reclamation and Enforcement (“OSM”) issued rules providing that no land within 100 feet of a stream shall be disturbed by surface mining activities, unless specifically authorized by the regulatory authority. On December 20, 2016, the OSM published a new, finalized “Stream Protection Rule,” setting standards for “material damage to the hydrologic balance outside the permit area” that are applicable to surface and underground mining operations. However, on February 17, 2017, President Trump signed a joint congressional resolution disapproving the Stream Protection Rule pursuant to the Congressional Review Act. Accordingly, the regulations in effect prior to the Stream Protection Rule now apply, including OSM’s 1983 rule. It remains unclear whether and how the results of the 2016 U.S. election could further impact regulatory or enforcement activities pursuant to the SMCRA.

Section 404 of the Clean Water Act (“CWA”) requires mining companies to obtain U.S. Army Corps of Engineers (“USACE”) permits to place material in streams for the purpose of creating slurry ponds, water impoundments, refuse areas, valley fills or other mining activities. As is the case with other met coal mining companies, our construction and mining activities require Section 404 permits. The issuance of permits to construct valley fills and refuse impoundments under Section 404 of the CWA has been the subject of many court cases and increased regulatory oversight, resulting in additional permitting requirements that are expected to delay or even prevent the opening of new mines. Stringent water quality standards for materials such as selenium have recently been issued. We have begun to incorporate these new requirements into our current permit applications; however, there can be no guarantee that we will be able to meet these or any other new standards with respect to our permit applications.

Additionally, in January 2011, the EPA rescinded a federal CWA permit held by another coal mining company for a surface mine in Appalachia citing associated environmental damage and degradation. On April 23, 2013, the D.C. Circuit ruled that the EPA has the power under the CWA to retroactively veto a section 404 dredge and fill permit “whenever” it makes a determination about certain adverse effects, even years after the USACE has granted the permit to an applicant. On March 24, 2014, the U.S. Supreme Court denied petitions for review. Subsequently, on July 19, 2016, the D.C. Circuit affirmed the district court’s further ruling that the EPA’s decision to withdraw approval for disposal sites satisfied administrative requirements. The D.C. Circuit held that the EPA’s ex post withdrawal was a product of its broad veto authority under the CWA, not a procedural defect. While our operations are not directly impacted by this ruling, it could be an indication that other surface mining water permits could be subject to more substantial review in the future.

Recent regulatory actions and court decisions have created some uncertainty over the scope of CWA jurisdiction. On June 29, 2015, the EPA and the USACE jointly promulgated final rules redefining the scope of waters protected under the CWA, revising regulations that had been in place for more than 25 years. The new rules may expand the scope of CWA jurisdiction, making more waters subject to the act’s permitting and other requirements in the case of discharges. Following its promulgation, numerous industry groups, states, and environmental groups challenged the rule and on October 9, 2015, a federal court stayed the rule’s implementation nationwide, pending further action in court. In response to this decision, the EPA and the USACE have resumed nationwide use of the agencies’ prior regulations defining the term “waters of the United

 

34


Table of Contents

States.” Further, on February 28, 2017, President Trump signed an executive order directing the relevant executive agencies to review the rules and to conduct notice and comment rulemaking to rescind or revise them, as appropriate under the stated policies of protecting navigable waters from pollution while promoting economic growth, reducing uncertainty, and showing due regard for Congress and the states. It remains unclear whether and how the results of the 2016 U.S. election could further impact regulatory developments in this area.

It is unknown what future changes will be implemented to the permitting review and issuance process or to other aspects of mining operations, but increased regulatory focus, future laws and judicial decisions could materially and adversely affect all coal mining companies. In addition, the public, including non-governmental organizations, anti-mining groups and individuals, have certain statutory rights to comment upon and submit objections to requested permits and environmental impact statements prepared in connection with applicable regulatory processes, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to challenge the issuance of permits, the validity of environmental impact statements or performance of mining activities.

In each jurisdiction in which we operate, we could incur additional permitting and operating costs, may be unable to obtain new permits or maintain existing permits and could incur fines, penalties and other costs, any of which could materially adversely affect our business. If met coal mining methods are limited or prohibited, it could significantly increase our operational costs and make it more difficult to economically recover a significant portion of our reserves. In the event that we cannot increase the price we charge for met coal to cover the higher production costs without reducing customer demand for our met coal, there could be a material adverse effect on our financial condition and results of operations. In addition, increased public focus on the environmental, health and aesthetic impacts of coal mining could harm our reputation and reduce demand for met coal.

Regulation of greenhouse gas emissions could increase our operating costs and impact the demand for, price of and value of our products.

Climate change continues to attract public and scientific attention, and increasing attention by government as well as private businesses is being paid to reducing greenhouse gas (“GHG”) emissions. There are three primary sources of GHGs associated with the met coal industry. First, the end use of our met coal by our customers in steelmaking is a source of GHGs. Second, combustion of fuel by equipment used in met coal production and to transport our met coal to our customers is a source of GHGs. Third, met coal mining itself can release methane, which is considered to be a more potent GHG than CO2, directly into the atmosphere. These emissions from met coal consumption, transportation and production are subject to pending and proposed regulation as part of initiatives to address global climate.

There are many legal and regulatory approaches currently in effect or being considered to address GHGs, including international treaty commitments, new foreign, federal and state legislation that may impose a carbon emissions tax or establish a “cap and trade” program, and regulation by the EPA. See “Business—Environmental and Regulatory Matters—Climate Change” for a detailed discussion of these regulations and programs.

The existing laws and regulations or other current and future efforts to stabilize or reduce GHG emissions could adversely impact the demand for, price of and value of our products and reserves. As our operations also emit GHGs directly, current or future laws or regulations limiting GHG emissions could increase our own costs. For example, methane must be expelled from our underground met coal mines for mining safety reasons. Methane has a greater GHG effect than carbon dioxide. Although our natural gas operations capture methane from our underground met coal mines, some methane is vented into the atmosphere when the met coal is mined. In June 2010, Earthjustice petitioned the EPA to make a finding that emissions from coal mines may reasonably be anticipated to endanger public health and welfare, and to list them as a stationary source subject to further regulation of emissions. On April 30, 2013, the EPA denied the petition. Judicial challenges seeking to force the EPA to list coal mines as stationary sources have likewise been unsuccessful to date. If the EPA were to make an endangerment finding in the future, we may have to further reduce our methane emissions, install additional air pollution controls, pay certain taxes or fees for our emissions, incur costs to purchase credits that permit us to

 

35


Table of Contents

continue operations as they now exist at our underground met coal mines or perhaps curtail met coal production. Although the potential impacts on us of additional climate change regulation are difficult to reliably quantify, they could be material. Also, while President Trump signed an executive order on March 28, 2017 directing the EPA and other executive agencies to review their existing regulations, orders, guidance documents and policies that unnecessarily obstruct, delay, curtail or otherwise impose significant costs on the development of energy resources, it remains unclear how and to what extent these executive actions will impact the regulation of GHG emissions at the federal level.

In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital.

Further, climate change may cause more extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our services and increase our costs, and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations.

The results of the 2016 U.S. presidential and congressional elections may create a period of additional regulatory uncertainty for the coal mining industry.

The results of the 2016 U.S. presidential and congressional elections may create a period of additional regulatory uncertainty in the coal mining industry. Specifically, the extent to which any new legislation or regulations, any repeal of existing legislation or regulations, or any changes to governmental enforcement priorities or international trade agreements may affect coal mining claims or operations or the market for our products is uncertain, and therefore the impact, if any, on our business or operations cannot be determined at this time.

Our operations may impact the environment or cause exposure to hazardous substances and our properties may have environmental contamination, which could result in material liabilities to us.

Our operations currently use hazardous materials from time to time. We could become subject to claims for toxic torts, natural resource damages and other damages as well as for the investigation and cleanup of soil, surface water, groundwater and other media. Such claims may arise, for example, out of conditions at sites that we currently own or operate, as well as at sites that we previously owned or operated, or may acquire. Our liability for such claims may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire amount of damages assessed.

We maintain extensive met coal refuse areas and slurry impoundments at our mining complexes. Such areas and impoundments are subject to comprehensive regulation. Slurry impoundments have been known to fail, releasing large volumes of met coal slurry into the surrounding environment. Structural failure of an impoundment can result in extensive damage to the environment and natural resources, such as bodies of water that the met coal slurry reaches, as well as create liability for related personal injuries, property damages and injuries to wildlife. Some of our impoundments overlie mined out areas, which can pose a heightened risk of failure and the assessment of damages arising out of such failure. If one of our impoundments were to fail, we could be subject to substantial claims for the resulting environmental contamination and associated liability, as well as for related fines and penalties.

Drainage flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a condition referred to as “acid mine drainage” (“AMD”). Treatment of AMD can be costly. Although we do not currently face material costs associated with AMD, it is possible that we could incur significant costs in the future.

These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect us. See also “Business—Environmental and Regulatory Matters.”

 

36


Table of Contents

Failure to obtain or renew surety bonds on acceptable terms could affect our ability to secure reclamation and coal lease obligations and, therefore, our ability to mine or lease met coal.

Federal and state laws require us to obtain surety bonds or post other financial security to secure performance or payment of certain long-term obligations, such as mine closure or reclamation costs, federal and state workers’ compensation and black lung benefits costs, coal leases and other obligations. The amount of security required to be obtained can change as the result of new federal or state laws, as well as changes to the factors used to calculate the bonding or security amounts. We may have difficulty procuring or maintaining our surety bonds. Our bond issuers may demand higher fees or additional collateral, including letters of credit or other terms less favorable to us upon those renewals. Because we are required by state and federal law to have these bonds or other acceptable security in place before mining can commence or continue, our failure to maintain surety bonds, letters of credit or other guarantees or security arrangements would materially and adversely affect our ability to mine or lease met coal. That failure could result from a variety of factors, including lack of availability, higher expense or unfavorable market terms, the exercise by third-party surety bond issuers of their right to refuse to renew the surety and restrictions on availability of collateral for current and future third-party surety bond issuers under the terms of our financing arrangements.

We have reclamation and mine closing obligations. If the assumptions underlying our accruals are inaccurate, we could be required to expend greater amounts than anticipated.

The SMCRA establishes operational, reclamation and closure standards for our mining operations. Alabama has a state law counterpart to SMCRA. We accrue for the costs of current mine disturbance and of final mine closure, including the cost of treating mine water discharge where necessary. The amounts recorded are dependent upon a number of variables, including the estimated future closure costs, estimated proven reserves, assumptions involving profit margins, inflation rates and the assumed credit-adjusted risk-free interest rates. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be materially adversely affected. We are also required to post bonds for the cost of coal mine reclamation.

We and our owners and controllers are subject to the Applicant Violator System.

Under SMCRA and its state law counterparts, all coal mining applications must include mandatory “ownership and control” information, which generally includes listing the names of our officers and directors, and our principal stockholders owning 10% or more of our voting shares, among others. Ownership and control reporting requirements are designed to allow regulatory review of any entities or persons deemed to have ownership or control of a coal mine, and bars the granting of a coal mining permit to any applicant who, or whose owner or controller, has unabated or uncorrected violations.

A federal database, known as the Applicant Violator System, is maintained for this purpose. Certain relationships are presumed to constitute ownership or control, including the following: being an officer or director of an entity; being the operator of the coal mining operation; having the ability to commit the financial or real property assets or working resources of the permittee or operator; based on the instruments of ownership or the voting securities of a corporate entity, owning of record 10% or more of the mining operator, among others. This presumption, in most cases, can be rebutted where the person or entity can demonstrate that it in fact does not or did not have authority directly or indirectly to determine the manner in which the relevant coal mining operation is conducted. An ownership and control notice must be filed by us each time an entity obtains a 10% or greater interest in us. If we have unabated violations of SMCRA or its state law counterparts, have a coal mining permit suspended or revoked, or forfeit a reclamation bond, we and our “owners and controllers,” as discussed above, may be prohibited from obtaining new coal mining permits, or amendments to existing permits, until such violations of law are corrected. This is known as being “permit-blocked.” Additionally, if an “owner or controller” of us is an “owner or controller” of another mining company, then, as such, we could be permit-blocked based upon the violations of or permit-blocked status of such an “owner or controller” of us.

 

37


Table of Contents

We may be subject to litigation, the disposition of which could negatively affect our profitability and cash flow in a particular period, or have a material adverse effect on our business, financial condition and results of operations.

Our profitability or cash flow in a particular period could be affected by an adverse ruling in any litigation that may be filed against us in the future. In addition, such litigation could have a material adverse effect on our business, financial condition and results of operations. See “Business—Legal Proceedings.”

We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries to meet any dividend and other obligations.

We are a holding company with no direct operations and no material assets other than our direct ownership of 100% of the equity interests of Warrior Met Coal Intermediate Holdco, LLC, our wholly owned holding company, through which we indirectly hold our operating subsidiaries. As a result of this structure, our cash flow and ability to meet our obligations or to pay any dividends on our common stock depend on the cash flows of our subsidiaries and the payment of funds by our subsidiaries to us in the form of dividends, loans and other payments. The ability of our subsidiaries to make such payments or loans to us, however, depends on their earnings and available assets, the terms of our ABL Facility and of any future agreements that may govern the indebtedness of our subsidiaries, and legal restrictions applicable to our subsidiaries, and could be affected by a claim or other action by a third party, including a creditor. To the extent we need funds and any of our subsidiaries are restricted from making such distributions under applicable law or regulation or under the terms of their financing arrangements, or they are otherwise unable to provide such funds, our liquidity and financial condition could be materially adversely affected.

Our ABL Facility contains restrictions that limit our flexibility in operating our business.

Our ABL Facility contains various covenants that limit our ability to engage in specified types of transactions. These covenants contain restrictions on, among other things, liens, indebtedness, investments, including loans, advances and acquisitions, mergers and other fundamental changes, dispositions of assets, restricted payments, changes in the nature of business and transactions with affiliates, subject to certain customary exceptions, baskets, thresholds and other qualifications. A breach of any of these covenants could result in a default under our ABL Facility. Upon our failure to maintain compliance with these covenants beyond any applicable grace periods, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit thereunder. If the lenders under our ABL Facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings. We pledged a significant portion of our assets as collateral under our ABL Facility. If we were unable to repay those amounts, the lenders under our ABL Facility could proceed against the collateral granted to them to secure that indebtedness. Additionally, if availability under the ABL Facility is less than a certain amount, the facility will be subject to the satisfaction of a specified financial ratio. Our ability to meet this financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio and other covenants.

We may incur substantially more debt in the future than we currently have. This could exacerbate the risks to our financial condition and business described above.

We may incur significant additional indebtedness in the future. Although our ABL Facility contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations that do not constitute indebtedness. If our current debt level increases, the related risks we face could intensify. Specifically, a high level of debt could have important consequences, including:

 

    limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

38


Table of Contents
    requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for the payment of dividends, working capital, capital expenditures, acquisitions and other general corporate purposes;

 

    increasing our vulnerability to general adverse economic and industry conditions;

 

    exposing us to the risk of increased interest rates with respect to borrowings subject to variable rates of interest;

 

    limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

    placing us at a competitive disadvantage to other, less leveraged competitors; and

 

    increasing our cost of borrowing.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take action, such as reducing or delaying our business activities and capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all.

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.

Borrowings under our ABL Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.

We may be unable to generate sufficient taxable income from future operations, or other circumstances could arise, which may limit or eliminate our ability to utilize our significant tax NOLs or maintain our deferred tax assets.

In connection with the Asset Acquisition consummated on March 31, 2016, we acquired deferred tax assets primarily associated with NOLs attributable to Walter Energy’s write-off of its investment in Walter Energy Canada Holdings, Inc. As a result of our history of losses and other factors, a valuation allowance has been recorded against our deferred tax assets, including our NOLs. A valuation allowance was established on our opening balance sheet at April 1, 2016 because it was more likely than not that a portion of the acquired deferred tax assets would not be realized in the future. Our NOLs are currently subject to an annual use limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as described below. Certain factors could change or circumstances could arise that could further limit or eliminate the amount of the available NOLs to the Company, such as an ownership change or an adjustment by a tax authority, and could necessitate a change in our valuation allowance or our liability for income taxes. In addition, we have a limited operating history as a new standalone company, have incurred operating losses since the Asset Acquisition and have recorded additional deferred tax assets. Also, certain circumstances, including our failing to generate sufficient future taxable income from operations, could limit our ability to fully utilize our deferred tax assets. At December 31, 2016, we recorded a valuation allowance of $767.3 million against all federal and state NOLs and gross deferred tax assets not expected to provide future tax benefits.

Under the Code, a company is generally allowed a deduction for NOLs against its federal taxable income. As of December 31, 2016, we have federal NOLs of approximately $2.2 billion, which expire predominantly in 2034 through 2036 and state NOLs of approximately $2.5 billion, which expire predominantly in 2029 through 2031 for income tax purposes. These NOLs and our other gross deferred tax assets collectively represent a deferred tax asset of approximately $949.7 million at December 31, 2016, before reduction for the valuation

 

39


Table of Contents

allowance described above. Our NOLs are subject to adjustment on audit by the Internal Revenue Services (“IRS”) and state authorities. The IRS has not audited any of the tax returns for any of the years in which the losses giving rise to the NOLs were generated. We cannot assure you that we would prevail if the IRS were to challenge the availability of the NOLs. If the IRS were successful in challenging our NOLs, all or a portion of our NOLs would not be available to offset any future consolidated taxable income, which could have a significant negative impact on our financial condition, results of operations and cash flows.

A company’s ability to deduct its NOLs and utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in Section 382 or if similar provisions of state law apply. We experienced an ownership change in connection with the Asset Acquisition and our financial statements have been prepared on this basis.

As a result, subject to the discussion in the paragraphs below, we currently expect to have NOLs available to shield up to approximately $365 million of income from federal taxation over the five years beginning in 2017, with NOLs available to shield up to approximately $140 million in 2017 and decreasing each subsequent year. Each year after this five-year period, the utilization of our NOLs would be limited to approximately $20 million of income from federal taxation, until the expiration of our NOLs. There can be no assurance that we will generate sufficient federal taxable income to utilize the available NOLs. We currently expect an average effective cash tax rate of approximately 11% over the five-year period, beginning with an estimated effective cash tax rate of approximately 5% in 2017. However, as discussed in the paragraph below, if we were to receive a private letter ruling, we would instead over such five-year period expect to have an average effective cash tax rate of approximately 2%. The actual tax rate may vary significantly based on certain factors including the Company’s actual results, effect of tax elections and adjustments to the valuation allowance.

We are seeking a private letter ruling from the IRS, which, if granted, would allow us to utilize our NOLs to shield our income from federal taxation without any annual use limitation. However, there can be no assurance the IRS will grant this private letter ruling. The private letter ruling, if obtained, would be based and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings provided to the IRS by us. If any of these facts, assumptions, representations, statements or undertakings are, or become, incorrect, inaccurate or incomplete, the private letter ruling may be invalid and the conclusions reached therein could be jeopardized. If our NOLs are not subject to any annual use limitation and we were to undergo a subsequent ownership change within two years of the Asset Acquisition, prior to April 1, 2018, our NOLs would effectively be reduced to zero.

Regardless of whether a favorable private letter ruling is obtained, a subsequent ownership change could severely limit or eliminate our ability to utilize our NOLs and other tax attributes. Furthermore, while we do not believe an ownership change has occurred since April 1, 2016, because the rules under Section 382 are highly complex and actions of our stockholders which are beyond our control or knowledge could impact whether an ownership change has occurred, we cannot give you any assurance that another Section 382 ownership change will not occur in the future.

Certain transactions, including public offerings by us or our stockholders and redemptions may cause us to undergo an “ownership shift” which by itself or when aggregated with other ownership shifts that we have undergone or will undergo could cause us to experience an ownership change. Upon the corporate conversion, we intend to adopt transfer restrictions in our certificate of incorporation (the “382 Transfer Restrictions”) to minimize the likelihood of an ownership change. See “—Risks Related to this Offering and the Ownership of our Common Stock—Our common stock is subject to the 382 Transfer Restrictions under our certificate of incorporation which are intended to prevent a Section 382 “ownership change,” which if not complied with, could result in the forfeiture of such stock and related distributions. Accordingly, this may impact the market price of our common stock.” We may engage in transactions or approve waivers of the 382 Transfer Restrictions that may cause an ownership shift. In doing so we expect to first perform the calculations necessary to confirm that our ability to use our NOLs and other federal income tax attributes will not be affected or otherwise determine that such transactions or waivers are

 

40


Table of Contents

in our best interests. For example, under certain circumstances, our board of directors may determine it is in our best interest to exempt certain transactions from the operation of the 382 Transfer Restrictions, if such transaction is determined not to be detrimental to the utilization of our NOLs or otherwise in our best interests. These calculations are complex and reflect certain necessary assumptions. Accordingly, it is possible that we could approve or engage in a transaction involving our common stock that causes an ownership change and impairs the use of our NOLs and other federal income tax attributes. For more information, see “—Risks Related to this Offering and the Ownership of Our Common Stock—We could engage in or approve transactions involving our common stock that adversely affect significant stockholders and our other stockholders.”

Terrorist attacks and cyber-attacks or other security breaches may negatively affect our business, financial condition and results of operations and cash flows.

Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, all of which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers could cause delays or losses in transportation and deliveries of met coal to our customers, decreased sales of our met coal and extension of time for payment of accounts receivable from our customers. Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States. It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

In addition, we have become increasingly dependent upon digital technologies, including information systems, infrastructure and cloud applications and services, to operate our businesses, process and record financial and operating data, communicate with our employees and business partners, analyze seismic and drilling information, estimate quantities of met coal reserves, as well as other activities related to our businesses. To that end, we have implemented security protocols and systems with the intent of maintaining the physical security of our operations and protecting our and our counterparties’ confidential information and information related to identifiable individuals against unauthorized access. Despite such efforts, we may be subject to security breaches, which could result in unauthorized access to our facilities or the information that we are trying to protect. Unauthorized physical access to one of our facilities or electronic access to our information systems could result in, among other things, unfavorable publicity, litigation by affected parties, damage to sources of competitive advantage, disruptions to our operations, loss of customers, financial obligations for damages related to the theft or misuse of such information and costs to remediate such security vulnerabilities, any of which could have a substantial impact on our results of operations, financial condition or cash flows. Our insurance may not protect us against such occurrences. Further, as cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.

Risks Related to this Offering and the Ownership of our Common Stock

An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The price for our common stock in this offering will be determined by negotiations among us and the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. We cannot predict the prices at which shares of our common stock may trade after this offering. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling

 

41


Table of Contents

our common stock, and it may impair our ability to motivate our employees and sales representatives through equity incentive awards and our ability to consummate acquisitions using our common stock as consideration.

The market price of our common stock may fluctuate significantly and you could lose all or part of your investment.

The market price of our common stock could fluctuate significantly due to a number of factors, including:

 

    our quarterly or annual earnings, or those of other companies in our industry;

 

    actual or anticipated fluctuations in our operating and financial results, including reserve estimates;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

    announcements by us or our competitors of significant acquisitions, dispositions or innovations;

 

    changes in financial estimates and recommendations by securities analysts following our stock, or the failure of securities analysts to cover our common stock after this offering;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of other comparable companies;

 

    declaration of bankruptcy by any of our customers or competitors;

 

    general economic conditions and overall market fluctuations, including changes in the price of met coal, steel or other commodities;

 

    additions or departures of key management personnel;

 

    actions by our stockholders;

 

    the trading volume of our common stock;

 

    sales of our common stock by us or the selling stockholders or the perception that such sales may occur; and

 

    changes in business, legal or regulatory conditions, or other developments affecting participants in, and publicity regarding, the met coal mining business, the domestic steel industry or any of our significant customers.

In particular, the realization of any of the risks described in these “Risk Factors” could have a material and adverse impact on the market price of our common stock in the future and cause the value of your investment to decline. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual performance. If the market price of our common stock reaches an elevated level following this offering, it may materially and rapidly decline. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted securities class action litigation against the company. If we were to be involved in a class action lawsuit, it could divert the attention of senior management, and, if adversely determined, have a material adverse effect on our business, results of operations and financial condition.

If securities or industry analysts adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, our stock price could decline.

The trading market for our common stock could be influenced by the research and reports that industry or securities analysts may publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.

 

42


Table of Contents

We cannot assure you that we will pay dividends on our common stock, and restrictions on our ability to receive funds from our subsidiaries could limit our ability to pay dividends on our common stock.

While we have not made any cash distributions since our inception, on March 31, 2017, our board of managers declared the Special Distribution, payable to the holders of our Class A Units, Class B Units and Class C Units. The Special Distribution was paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017 and does not apply to the shares of our common stock to be sold in this offering. In addition, the Special Distribution was funded with available cash on hand, thereby reducing our liquidity.

After completion of this offering, we may pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, any restrictions in our ABL Facility and in any preferred stock, business prospects and other factors that our board of directors may deem relevant. In addition, our business is conducted through our subsidiaries. Dividends, distributions and other payments from, and cash generated by, our subsidiaries are our principal sources of cash to repay indebtedness, fund operations and pay dividends. Therefore, any restrictions on our ability to receive funds from our subsidiaries could limit our ability to pay dividends. See “—Risks Related to Our Business—We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries to meet any dividend and other obligations.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. For more information, see “Dividend Policy.”

As a public company, we will become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy, strain our resources, increase our costs and divert management’s attention from our business, and we may be unable to comply with these new requirements in a timely or cost-effective manner.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements pursuant to the Exchange Act. We will be required to ensure that we have the ability to prepare financial statements that comply with SEC reporting requirements on a timely basis. We will also be subject to other reporting and corporate governance requirements, including the NYSE listing standards and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which impose significant compliance obligations upon us. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, particularly after we are no longer an “emerging growth company,” as defined in the JOBS Act.

Specifically, we will be required to:

 

    prepare and distribute periodic reports and other stockholder communications in compliance with our obligations under the federal securities laws and NYSE rules;

 

    create or expand the roles and duties of our board of directors and committees of the board;

 

    institute compliance and internal audit functions that are more comprehensive;

 

    evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the PCAOB;

 

    enhance our investor relations function;

 

    establish or amend internal policies, including those relating to disclosure controls and procedures as well as insider trading; and

 

    involve and retain outside legal counsel and accountants in connection with the activities listed above.

As a public company, we will be required to commit significant resources and board and management oversight to the above-listed requirements, which will cause us to incur significant costs and which will place a

 

43


Table of Contents

strain on our systems and resources. As a result, the attention of our board of directors and management might be diverted from other business concerns. In addition, we might not be successful in implementing these requirements. In addition, we also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.

We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. We will remain an emerging growth company for up to five years. After we are no longer an “emerging growth company,” we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with those requirements applicable to companies that are not “emerging growth companies,” including Section 404 of the Sarbanes-Oxley Act. We cannot assure you that we will be able to comply with such requirements in a timely or cost-effective manner. See “Prospectus Summary—Implications of Being an Emerging Growth Company” and “—We will be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to timely comply with Section 404 or if the costs related to developing and maintaining internal controls over financial reporting are significant, our profitability, stock price, results of operations and financial condition could be materially adversely affected.”

For so long as we are an “emerging growth company” we will not be required to comply with certain disclosure requirements that are applicable to other public companies and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an emerging growth company, unlike other public companies, we will not be required to, among other things: (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (ii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; (iii) provide certain disclosure regarding executive compensation required of larger public companies; or (iv) hold nonbinding advisory votes on executive compensation. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.0 billion of revenues in a fiscal year, have more than $700.0 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common stock to be less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Prior to the completion of this offering, we intend to irrevocably elect not to avail ourselves to this exemption from new or revised accounting standards and,

 

44


Table of Contents

therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We have material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which could cause investors to lose confidence in our financial reporting and, as a result, materially adversely affect the trading price of our common stock.

We are not currently required to comply with SEC rules implementing Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act. See “—We will be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to timely comply with Section 404 or if the costs related to developing and maintaining internal controls over financial reporting are significant, our profitability, stock price, results of operations and financial condition could be materially adversely affected.”

In connection with the audit of the financial statements of our Predecessor, our independent registered public accounting firm identified two material weaknesses as of March 31, 2016, one of which related to the Predecessor’s financial close process and the other related to the Predecessor’s calculation of its asset retirement obligation. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. These two identified material weaknesses could, among other things, adversely impact our ability to provide timely and accurate financial information or result in a misstatement of the account balances or disclosures that could result in a material misstatement to our annual or interim financial statements that would not be prevented or detected. For additional information regarding these material weaknesses, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Material Weaknesses in Internal Control Over Financial Reporting.”

We are currently in the process of remediating the above-noted material weaknesses. Following the closing of the Asset Acquisition on March 31, 2016, our management took numerous steps to enhance our internal control environment to address the underlying causes of the material weaknesses, including, but not limited to, implementing a new enterprise resource planning (“ERP”) system, reassigning existing personnel and hiring new personnel, which includes a Chief Financial Officer effective January 1, 2017, who are charged with the responsibility of developing and maintaining an appropriate accounting process and system of internal control over financial reporting, including performing augmented reviews of the processes impacted by the material weaknesses.

As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures, modify the remediation plan described above or identify additional material weaknesses. We cannot assure you that our remedial measures will be sufficient to remediate the material weaknesses described above or prevent future material weaknesses or control deficiencies from occurring. There is no assurance that we will not identify additional material weaknesses in our internal control over financial reporting in the future.

If we fail to effectively remediate the material weaknesses in our control environment, if we identify future material weaknesses in our internal control over financial reporting or if we are unable to comply with the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. The material weaknesses described above or any newly identified material weakness could result in a misstatement of our accounts or disclosures that could result in a material misstatement to our annual or interim financial statements that would not be prevented or detected. We

 

45


Table of Contents

also could become subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price may be materially adversely affected.

We will be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to timely comply with Section 404 or if the costs related to developing and maintaining internal controls over financial reporting are significant, our profitability, stock price, results of operations and financial condition could be materially adversely affected.

We will be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act. Beginning with our annual report on Form 10-K for the year ending December 31, 2018 (subject to any change in applicable SEC rules), Section 404 will require that we include management’s assessment of our internal control over financial reporting in our annual reports. In addition, Section 404 will require that our independent registered public accounting firm attest to our internal controls upon us ceasing to qualify for an exemption from the requirement to provide an auditor’s attestation on internal controls afforded to emerging growth companies under the JOBS Act. We are currently evaluating our existing controls against the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). During the course of our ongoing evaluation and implementation of the internal control over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review. For example, we anticipate the need to hire additional administrative and accounting personnel to conduct our financial reporting. We believe that the out-of-pocket costs, the diversion of management’s attention from running the day-to-day operations and operational changes caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant. The time and costs associated with such compliance could exceed our current expectations and our results of operations could be adversely affected.

We cannot be certain at this time that we will be able to successfully implement the procedures, certification and attestation requirements of Section 404 when required or that we or our auditors will not identify further material weaknesses in internal control over financial reporting. As noted above, our independent registered public accounting firm identified two material weaknesses as of March 31, 2016. If we fail to comply with the requirements of Section 404, or if at any time after becoming public we or our auditors identify and report any material weaknesses in internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected (which, in some cases, could result in a restatement of our financial statements) and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud, reputational harm and the loss of customers, reduce our ability to obtain financing, subject us to investigations by the NYSE, the SEC or other regulatory authorities and require additional expenditures and management attention to address these matters, each of which could have a material adverse effect on our business, results of operations, financial condition and trading price of our common stock.

The market price of our common stock could decline as a result of the sale or distribution of a large number of shares of our common stock in the market after this offering or the perception that a sale or distribution could occur. These factors also could make it more difficult for us to raise funds through future offerings of our common stock.

Sales of substantial amounts of our common stock in the public market, or the perception that those sales might occur, could materially adversely affect the market price of our common stock. Upon completion of this offering, the Principal Stockholders will beneficially own approximately 25.3 million shares, or 47.4%, of our common stock (or approximately 23.1 million shares, or 43.1%, of our common stock if the underwriters’ option

 

46


Table of Contents

to acquire additional shares of common stock is exercised in full). The Principal Stockholders have no contractual obligation to retain any of our common stock, except for a limited period, as described under “Underwriting,” during which they agreed not to sell any of our common stock without the consent of the representatives of the underwriters until 180 days after the date of this prospectus. Subject to applicable securities laws, after the expiration of this 180-day lock-up period, or before, with consent of the representatives of the underwriters, the Principal Stockholders may sell any or all of our common stock that they beneficially own. Any disposition by the Principal Stockholders of our common stock in the public market, or the perception that such dispositions could occur, could adversely affect prevailing market prices for our common stock.

The shares of our common stock sold in this offering will be freely tradable without restriction, except for any shares acquired by an affiliate of our company which can be sold under Rule 144 under the Securities Act, subject to various volume and other limitations. Subject to certain limited exceptions, we, our executive officers, directors, the selling stockholders and holders of substantially all of our stock have agreed with the underwriters, not to sell, dispose of or hedge any of our common stock or securities convertible into or exchangeable for shares of common stock, without the prior written consent of the representatives of the underwriters, for the period ending 180 days after the date of this prospectus. After the expiration of the 180-day period, our executive officers, directors and such stockholders could dispose of all or any part of its shares of our common stock through a public offering, sales under Rule 144, or other transaction.

In the future, we may also issue common stock for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, or to provide incentives pursuant to certain executive compensation arrangements. Such future issuances of equity securities, or the expectation that they will occur, could cause the market price for our common stock to decline. The price of our common stock also could be affected by hedging or arbitrage trading activity that may exist or develop involving our common stock.

Your percentage ownership in us may be diluted by future issuances of capital stock or securities or instruments that are convertible into our capital stock, which could reduce your influence over matters on which stockholders vote.

Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our obligations under our incentive plans, shares of our authorized but unissued preferred stock and securities and instruments that are convertible into our common stock. In addition, to the extent certain letters of credit arising under the first lien debt of the Walter Energy Debtors are drawn, including following the closing of this offering, the revolving lenders are entitled to an additional distribution of our equity interests, up to a maximum amount of equity that could be distributed on account of such outstanding, but undrawn, letters of credit of less than 0.1% of our outstanding equity before giving effect to this offering. These letters of credit will expire by July 10, 2017. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, likely would result in your interest in us being subject to the prior rights of holders of that preferred stock.

Investors in this offering will experience immediate and substantial dilution of $7.69 per share.

Based on an assumed initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $7.69 per share in the net tangible book value per share of common stock from the initial public offering price, and our historical and pro forma net tangible book value as of December 31, 2016 would be $10.31 per share. See “Dilution.”

We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

Our certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights,

 

47


Table of Contents

including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. In addition, the issuance of such preferred stock could make it more difficult for a third party to acquire us. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Our Capital Stock.”

Our common stock is subject to the 382 Transfer Restrictions under our certificate of incorporation which are intended to prevent a Section 382 “ownership change,” which if not complied with, could result in the forfeiture of such stock and related distributions. Accordingly, this may impact the market price of our common stock.

Prior to the corporate conversion, the members of Warrior Met Coal, LLC approved an amendment to our LLC Agreement (as defined below) and approved the form of our certificate of incorporation with respect to certain transfer restrictions on our shares, which we refer to as the 382 Transfer Restrictions. The 382 Transfer Restrictions are intended to prevent the likelihood that we will be deemed to have an “ownership change” within the meaning of Section 382 of the Code that could limit our ability to utilize significant NOLs and other federal income tax attributes under and in accordance with the Code and regulations promulgated by the IRS.

In particular, without the approval of our board of directors, no person or group of persons treated as a single entity under Treasury Regulation Section 1.382-3 will be permitted to acquire, whether directly, indirectly or constructively, and whether in one transaction or a series of related transactions, any of our common stock or any other instrument treated as stock for purposes of Section 382, to the extent that after giving effect to such purported acquisition (a) the purported acquirer, or any other person by reason of the purported acquirer’s acquisition, would become a Substantial Holder (as defined below), or (b) the percentage of ownership of our common stock by a person that, prior to giving effect to the purported acquisition, is already a Substantial Holder would be increased. A “Substantial Holder” is a person that owns (as determined for purposes of Section 382 of the Code) at least 4.99% of the total value of our common stock, including any instrument treated as stock for purposes of Section 382 of the Code.

Furthermore, under our post-conversion certificate of incorporation, our board of directors has the sole power to determine compliance with the 382 Transfer Restrictions and we cannot assure you that our board of directors will concur with any conclusions reached by any holder of our securities or their respective advisors, and/or approve or ratify any proposed acquisitions of our securities. If our board of directors determines that a Prohibited Transfer (as defined in our certificate of incorporation) has occurred, such Prohibited Transfer shall, to the fullest extent permitted by law, be void ab initio and have no legal effect, and upon written demand by us, the Purported Transferee (as defined in the certificate of incorporation) shall disgorge or cause to be disgorged our securities, together with any dividends or distributions received, with respect to such securities.

The 382 Transfer Restrictions may make our stock less attractive to large institutional holders, discourage potential acquirers from attempting to take over our company, limit the price that investors might be willing to pay for shares of our common stock and otherwise have an adverse impact on the market for our common stock. Because of the complexity of applying Section 382, and because the determination of ownership for purposes of Section 382 does not correspond to SEC beneficial ownership reporting on Schedules 13D and 13G, stockholders and potential acquirers of our securities should consult with their legal and tax advisors prior to making any acquisition of our securities that could implicate the 382 Transfer Restrictions.

We could engage in or approve transactions involving our common stock that adversely affect significant stockholders and our other stockholders.

Under the 382 Transfer Restrictions that we expect will be contained in our certificate of incorporation, prior to the third anniversary of our initial public offering, our 4.99% stockholders will effectively be required to

 

48


Table of Contents

seek the approval of, or a determination by, our board of directors before they engage in certain transactions involving our common stock. Furthermore, we could engage in or approve transactions involving our common stock that limit our ability to approve future transactions involving our common stock by our 4.99% stockholders without impairing the use of our federal income tax attributes. In addition, we could engage in or approve transactions involving our common stock that cause stockholders owning less than 4.99% to become 4.99% stockholders, resulting in those stockholders’ having to either disgorge our securities, and any dividends or distributions related to such securities, in accordance with the 382 Transfer Restrictions or seek the approval of, or a determination by, our board of directors before they could engage in certain future transactions involving our common stock. For example, share repurchases could reduce the number of our common stock outstanding and result in a stockholder, that prior to the share repurchase held less than 4.99%, becoming a 4.99% stockholder even though it has not acquired any additional shares. If it is determined by our board of directors, such 4.99% stockholder may be required to disgorge our securities, and any dividends or distributions related to such securities, in accordance with the 382 Transfer Restrictions and be subject to additional requirements as determined by our board of directors in order to preserve our NOLs and other federal income tax attributes.

Provisions in our certificate of incorporation and bylaws and Delaware law will make it more difficult to effect a change in control of the Company, which could adversely affect the price of our common stock.

The existence of some provisions in our certificate of incorporation and bylaws and Delaware corporate law could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws will contain provisions that may make acquiring control of our company difficult, including:

 

    our board of directors’ ability to issue, from time to time, one or more series of preferred stock and, with respect to each such series, to fix the terms thereof by resolution;

 

    provisions relating to the appointment of directors upon an increase in the number of directors or vacancy on our board of directors;

 

    provisions requiring stockholders to hold at least a majority of our outstanding common stock in the aggregate to request special meetings;

 

    provisions that restrict transfers of our stock (including any other instruments treated as stock for purposes of Section 382) that could limit our ability to utilize NOLs;

 

    provisions that provide that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any of our stockholders or directors, other than any stockholder or director that is an employee, consultant or officer of ours; and

 

    provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals for consideration at meetings of stockholders.

In addition, we will elect to opt out of Section 203 of the Delaware General Corporation Law (“DGCL”), which, subject to some exceptions, prohibits business combinations between a Delaware corporation and an interested stockholder, which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder. At some time in the future, we may be governed by DGCL Section 203. DGCL Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests. See “Description of Our Capital Stock.”

These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, which may limit the price that investors are willing to pay in the future for shares of our common stock.

 

49


Table of Contents

Our certificate of incorporation will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation will provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

    any derivative action or proceeding brought on our behalf;

 

    any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

    any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or bylaws; or

 

    any other action asserting a claim against us that is governed by the internal affairs doctrine.

In addition, our certificate of incorporation will provide that if any action specified above (each is referred to herein as a “covered proceeding”), is filed in a court other than the specified Delaware courts without the approval of our board of directors (each is referred to herein as a foreign action), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the foreign action as agent for such claiming party.

These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the covered proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Our four largest stockholders control a significant percentage of our common stock, and their interests may conflict with those of our other stockholders.

Immediately prior to the completion of this offering, the Apollo Funds, the GSO Funds, the KKR Funds and the Franklin Funds beneficially own 30.0%, 19.4%, 12.1% and 13.7%, respectively, of our equity interests. Upon completion of this offering, the Apollo Funds, the GSO Funds, the KKR Funds and the Franklin Funds will beneficially own approximately 18.9%, 12.2%, 7.6% and 8.7%, respectively, of our common stock, or approximately 17.2%, 11.1%, 6.9% and 7.9%, respectively, if the underwriters exercise their option to purchase additional shares in full. See “Principal and Selling Stockholders.” As a result, each of the Principal Stockholders may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions. Further, we anticipate that several individuals who will serve as directors upon completion of this offering will be affiliates of each of the Principal Stockholders. This concentration of ownership and relationships with the Principal Stockholders make it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business. The interests of the Principal Stockholders and of our directors who are affiliates of any of the Principal Stockholders with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities, and attempts to acquire us, may conflict with the interests of our other stockholders, and the resolution of these conflicts may not always be in your best interest. This continued concentrated ownership will make it impossible for another company to acquire us and for you to receive any related takeover premium for your shares unless each of these stockholders approves the acquisition. In addition, the Principal Stockholders’ concentration of stock ownership may also adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with significant stockholders.

 

50


Table of Contents

The corporate opportunity provisions in our certificate of incorporation could enable any of our officers, directors or stockholders to benefit from corporate opportunities that might otherwise be available to us.

Subject to the limitations of applicable law, our certificate of incorporation, among other things:

 

    will permit us to enter into transactions with entities in which one or more of our officers or directors are financially or otherwise interested;

 

    will permit any of our stockholders, officers or directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and

 

    will provide that if any director or officer of one of our affiliates who is also one of our officers or directors becomes aware of a potential business opportunity, transaction or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as our director or officer), that director or officer will have no duty to communicate or offer that opportunity to us, and will be permitted to communicate or offer that opportunity to such affiliates and that director or officer will not be deemed to have (i) acted in a manner inconsistent with his or her fiduciary or other duties to us regarding the opportunity or (ii) acted in bad faith or in a manner inconsistent with our best interests.

These provisions create the possibility that a corporate opportunity that would otherwise be available to us may be used for the benefit of our officers, directors, stockholders or their respective affiliates.

 

51


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes statements of our expectations, intentions, plans and beliefs that constitute forward-looking statements. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words “anticipate,” “approximately,” “assume,” “believe,” “could,” “contemplate,” “continue,” “estimate,” “expect,” “target,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should” and similar terms and phrases, including in references to assumptions, in this prospectus to identify forward looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to:

 

    our ability to consummate this offering;

 

    successful implementation of our business strategies;

 

    a substantial or extended decline in pricing or demand for met coal;

 

    global steel demand and the downstream impact on met coal prices;

 

    inherent difficulties and challenges in the coal mining industry that are beyond our control;

 

    geologic, equipment, permitting, site access, operational risks and new technologies related to mining;

 

    impact of weather and natural disasters on demand and production;

 

    our relationships with, and other conditions affecting, our customers;

 

    unavailability of, or price increases in, the transportation of our met coal;

 

    competition and foreign currency fluctuations;

 

    our ability to comply with covenants in our ABL Facility;

 

    significant cost increases and fluctuations, and delay in the delivery of raw materials, mining equipment and purchased components;

 

    work stoppages, negotiation of labor contracts, employee relations and workforce availability;

 

    adequate liquidity and the cost, availability and access to capital and financial markets;

 

    any consequences related to our 382 Transfer Restrictions;

 

    our obligations surrounding reclamation and mine closure;

 

    inaccuracies in our estimates of our met coal reserves;

 

    our ability to develop or acquire met coal reserves in an economically feasible manner;

 

    challenges to our licenses, permits and other authorizations;

 

    challenges associated with environmental, health and safety laws and regulations;

 

    regulatory requirements associated with federal, state and local regulatory agencies, and such agencies’ authority to order temporary or permanent closure of our mines;

 

    climate change concerns and our operations’ impact on the environment;

 

    failure to obtain or renew surety bonds on acceptable terms, which could affect our ability to secure reclamation and coal lease obligations;

 

52


Table of Contents
    costs associated with our pension and benefits, including post-retirement benefits;

 

    costs associated with our workers’ compensation benefits;

 

    litigation, including claims not yet asserted;

 

    terrorist attacks or security threats, including cybersecurity threats; and

 

    other factors, including the other factors discussed in “Risk Factors.”

The forward-looking statements contained in this prospectus are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors,” which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. When considering forward-looking statements made by us in this prospectus, such statements speak only as of the date on which we make them. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements herein after the date of this prospectus, except as may be required by law. In light of these risks and uncertainties, stockholders should keep in mind that any forward-looking statement made in this prospectus might not occur.

 

53


Table of Contents

USE OF PROCEEDS

We will not receive any proceeds from the sale of our common stock in this offering, including from any exercise of the underwriters’ option to purchase additional shares of our common stock. All of the net proceeds from this offering will be received by the selling stockholders. See “Principal and Selling Stockholders.”

DIVIDEND POLICY

While we have not made any cash distributions since our inception, on March 31, 2017, our board of managers declared the Special Distribution payable to holders of our Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in total distributions to such holders in an aggregate amount of $190.0 million. The Special Distribution was paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017. The Special Distribution does not apply to the shares of our common stock to be sold in this offering.

After completion of this offering, we may pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements and in any preferred stock, business prospects and other factors that our board of directors may deem relevant. Our ability to pay dividends on our common stock is limited by covenants in the ABL Facility and may be further restricted by the terms of any future debt or preferred securities. See “Risk Factors—Risks Related to this Offering and the Ownership of our Common Stock—We cannot assure you that we will pay dividends on our common stock, and restrictions on our ability to receive funds from our subsidiaries could limit our ability to pay dividends on our common stock” and “Description of Certain Indebtedness.”

 

54


Table of Contents

CORPORATE CONVERSION

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will convert Warrior Met Coal, LLC from a Delaware limited liability company to Warrior Met Coal, Inc., a Delaware corporation. In order to consummate the corporate conversion, a certificate of conversion, which is filed as Exhibit 2.2 to the registration statement of which this prospectus forms a part, and our certificate of incorporation, which is filed as Exhibit 3.1 to the Registration Statement of which this prospectus forms a part, will be filed with the Secretary of State of the State of Delaware. As part of the corporate conversion:

 

    the additional capital commitment under the Warrior Met Coal, LLC Amended and Restated Limited Liability Company Agreement, as amended (the “LLC Agreement”), will be terminated in accordance with the terms of the LLC Agreement and all outstanding Class B Units of Warrior Met Coal, LLC will automatically be converted into Class A Units on a one-for-one basis (the “Additional Capital Commitment Termination”); and

 

    following the Additional Capital Commitment Termination, each Class A Unit and Class C Unit then outstanding of Warrior Met Coal, LLC will be converted into approximately 13.9457 shares of common stock, par value $0.01 per share, of Warrior Met Coal, Inc. on the effective date of the conversion of Warrior Met Coal, LLC to Warrior Met Coal, Inc.

For additional information regarding the additional capital commitment under the LLC Agreement, see “Certain Relationships and Related Party Transactions—Additional Capital Commitment under the LLC Agreement.” Assuming the effectiveness of the corporate conversion as of March 31, 2017:

 

    2,500,004 outstanding Class B Units of Warrior Met Coal, LLC will convert into an aggregate of 2,500,004 Class A Units of Warrior Met Coal, LLC pursuant to the Additional Capital Commitment Termination; and

 

    3,774,409 Class A Units of Warrior Met Coal, LLC issued and outstanding following the Additional Capital Commitment Termination and 61,897 Class C Units of Warrior Met Coal, LLC will collectively convert into an aggregate of 53,500,000 shares of our common stock.

In connection with the corporate conversion, all awards previously granted to employees and directors under our 2016 Equity Plan will convert from Class C Units into shares of our common stock. Therefore, the 53,500,000 shares of our common stock outstanding following the corporate conversion and immediately prior to the closing of this offering includes 863,187 shares of common stock that relate to these awards under our 2016 Equity Plan.

In connection with the corporate conversion, Warrior Met Coal, Inc. will continue to hold all assets of Warrior Met Coal, LLC and will assume all of the debts and obligations of Warrior Met Coal, LLC. Warrior Met Coal, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of each of which are described in “Description of Our Capital Stock.” On the effective date of the corporate conversion, the members of the board of managers of Warrior Met Coal, LLC will become the members of the board of directors of Warrior Met Coal, Inc. and the officers of Warrior Met Coal, LLC will become the officers of Warrior Met Coal, Inc.

Except as otherwise disclosed, the audited financial statements and related notes thereto and selected consolidated and combined historical financial data and other financial information included in this prospectus are those of Warrior Met Coal, LLC and its subsidiaries and its predecessor and do not give effect to the corporate conversion.

 

55


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2016 on an actual basis and on a pro forma basis giving effect to (i) the payment of the Special Distribution, which occurred on March 31, 2017 and (ii) the corporate conversion, which will occur prior to the effectiveness of the registration statement of which this prospectus forms a part. For more information regarding the Special Distribution and the corporate conversion, see “Prospectus Summary—Recent Developments” and “Corporate Conversion,” respectively.

The information below is not necessarily indicative of our future cash and cash equivalents and capitalization. This table is derived from, and is qualified in its entirety by reference to, our audited financial statements and related notes thereto included elsewhere in this prospectus, and should be read in conjunction with “Prospectus Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data,” “Selected Consolidated and Combined Historical and Pro Forma Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of December 31, 2016  
     Actual      Pro Forma  
     (in thousands, except number
of shares and par value)
 

Cash and cash equivalents(1)

   $ 150,045      $ —    
  

 

 

    

 

 

 

Debt

     

Long-term debt, including current portion(2)

     6,574        6,574  

ABL Facility(3)

     —          —    

Equity

     

Members’ equity contributions

     802,640        —    

Common stock, $0.01 par value per share (no shares authorized, issued and outstanding, actual; 140,000,000 shares authorized, 53,500,000 shares issued and outstanding, pro forma)(4)

     —          535  

Preferred stock, $0.01 par value per share (no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma)

     —          —    

Additional paid in capital(5)

     —          612,105  

Accumulated deficit

     (49,673      (49,673
  

 

 

    

 

 

 

Total equity

     752,967        562,967  
  

 

 

    

 

 

 

Total capitalization

   $ 759,541      $ 569,541  
  

 

 

    

 

 

 

 

(1) Cash on hand at December 31, 2016 plus cash generated subsequent to December 31, 2016 was used to pay the Special Distribution in the amount of $190.0 million. Cash and cash equivalents on a pro forma basis in the table above does not reflect the cash that we have accumulated subsequent to December 31, 2016.
(2) Represents a security agreement and promissory note assumed in the Asset Acquisition. The agreement was entered into for the purchase of underground mining equipment. The promissory note matures on March 31, 2019, has a fixed interest rate of 4.00% per annum and is secured by the underground mining equipment it was used to purchase.
(3) As of March 31, 2017, there were no borrowings under our ABL Facility.
(4) On a pro forma basis, reflects $0.5 million aggregate par value of $0.01 per share on 53,500,000 shares outstanding as a result of the corporate conversion.
(5) On a pro forma basis, reflects the reclassification of historical members’ equity contributions of $802.6 million to additional paid in capital reduced by (i) the payment of the Special Distribution in the amount of $190.0 million to our unitholders and (ii) the aggregate par value of $0.5 million of the common stock as a result of the corporate conversion.

 

56


Table of Contents

DILUTION

Dilution is the amount by which the offering price paid by the purchasers of shares of common stock sold in this offering will exceed the net tangible book value per share of common stock after this offering. On a pro forma basis after giving effect to the Special Distribution and the corporate conversion as of December 31, 2016, our net tangible book value would have been approximately $563.0 million, or $10.52 per share of common stock. Because all of the shares of common stock to be sold in this offering, including those subject to any exercise of the underwriters’ option to purchase additional shares, will be sold by the selling stockholders, there will be no increase in the number of shares of our common stock outstanding as a result of this offering. The common stock to be sold by the selling stockholders is common stock that will be issued and outstanding immediately upon the corporate conversion. Accordingly, our pro forma net tangible book value as of December 31, 2016 would be unchanged at approximately $563.0 million, or $10.52 per share of common stock, prior to giving effect to the payment by us of estimated offering expenses of $11.5 million in connection with this offering.

After deducting the payment of the estimated offering expenses in connection with this offering, our pro forma as adjusted net tangible book value as of December 31, 2016 would be approximately $551.5 million, or $10.31 per share of common stock. This represents an immediate decrease in pro forma net tangible book value of $0.21 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $7.69 per share to investors purchasing shares of common stock in this offering, based on the assumed initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus), as illustrated in the following table.

 

Assumed initial public offering price per share

     $ 18.00  

Pro forma net tangible book value per share as of December 31, 2016

   $ 10.52    

Decrease in pro forma net tangible book value per share attributable to this offering

     (0.21  

Pro forma as adjusted net tangible book value per share immediately after this offering

       10.31  
    

 

 

 

Immediate dilution per share to purchasers in this offering(1)

     $ 7.69
    

 

 

 

 

(1) Because the offering expenses payable by us and the total number of shares outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional shares of common stock from the selling stockholders and we will not receive any net proceeds from such exercise, there will be no change to the dilution in net tangible book value per share of common stock to purchasers in this offering due to any such exercise of the option.

Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would not affect our pro forma as adjusted net tangible book value per share to purchasers, but would increase or decrease, as applicable, dilution per share to purchasers in this offering by $1.00.

The following table sets forth the total number of shares issued and outstanding as of December 31, 2016 after giving pro forma effect to the corporate conversion and the sale by the selling stockholders of 16,666,667 shares of common stock in this offering at the assumed initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus), together with the total consideration paid and average price per share paid for such shares, before deducting underwriting discounts and commissions and estimated offering expenses.

 

     Shares
Purchased
        Total Consideration         Average
Price
 
     (dollars in thousands, except per share amounts)  
     Number      Percent     Amount      Percent     Per
Share
 

Existing stockholders

     36,833,333        68.8   $ 562,967        65.2   $ 15.28  

New investors

     16,666,667        31.2   $ 300,000        34.8   $ 18.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     53,500,000        100   $ 862,967        100.0   $ 16.13  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

57


Table of Contents

If the underwriters’ option to purchase additional shares is exercised in full, the number of shares held by new investors will be increased to 19,166,667, or approximately 35.8% of the total number of shares of common stock issued and outstanding immediately following this offering.

The data in the table above excludes 5,944,444 shares of our common stock reserved for issuance under our 2017 Equity Plan for our employees and directors.

 

58


Table of Contents

SELECTED CONSOLIDATED AND COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following tables set forth our selected consolidated and combined historical and pro forma financial data as of and for each of the periods indicated. The selected consolidated historical financial data as of December 31, 2016 and for the nine months ended December 31, 2016 is derived from the audited consolidated financial statements of the Successor included elsewhere in this prospectus. The selected combined historical financial data as of December 31, 2015 and for the three months ended March 31, 2016 and the year ended December 31, 2015 is derived from the audited combined financial statements of our Predecessor included elsewhere in this prospectus. The term “Successor” refers to (1) Warrior Met Coal, LLC and its subsidiaries for periods beginning as of April 1, 2016 and ending immediately before the completion of our corporate conversion and (2) Warrior Met Coal, Inc. and its subsidiaries for periods beginning with the completion of our corporate conversion and thereafter. The term “Predecessor” refers to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter Energy in the Asset Acquisition on March 31, 2016. The Predecessor periods included in this prospectus begin as of January 1, 2015 and end as of March 31, 2016.

The selected unaudited pro forma statement of operations data for the year ended December 31, 2016 is derived from the unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2016 assumes that the Transactions occurred as of January 1, 2015. The selected unaudited pro forma balance sheet data as of December 31, 2016 assumes that the declaration of the Special Distribution occurred as of December 31, 2016. The selected unaudited pro forma financial data is based upon available information and certain assumptions that management believes are factually supportable, are reasonable under the circumstances and are directly related to the Transactions. The selected unaudited pro forma financial data is provided for informational purposes only and does not purport to represent what our results of operations or financial position actually would have been if these transactions had occurred at any other date, and such data does not purport to project our results of operations for any future period.

You should read this selected consolidated and combined historical and pro forma financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Prospectus Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data,” the unaudited pro forma condensed combined statements of operations and the audited financial statements and related notes thereto included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results of operations, financial position and cash flows.

 

59


Table of Contents
    Historical     Pro Forma  
    Successor     Predecessor     Predecessor/
Successor
 
    For the
nine months
ended
December 31,
2016
    For the
three months
ended
March 31,
2016
    For the year
ended
December 31,
2015
    For the year
ended
December 31,
2016
 
   

(in thousands, except per unit, per share

and per metric ton data)

 

Statements of Operations Data:

       

Revenues:

       

Sales

  $ 276,560     $ 65,154     $ 514,334     $ 341,714  

Other revenues

    21,074       6,229       30,399       27,303  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    297,634       71,383       544,733       369,017  
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

       

Cost of sales (exclusive of items shown separately below)

    244,723       72,297       601,545       315,563  

Cost of other revenues (exclusive of items shown separately below)

    19,367       4,698       27,442       24,065  

Depreciation and depletion

    47,413       28,958       123,633       58,950  

Selling, general and administrative

    20,507       9,008       38,922       29,125  

Other postretirement benefits

    —         6,160       30,899       —    

Restructuring costs

    —         3,418       13,832       3,418  

Asset impairment charges

    —         —         27,986       —    

Transaction and other costs

    13,568       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    345,578       124,539       864,259       431,121  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (47,944     (53,156     (319,526     (62,104

Interest expense, net

    (1,711     (16,562     (51,077     (2,243

Gain on extinguishment of debt

    —         —         26,968       —    

Reorganization items, net

    —         7,920       (7,735     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (49,655     (61,798     (351,370     (64,347

Income tax expense (benefit)

    18       18       (40,789     36  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (49,673   $ (61,816   $ (310,581   $ (64,383
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per unit—basic and diluted(1)

  $ (13.15      

Weighted average units outstanding—basic and diluted(1)

    3,777        

Pro forma net loss per share—basic and diluted(2)

        $ (1.20

Pro forma weighted average shares outstanding—basic and diluted(2)

          53,500  

Supplemental pro forma net loss per share—basic and diluted(3)

  $ (0.93      

Supplemental pro forma weighted average shares outstanding—basic and diluted(3)

    53,500        
 

Statements of Cash Flow Data:

       

Cash provided by (used in):

       

Operating activities

  $ (9,187   $ (40,698   $ (131,818  

Investing activities

  $ (30,884   $ (5,422   $ (64,249  

Financing activities

  $ (192,727   $ (6,240   $ (147,145  
 

Other Financial Data:

         

Depreciation and depletion

  $ 47,413     $ 28,958     $ 123,633     $ 58,950  

Capital expenditures(4)

  $ 11,531     $ 5,422     $ 64,971    

Adjusted EBITDA(5)

  $ 50,089     $ (9,048   $ (145,805   $ 48,428  
 

Sales Data:

         

Metric tons sold

    2,391       777       5,121       3,168  

Average selling price per metric ton

  $ 115.67     $ 83.85     $ 100.44     $ 107.86  

Cash cost of sales (free-on-board port) per metric ton(6)

  $ 82.84     $ 69.74     $ 112.96     $ 79.17  

 

60


Table of Contents
     Pro Forma(7)      Historical  
     Successor      Successor     Predecessor  
     December 31,
2016
     December 31,
2016
    December 31,
2015
 
    

(in thousands)

 

Balance Sheet Data:

       

Cash and cash equivalents

   $ 150,045      $ 150,045     $ 79,762  

Working capital(8)

   $ 36,137      $ 226,137     $ 129,558  

Mineral interests, net

   $ 143,231      $ 143,231     $ 5,295  

Property, plant and equipment, net

   $ 496,959      $ 496,959     $ 567,594  

Total assets

   $ 947,631      $ 947,631     $ 802,137  

Long-term debt(9)

   $ 3,725      $ 3,725     $ —    

Total liabilities not subject to compromise

   $ 384,664      $ 194,664     $ 126,720  

Total members’ equity and parent net investment

   $ 562,967      $ 752,967     $ (820,861

 

(1) Does not give effect to the corporate conversion.
(2) See Note 4 to the unaudited pro forma condensed combined statements of operations included elsewhere in this prospectus for additional information regarding the calculation of pro forma basic and diluted net loss per share.
(3) We present certain per share data on a supplemental pro forma basis to the extent that the proceeds from this offering will be deemed to be used to fund the Special Distribution of $190.0 million. For further information on the supplemental pro forma per share data, see Note 26 to our audited financial statements included elsewhere in this prospectus.
(4) Capital expenditures consist of the purchases of property, plant and equipment.
(5) Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Prospectus Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA.”
(6) Cash cost of sales is a non-GAAP financial measure. For a definition of cash cost of sales and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Prospectus Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data—Non-GAAP Financial Measures—Cash Cost of Sales.”
(7) Reflects only the declaration of the Special Distribution. See Note 26 to our audited financial statements appearing elsewhere in this prospectus for information regarding this unaudited pro forma balance sheet data. Refer to “Capitalization” for the pro forma impact of the payment of the Special Distribution.
(8) Working capital consists of current assets less current liabilities.
(9) Represents a security agreement and the long-term portion of a promissory note assumed in the Asset Acquisition. The agreement was entered into for the purchase of underground mining equipment. The promissory note matures on March 31, 2019, has a fixed interest rate of 4.00% per annum and is secured by the underground mining equipment it was used to purchase.

 

61


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis provides a narrative of our results of operations and financial condition for the nine months ended December 31, 2016 (Successor), the three months ended March 31, 2016 (Predecessor), the year ended December 31, 2015 (Predecessor) and pro forma results of operations for the year ended December 31, 2016 compared to the year ended December 31, 2015. You should read the following discussion of our results of operations and financial condition in conjunction with the accompanying audited Predecessor combined financial statements and Successor consolidated financial statements and the related notes, our unaudited pro forma condensed combined statements of operations and the related notes, and “Selected Consolidated and Combined Historical and Pro Forma Financial Data” each included elsewhere in this prospectus.

This discussion contains forward-looking statements that involve risks, uncertainties and assumptions, including but not limited to, those described in “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements. See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with those statements. In this discussion, we use financial measures that are considered non-GAAP financial measures under SEC rules. These rules require, among other things, supplemental explanation and reconciliation to the most directly comparable GAAP financial measures, which are included in “Prospectus Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data—Non-GAAP Financial Measures.” Investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.

Overview

We are a large scale, low cost U.S.-based producer and exporter of premium met coal operating two highly productive underground mines in Alabama.

As of December 31, 2016, based on a reserve report prepared by Marshall Miller, Mine No. 4 and Mine No. 7, our two operating mines, had approximately 107.8 million metric tons of recoverable reserves and, based on a reserve report by Norwest, our undeveloped Blue Creek Energy Mine contained 103.0 million metric tons of recoverable reserves. The HCC we produce is of a similar quality to coal referred to as the “benchmark HCC” produced in Australia, which is used to set quarterly pricing for the met coal industry. Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and low-to-medium volatility. These qualities make our coal ideally suited as a coking coal for the manufacture of steel.

We sell our met coal to a diversified customer base of blast furnace steel producers, primarily located in Europe and South America. Approximately 97% of our total revenues from coal sales for the nine months ended December 31, 2016 (Successor) were from customers outside of the United States, primarily in Germany, Austria, Brazil, and Turkey.

For the nine months ended December 31, 2016, our Mine No. 4 and one of the longwalls at our Mine No. 7 operated at reduced levels in response to the historically weak met coal market conditions. We produced a total of 2.3 million metric tons of met coal for the nine months ended December 31, 2016 and sold 2.4 million metric tons of met coal for the same period at an average selling price of $115.67 per metric ton.

Industry Overview and Outlook

Met coal, which is converted to coke, is a critical input in the steel production process. Met coal is both consumed domestically in the countries where it is produced and exported by several of the largest producing

 

62


Table of Contents

countries, such as China, Australia, the United States, Canada and Russia. According to Wood Mackenzie, in 2016, Australia, the United States, Canada and Russia are expected to account for 96.3% of total seaborne exports, with Australia being the largest player, responsible for 66.6% of total seaborne exports. In 2016, the largest importers of seaborne met coal are expected to be Japan, China, India and Europe, accounting for 73.6% of total seaborne met coal imports. Met coal is predominately sold in three forms, HCC, SSCC and PCI, with HCC being the most valuable. The benchmark product is premium HCC sold free-on-board (“FOB”) from ports on the east coast of Australia and is similar to the coal that we produce at our two mines. Benchmark HCC prices have strengthened significantly since the beginning of 2016. For example, the first quarter 2017 benchmark HCC settlement price of $285 per metric ton represents a 252% increase compared to the first quarter 2016 benchmark HCC settlement price of $81 per metric ton.

We believe there are a number of structural developments in the industry, both on the supply and demand sides which suggest prices are unlikely to decrease to levels seen in the first quarter of 2016 in the near-term. Despite the increase in benchmark HCC prices since this period, Wood Mackenzie forecasts a relatively limited compound annual growth rate (“CAGR”) in global seaborne exports of 1.0% per annum from 2016 to 2020. Consistent with Wood Mackenzie’s outlook for supply, we believe that much of the decrease in met coal production is likely to persist despite currently elevated prices, and reflects an extended period of underinvestment in the industry, mine-life extension and infrastructure constraints in Australia and Canada, as well as the permanent closure of higher cost mines globally. While met coal supply remains largely capacity constrained, demand for met coal is expected to be stable in the coming years. Wood Mackenzie expects demand from blast furnace steel producers to stabilize in 2016 compared to 2015, following a 2.5% decline from 2014 to 2015, which was the first year-over-year decline since 2009. While China was the primary driver of growth in global steel production in the recent past, going forward, Wood Mackenzie expects global steel growth to be driven in large part by India and non-Japan Asia, netting a forecasted CAGR for global steel production of 0.9% from 2016 to 2020.

We sell substantially all of our met coal production to steel producers. Therefore, demand for our coal will be highly correlated to conditions in the global steelmaking industry. The steelmaking industry’s demand for met coal is affected by a number of factors, including the cyclical nature of that industry’s business, technological developments in the steelmaking process and the availability of substitutes for steel such as aluminum, composites and plastics. A significant reduction in the demand for steel products would reduce the demand for met coal, which would have a material adverse effect upon our business. Similarly, if alternative ingredients are used in substitution for met coal in the integrated steel mill process, the demand for met coal would materially decrease, which could also materially adversely affect demand for our met coal.

Formation

On July 15, 2015, the Walter Energy Debtors filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the “Chapter 11 Cases”) in the Northern District of Alabama, Southern Division.

We were formed on September 3, 2015 by Walter Energy’s First Lien Lenders in connection with the Asset Acquisition.

On November 5, 2015, we and the Walter Energy Debtors entered into an asset purchase agreement, pursuant to which we agreed, on behalf of Walter Energy’s First Lien Lenders, to credit bid the first lien debt obligations held by Walter Energy’s First Lien Lenders, to release the liens on the assets being sold as part of the Asset Acquisition, to assume certain liabilities of the Walter Energy Debtors and to pay certain cash consideration in connection with the Asset Acquisition. On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016. Prior to the closing of the Asset Acquisition, the Company had no operations and nominal assets.

 

63


Table of Contents

Basis of Presentation

Our results on a “Predecessor” basis relate to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter Energy in the Asset Acquisition and the related periods ending on or prior to March 31, 2016. Our results on a “Successor” basis relate to Warrior Met Coal, LLC and its subsidiaries for periods beginning as of April 1, 2016. Our results have been separated by a vertical line to identify these different bases of accounting.

The historical costs and expenses reflected in the Predecessor combined results of operations include an allocation for certain corporate functions historically provided by Walter Energy. Substantially all of the Predecessor’s senior management were employed by Walter Energy and certain functions critical to the Predecessor’s operations were centralized and managed by Walter Energy. Historically, the centralized functions have included executive senior management, financial reporting, financial planning and analysis, accounting, shared services, information technology, tax, risk management, treasury, legal, human resources, and strategy and development. The costs of each of these services has been allocated to the Predecessor on the basis of the Predecessor’s relative headcount, revenue and total assets to that of Walter Energy.

The combined financial statements of our Predecessor included elsewhere in this prospectus and the other historical Predecessor combined financial information presented and discussed in this discussion and analysis may not be indicative of what our financial condition, results of operations and cash flows would actually have been had we been a separate stand-alone entity, nor are they indicative of what our financial position, results of operations and cash flows may be in the future.

Factors Affecting the Comparability of our Financial Statements

Asset Acquisition

On March 31, 2016, we consummated the acquisition of the Predecessor on a debt free basis with minimum legacy liabilities. The Asset Acquisition included Mine No. 4 and Mine No. 7, which management believes to be two of the highest quality and lowest cost met coal mines in the United States. Prior to the Asset Acquisition, the Company had no operations and nominal assets. We acquired the Predecessor for an aggregate cash consideration of $50.8 million and the release of claims associated with the 2011 Credit Agreement and Walter Energy’s 9.50% Senior Secured Notes due 2019. In connection with the closing of the Asset Acquisition and in exchange for a portion of the outstanding first lien debt, Walter Energy’s First Lien Lenders were entitled to receive, on a pro rata basis, a distribution of our Class A Units. We accounted for the Asset Acquisition as a business combination under Accounting Standard Codification (“ASC”) Topic 805, Business Combinations.

As part of the Asset Acquisition, we incurred transaction costs related to professional fees in the amount of $10.5 million for the nine months ended December 31, 2016 (Successor), which is recorded in transaction and other costs on the Statement of Operations.

Rights Offerings

As part of the Asset Acquisition, we also conducted the Rights Offerings. The Rights Offerings gave Walter Energy’s First Lien Lenders and certain qualified unsecured creditors the option to purchase an aggregate 2,500,004 Class B Units for $80.00 per unit and irrevocably commit to purchase, on the same pro rata basis, Class A Units in one or more capital raising transactions at such later date and on such terms and subject to such conditions as determined by a supermajority vote of our board of managers. The $200.0 million raised from the Rights Offerings was used to pay cash consideration of $50.8 million for the Asset Acquisition, including repayment of certain debtor-in-possession credit agreements of Walter Energy, to sustain our coal mining operations following consummation of the Asset Acquisition and for general corporate purposes.

 

64


Table of Contents

How We Evaluate Our Operations

Our primary business, the mining and exporting of met coal for the steel industry, is conducted in one business segment: Mining. All other operations and results are reported under the “All Other” category as a reconciling item to consolidated amounts, which includes the business results from our sale of natural gas extracted as a byproduct from our underground coal mines and royalties from our leased properties. Our natural gas and royalty businesses do not meet the criteria in ASC 280, Segment Reporting, to be considered as operating or reportable segments.

Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) Segment Adjusted EBITDA; (ii) sales volumes and average selling price, which drive coal sales revenue; (iii) cash cost of sales, a non-GAAP financial measure; and (iv) Adjusted EBITDA, a non-GAAP financial measure.

 

     Successor      Predecessor  
     For the nine
months ended
December 31,
2016
     For the three
months ended
March 31,
2016
    For the year
ended
December 31,
2015
 

(in thousands)

       

Segment Adjusted EBITDA

   $ 31,837      $ (7,143   $ (115,197

Metric tons sold

     2,391        777       5,121  

Average selling price per metric ton

   $ 115.67      $ 83.85     $ 100.44  

Cash cost of sales per metric ton

   $ 82.84      $ 69.74     $ 112.96  

Adjusted EBITDA

   $ 50,089      $ (9,048   $ (145,805

Segment Adjusted EBITDA

We define Segment Adjusted EBITDA as net income adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, and certain transactions or adjustments that the CEO, our Chief Operating Decision Maker does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

 

    our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;

 

    the ability of our assets to generate sufficient cash flow to pay distributions;

 

    our ability to incur and service debt and fund capital expenditures; and

 

    the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

Sales Volumes and Average Selling Price

We evaluate our operations based on the volume of coal we can safely produce and sell in compliance with regulatory standards, and the prices we receive for our coal. Our sales volume and sales prices are largely dependent upon the terms of our annual coal sales contracts, for which prices generally are set on a quarterly basis. The volume of coal we sell is also a function of the pricing environment in the domestic and international met coal markets. We evaluate the price we receive for our coal on an average sales price per metric ton basis. Our average sales price per metric ton represents our coal sales revenue divided by total metric tons of coal sold. On a quarterly basis, our average realized sales price per metric ton may differ from the average HCC quarterly benchmark price per metric ton and our average gross realized price for that respective quarter, primarily due to

 

65


Table of Contents

tons that were priced at a previous quarter’s benchmark price, but for which revenue was recognized in a subsequent quarter. In addition, there are certain quality specification adjustments that may occur that would result in a difference between our average realized sales price per metric ton and the average HCC quarterly benchmark price per metric ton and our average gross realized price.

Cash Cost of Sales

We evaluate our cash cost of sales on a cost per metric ton basis. Cash cost of sales is based on reported cost of sales and includes items such as freight, royalties, manpower, fuel and other similar production and sales cost items, and may be adjusted for other items that, pursuant to GAAP, are classified in the Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal. Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold. Cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

 

    our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and

 

    the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of cash cost of sales in this prospectus provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to cash cost of sales is cost of sales. Cash cost of sales should not be considered an alternative to cost of sales or any other measure of financial performance or liquidity presented in accordance with GAAP. Cash cost of sales excludes some, but not all, items that affect cost of sales, and our presentation may vary from the presentations of other companies. As a result, cash cost of sales as presented below may not be comparable to similarly titled measures of other companies. For a reconciliation of cash cost of sales to total cost of sales, the most directly comparable GAAP financial measure, on a historical basis and pro forma basis, please read “Prospectus Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data—Non-GAAP Financial Measures—Cash Cost of Sales.”

Adjusted EBITDA

We define Adjusted EBITDA as net loss before net interest expense, income tax expense (benefit), depreciation and depletion, net reorganization items, gain on extinguishment of debt, restructuring costs, asset impairment charges, transaction and other costs, Mine No. 4 idle costs, VEBA contributions, non-cash stock compensation expense and non-cash asset retirement obligation accretion. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

 

    our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and

 

    the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of Adjusted EBITDA in this prospectus provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net loss. Adjusted EBITDA should not be considered an alternative to net income or loss or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjustments excludes some, but not all, items that affect net loss and our presentation of Adjusted EBITDA may vary from that presented by other companies. For a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis and pro forma basis, please read “Prospectus

 

66


Table of Contents

Summary—Summary Consolidated and Combined Historical and Pro Forma Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA.”

Results of Operations

The results of operations, cash flows and financial condition for the Predecessor and Successor periods reflect different bases of accounting due to the impact of the Asset Acquisition on the financial statements.

To aid the reader in understanding the results of operations of each of these distinctive periods, we have provided the following discussion of our historical results for the nine months ended December 31, 2016 (Successor), the three months ended March 31, 2016 (Predecessor), and the year ended December 31, 2015 (Predecessor).

We have supplemented our discussion of historical results with an analysis of the results of operations for the year ended December 31, 2016 and the year ended December 31, 2015 on a pro forma basis, reflecting the pro forma assumptions and adjustments described in the unaudited pro forma condensed combined statements of operations and the notes thereto included elsewhere in this prospectus as if the Asset Acquisition had occurred on January 1, 2015. We believe presenting this supplemental pro forma information is beneficial to the reader because the Asset Acquisition affects the comparability of the financial information for the historical periods presented. We believe this supplemental pro forma presentation provides the reader with additional information to analyze our financial results.

Nine Months Ended December 31, 2016 (Successor)

The following table summarizes certain financial information relating to our operating results that have been derived from our audited financial statements for the nine months ended December 31, 2016 (Successor).

 

     Successor      % of
Total
Revenues
 
(in thousands)    For the
nine months
ended
December 31,
2016
    

Revenues:

     

Sales

   $ 276,560        92.9

Other revenues

     21,074        7.1
  

 

 

    

 

 

 

Total revenues

     297,634        100.0

Costs and expenses:

     

Cost of sales (exclusive of items shown separately below)

     244,723        82.2

Cost of other revenues (exclusive of items shown separately below)

     19,367        6.5

Depreciation and depletion

     47,413        15.9

Selling, general and administrative

     20,507        6.9

Transaction and other costs

     13,568        4.6
  

 

 

    

 

 

 

Total costs and expenses

     345,578        116.1
  

 

 

    

 

 

 

Operating loss

     (47,944      (16.1 )% 

Interest expense, net

     (1,711      (0.6 )% 
  

 

 

    

 

 

 

Loss before income taxes

     (49,655      (16.7 )% 

Income tax benefit

     18        —  
  

 

 

    

 

 

 

Net loss

   $ (49,673      (16.7 )% 
  

 

 

    

 

 

 

 

67


Table of Contents

Sales and cost of sales components on a per unit basis for the nine months ended December 31, 2016 (Successor) were as follows:

 

     Successor  
     For the
nine months
ended
December 31,
2016
 

Met Coal

  

Metric tons sold (metric tons in thousands)

     2,391  

Average selling price per metric ton

   $ 115.67  

Cash cost of sales per metric ton

   $ 82.84  

Total revenues were $297.6 million for the nine months ended December 31, 2016.

Sales were $276.6 million for the nine months ended December 31, 2016, and were comprised of met coal sales of 2.4 million metric tons at an average selling price of $115.67 per metric ton. Substantially all of these sales came from Mine No. 7 as Mine No. 4 was idled in early 2016 and reinitiated operations in August of 2016. Also, we restarted a second longwall in Mine No. 7 in October 2016. Our sales were negatively impacted by roof instability issues experienced at Mine No. 7. Beginning in October of 2016, we completed mining on the longwall panel where we experienced the roof instability issues and began production on a new longwall panel.

Other revenues were $21.1 million, and were comprised of revenue derived from our natural gas operations, as well as earned royalty revenue. Cost of other revenues was $19.4 million, representing 6.5% of total revenues and 91.9% of other revenues.

Cost of sales (exclusive of items shown separately below) was $244.7 million, or 82.2% of total revenues, and was primarily comprised of met coal sales of 2.4 million metric tons at an average cash cost of sales of $82.84 per metric ton. Our cash cost of sales was negatively impacted by the previously mentioned roof instability issues at Mine No. 7, carrying costs of $8.7 million for the idled Mine No. 4, the $25.0 million VEBA contribution and an increase in royalty expenses due to an increase in our realized sales price.

Depreciation and depletion was $47.4 million, or 15.9% of total revenues, and was primarily related to depreciation of machinery and equipment and depletion of mineral interests.

Selling, general and administrative expenses were $20.5 million, or 6.9% of total revenues, reflecting the benefits of a restructured business without the legacy costs and liabilities which were not assumed in the Asset Acquisition.

Transaction and other costs associated with the Asset Acquisition and this offering were $13.6 million, or 4.6% of total revenues, of which $10.5 million was comprised of professional fees incurred in connection with the Asset Acquisition and $3.1 million was comprised of professional fees incurred in connection with this offering.

Interest expense of $1.7 million, or 0.6% of total revenues, is comprised of interest on our security agreement and promissory note, and amortization of our ABL Facility origination fees.

 

68


Table of Contents

Three Months Ended March 31, 2016 (Predecessor)

The following table summarizes certain financial information relating to the Predecessor’s operating results that have been derived from our audited financial statements for the three months ended March 31, 2016 (Predecessor).

 

     Predecessor        
(in thousands)    For the
three
months
ended
March 31,
2016
    % of
Total
Revenues
 

Revenues:

    

Sales

   $ 65,154       91.3

Other revenues

     6,229       8.7
  

 

 

   

 

 

 

Total revenues

     71,383       100.0

Costs and expenses:

    

Cost of sales (exclusive of items shown separately below)

     72,297       101.3

Cost of other revenues (exclusive of items shown separately below)

     4,698       6.6

Depreciation and depletion

     28,958       40.6

Selling, general and administrative

     9,008       12.6

Other postretirement benefits

     6,160       8.6

Restructuring cost

     3,418       4.8
  

 

 

   

 

 

 

Total costs and expenses

     124,539       174.5
  

 

 

   

 

 

 

Operating loss

     (53,156     (74.5 )% 

Interest expense, net

     (16,562     (23.2 )% 

Reorganization items, net

     7,920       11.1
  

 

 

   

 

 

 

Loss before income taxes

     (61,798     (86.6 )% 

Income tax expense

     18      
  

 

 

   

 

 

 

Net loss

   $ (61,816     (86.6 )% 
  

 

 

   

 

 

 

Sales and cost of sales components on a per unit basis for the three months ended March 31, 2016 (Predecessor) were as follows:

 

     Predecessor  
     For the
three months
ended
March 31,
2016
 

Met Coal

  

Metric tons sold (metric tons in thousands)

     777  

Average selling price per metric ton

   $ 83.85  

Cash cost of sales per metric ton

   $ 69.74  

Total revenues were $71.4 million for the three months ended March 31, 2016.

Sales were $65.2 million for the three months ended March 31, 2016, and were comprised of met coal sales of 0.8 million metric tons at an average selling price of $83.85 per metric ton.

Other revenues were $6.2 million, and were comprised of revenue derived from our natural gas operations, as well as earned royalty revenue. Cost of other revenues was $4.7 million, representing 6.6% of total revenues and 75.4% of other revenues.

 

69


Table of Contents

Cost of sales (exclusive of items shown separately below), was $72.3 million, or 101.3% of total revenues, and was primarily comprised of met coal sales of 0.8 million metric tons at an average cash cost of sales of $69.74 per metric ton. Our cost of sales were negatively impacted by carrying costs of $10.2 million for the idled Mine No. 4.

Depreciation and depletion expense was $29.0 million, or 40.6% of total revenues, and was primarily related to depreciation of machinery and equipment and mine development costs.

Selling, general and administrative expenses were $9.0 million, or 12.6% of total revenues, and were primarily comprised of employee salaries and benefits.

Other postretirement benefits were $6.2 million, or 8.6% of total revenues, and represent postretirement healthcare benefits of the Predecessor.

Restructuring cost of $3.4 million, or 4.8% of total revenues, resulted from the Predecessor idling Mine No. 4 and workforce reductions at both Mine No. 4 and Mine No. 7 and corporate headquarters due to the continued decline in met coal prices.

Interest expense of $16.6 million, or 23.2% of total revenues, represents interest on liabilities subject to compromise, which were attributed to the Predecessor.

Reorganization items, net, was $7.9 million, or 11.1% of total revenues, and was comprised of an allocation of corporate professional fees incurred by the Predecessor in relation to the Chapter 11 Cases of $11.0 million offset by rejected executory contracts and leases of $18.9 million.

An income tax expense of $18.0 thousand was recognized for the three months ended March 31, 2016 as a result of the recognition of a full valuation allowance.

 

70


Table of Contents

Year Ended December 31, 2015 (Predecessor)

The following table summarizes certain financial information relating to the Predecessor’s operating results that have been derived from our audited combined financial statements for the year ended December 31, 2015 (Predecessor).

 

     Predecessor         
(in thousands)    For the year
ended
December 31,
2015
     % of
Total
Revenues
 

Revenues:

     

Sales

   $ 514,334        94.4

Other revenues

     30,399        5.6
  

 

 

    

 

 

 

Total revenues

     544,733        100.0

Costs and expenses:

     

Cost of sales (exclusive of items shown separately below)

     601,545        110.4

Cost of other revenues (exclusive of items shown separately below)

     27,442        5.0

Depreciation and depletion

     123,633        22.7

Selling, general and administrative

     38,922        7.1

Other postretirement benefits

     30,899        5.7

Restructuring costs

     13,832        2.5

Asset impairment charges

     27,986        5.1
  

 

 

    

 

 

 

Total costs and expenses

     864,259        158.7
  

 

 

    

 

 

 

Operating loss

     (319,526      (58.7 )% 

Interest expense, net

     (51,077      (9.4 )% 

Gain on extinguishment of debt

     26,968        5.0

Reorganization items, net

     (7,735      (1.4 )% 
  

 

 

    

 

 

 

Loss before income taxes

     (351,370      (64.5 )% 

Income tax expense (benefit)

     (40,789      (7.5 )% 
  

 

 

    

 

 

 

Net loss

   $ (310,581      (57.0 )% 
  

 

 

    

 

 

 

Sales and cost of sales components on a per unit basis for the year ended December 31, 2015 (Predecessor) were as follows:

 

     Predecessor  
     For the year
ended
December 31,
2015
 

Met Coal

  

Metric tons sold (metric tons in thousands)

     5,121  

Average selling price per metric ton

   $ 100.44  

Cash cost of sales per metric ton

   $ 112.96  

Total revenues were $544.7 million for the year ended December 31, 2015.

Sales were $514.3 million for the year ended December 31, 2015, and were comprised of met coal sales of 5.1 million metric tons at an average selling price of $100.44 per metric ton.

 

71


Table of Contents

Other revenues were $30.4 million, and were comprised of revenue derived from our natural gas operations, as well as earned royalty revenue. Cost of other revenues was $27.4 million, representing 5.0% of total revenues and 90.3% of other revenues.

Cost of sales (exclusive of items shown separately below) was $601.5 million, or 110.4% of revenues, and was primarily comprised of met coal sales of 5.1 million metric tons at an average cash cost of sales of $112.96 per metric ton.

Depreciation and depletion expense was $123.6 million, or 22.7% of total revenues, and was primarily related to depreciation of machinery and equipment and mine development costs.

Selling, general and administrative expenses were $38.9 million, or 7.1% of total revenues, and were primarily comprised of employee salaries and benefits and professional fees incurred in connection with the Chapter 11 Cases.

Other postretirement benefits were $30.9 million, or 5.7% of total revenues, and represent postretirement healthcare benefits of the Predecessor.

Restructuring costs of $13.8 million, or 2.5% of total revenues, resulting from the Predecessor idling Mine No. 4 and workforce reductions at both Mine No. 4 and Mine No. 7 as well as corporate headquarters due to the continued decline in in met coal prices.

Asset impairment charges of $28.0 million, or 5.1% of total revenues, represent an asset impairment recognized in the fourth quarter of 2015 associated with the Blue Creek Energy Mine as a result of management’s recoverability analysis.

Interest expense of $51.1 million, or 9.4% of total revenues, represents interest on liabilities subject to compromise which were attributed to the Predecessor.

On March 6, 2015, Walter Energy issued an aggregate of 8.65 million shares of its common stock in exchange for $66.7 million of its 8.50% Senior Notes due 2021 and recognized a net gain on extinguishment of debt of $58.6 million, of which $27.0 million, or 5.0% of total revenues, has been allocated to the Predecessor.

Reorganization items, net, was $7.7 million, or 1.4% of total revenues, and was comprised of an impairment of an intercompany receivable from Walter Energy Canada Holdings, Inc. of $13.6 million, which was acquired in the Asset Acquisition and an allocation of $19.3 million for corporate professional fees incurred in relation to the Chapter 11 Cases offset by rejected workers’ compensation liabilities of $22.2 million and executory contracts of $2.8 million.

An income tax benefit of $40.8 million was recognized for the year ended December 31, 2015.

 

72


Table of Contents

Pro Forma Year Ended December 31, 2016 Compared to Pro Forma Year Ended December 31, 2015

Pro Forma Total Company

The following table summarizes certain supplemental pro forma financial information derived from our unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and 2015 included elsewhere in this prospectus. The unaudited supplemental pro forma financial information below is presented because management believes it provides a meaningful comparison of operating results, however is should not be viewed as a substitute for the historical financial results of the Predecessor and the Successor presented in accordance with GAAP.

 

     Pro Forma                    
     Predecessor/
Successor
          Predecessor                    
     For the year
ended
December 31,
2016
    % of
pro
forma
total
revenues
    For the year
ended
December 31,
2015
    % of
pro
forma
total
revenues
    $
Change
    %
Change
 
     (in thousands)  

Revenues:

      

Sales

   $ 341,714       92.6   $ 514,334       94.4   $ (172,620     (33.6 )% 

Other revenues

     27,303       7.4     30,399       5.6     (3,096     (10.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     369,017       100.0     544,733       100.0     (175,716     (32.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

      

Cost of sales (exclusive of items shown separately below)

     315,563       85.5     582,441       106.9     (266,878     (45.8 )% 

Cost of other revenues (exclusive of items shown separately below)

     24,065       6.5     27,442       5.0     (3,377     (12.3 )% 

Depreciation and depletion

     58,950       16.0     66,028       12.1     (7,078     (10.7 )% 

Selling, general and administrative

     29,125       7.9     34,888       6.4     (5,763     (16.5 )% 

Restructuring costs

     3,418       0.9     13,832       2.5     (10,414     (75.3 )% 

Asset impairment charges

               27,986       5.1     (27,986     (100.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     431,121       116.8     752,617       138.2     (321,496     (42.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (62,104     (16.8 )%      (207,884     (38.2 )%      145,780       (70.1 )% 

Interest expense, net

     (2,243     (0.6 )%      (2,243     (0.4 )%      —         —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (64,347     (17.4 )%      (210,127     (38.6 )%      145,780       (69.4 )% 

Income tax expense

     36       —       (40,789     (7.5 )%      40,825       (100.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (64,383     (17.4 )%    $ (169,338     (31.1 )%    $ 104,955       (62.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma sales and cost of sales components on a per unit basis for the year ended December 31, 2016 and 2015, were as follows:

 

     Pro Forma  
     Predecessor/
Successor
     Predecessor  
     For the
year ended
December 31,
2016
     For the
year ended
December 31,
2015
 

Met Coal

     

Metric tons sold (metric tons in thousands)

     3,168        5,121  

Average selling price per metric ton

   $ 107.86      $ 100.44  

Cash cost of sales per metric ton

   $ 79.17      $ 109.23  

 

73


Table of Contents

Pro forma total revenues decreased by $175.7 million, or 32.3%, to $369.0 million for the year ended December 31, 2016 compared to $544.7 million for the year ended December 31, 2015. The decrease is primarily attributable to a decrease in metric tons of coal sold due to a reduction in metric tons of coal produced as a result of the idling of Mine No. 4, which reinitiated operations in August of 2016.

Pro forma sales decreased by $172.6 million, or 33.6%, to $341.7 million for the year ended December 31, 2016 compared to $514.3 million for the year ended December 31, 2015. The decrease is primarily attributable to a decrease in metric tons of coal sold due to a reduction in metric tons of coal produced as a result of the idling of Mine No. 4. Our pro forma sales for the year ended December 31, 2016 were comprised of met coal sales of 3.2 million metric tons at an average selling price of $107.86 per metric ton compared to met coal sales of 5.1 million metric tons at an average selling price of $100.44 per metric ton for the year ended December 31, 2015.

Pro forma other revenues decreased by $3.1 million, or 10.2%, to $27.3 million for the year ended December 31, 2016 compared to $30.4 million for the year ended December 31, 2015. The decrease is primarily due to a loss recognized in the fair value adjustment of our gas derivative instrument, and to a lesser extent, lower sales prices of natural gas extracted as a byproduct from our underground coal mines.

Pro forma cost of sales (exclusive of items shown separately below) decreased by $266.9 million, or 45.8%, to $315.6 million for the year ended December 31, 2016 compared to $582.4 million for the year ended December 31, 2015. The decrease is attributable to a reduction in metric tons of coal produced as a result of the idling of Mine No. 4 and a reduction in our average cash cost of sales per metric ton in connection with our cost containment initiatives. Our pro forma cost of sales for the year ended December 31, 2016 were comprised of met coal sales of 3.2 million metric tons at an average cash cost of sales of $79.17 per metric ton compared to met coal sales of 5.1 million metric tons at an average cash cost of sales of $109.23 per metric ton for the year ended December 31, 2015. The significant decrease in average cash cost of sales is primarily due to cost savings achieved as a result of our new initial CBA of approximately $13.40 per metric ton, our new flexible mine plan of approximately $10.05 per metric ton and reduced transportation costs of approximately $6.61 per metric ton.

Pro forma cost of other revenues (exclusive of items shown separately below) decreased by $3.4 million, or 12.3%, to $24.1 million for the year ended December 31, 2016 compared to $27.4 million for the year ended December 31, 2015 primarily due to cost savings achieved through the Asset Acquisition.

Pro forma depreciation and depletion expense decreased by $7.1 million, or 10.7%, to $58.9 million for the year ended December 31, 2016 compared to $66.0 million for the year ended December 31, 2015 primarily due to depreciation expense associated with assets that had a one year useful life as a result of the valuation performed in connection with the Asset Acquisition ($6.5 million) and a $0.6 million decrease in depletion expense due to decreased production in 2016 compared to 2015.

Pro forma selling, general and administrative expenses decreased by $5.8 million, or 16.6%, to $29.1 million for the year ended December 31, 2016 compared to $34.9 million for the year ended December 31, 2015. The decrease of $5.8 million is attributable to the closure of our corporate offices located in Hoover, Alabama as well as significant reductions in corporate salaried employees.

Pro forma restructuring costs decreased by $10.4 million, or 75.3%, to $3.4 million for the year ended December 31, 2016 compared to costs of $13.8 million for the year ended December 31, 2015. The decrease is primarily attributable to a reduction in severance costs.

Pro forma asset impairment charges were $28.0 million for the year ended December 31, 2015, due to an impairment recognized in the fourth quarter of 2015 associated with the Blue Creek Energy Mine as a result of management’s recoverability analysis. There were no impairments recorded in 2016.

Pro forma interest expense was $2.2 million for the year ended December 31, 2016 compared to $2.2 million for the year ended December 31, 2015.

 

74


Table of Contents

Pro forma income tax increased by $40.8 million for the year ended December 31, 2015. The increase is attributable to the recognition of a full valuation allowance for the year ended December 31, 2016.

Liquidity and Capital Resources

Overview

Our sources of cash have been coal and natural gas sales to customers, proceeds received from the Rights Offerings and access to our ABL Facility. Our primary uses of cash have been for funding the operations of our coal and natural gas production operations, our capital expenditures, our reclamation obligations, professional fees and other costs incurred in connection with the Asset Acquisition. In addition, we used available cash on hand to pay the Special Distribution, which reduced cash and cash equivalents.

Going forward, we may need cash to fund operating activities, working capital, capital expenditures, and strategic investments. Our ability to fund our capital needs going forward will depend on our ongoing ability to generate cash from operations and borrowing availability under the ABL Facility, and, in the case of any future strategic investments or capital expenditures, our ability to access the debt and equity markets to raise additional capital. We believe that our future cash flow from operations, together with cash on our balance sheet after the Special Distribution and borrowing availability under our ABL Facility, will provide adequate resources to fund our planned operating and capital expenditure needs for at least the next twelve months.

If our cash flows from operations are less than we require, we may need to incur additional debt or issue additional equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe we can currently finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future will be affected by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, (iii) the current state of the global economy and (iv) restrictions in our ABL Facility and any other existing or future debt agreements. There can be no assurance that we will have or continue to have access to the capital markets on terms acceptable to us. See “Risk Factors” included elsewhere in this prospectus for further discussion.

Our available liquidity as of December 31, 2016 was $192.3 million, consisting of cash and cash equivalents of $150.0 million and $42.3 million available under our ABL Facility. We currently do not have any outstanding borrowings under the ABL Facility. For the nine months ended December 31, 2016, cash flows used in operating activities were $9.2 million, cash flows used in investing activities were $30.9 million and cash flows provided by financing activities were $192.7 million.

Statements of Cash Flows

Cash balances were $150.0 million and $79.8 million at December 31, 2016 and December 31, 2015, respectively.

 

75


Table of Contents

The following table sets forth, a summary of the net cash provided by (used in) operating, investing and financing activities for the period (in thousands):

 

     Successor     Predecessor  
     For the
nine months
ended
December 31,
2016
    For the
three months
ended
March 31,
2016
     For the year
ended
December 31,
2015
 

Net cash used in operating activities

   $ (9,187   $ (40,698    $ (131,818

Net cash used in investing activities

     (30,884     (5,422      (64,249

Net cash provided by (used in) financing activities

     192,727       (6,240      (147,145
  

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents and restricted cash

   $ 152,656     $ (52,360    $ (343,212
  

 

 

   

 

 

    

 

 

 

Operating Activities

Net cash flows from operating activities consist of net income (loss) adjusted for noncash items, such as depreciation and depletion of property, plant and equipment and mineral interests, deferred income tax expense (benefit), stock-based compensation, non-cash reorganization items, amortization of debt issuance costs and debt discount, gain on extinguishment of debt, asset impairment charges, accretion of asset retirement obligations and changes in net working capital. The timing between the conversion of our billed and unbilled receivables into cash from our customers and disbursements to our vendors is the primary driver of changes in our working capital.

Net cash used in operating activities was $9.2 million for the nine months ended December 31, 2016, and was primarily attributed to a net loss of $49.7 million adjusted for depreciation and depletion expense of $47.4 million, amortization of debt issuance costs and debt discount of $1.2 million and accretion of asset retirement obligations of $2.8 million, offset by a net decrease in our working capital of $17.7 million. The decrease in our working capital was primarily driven by effects of the Asset Acquisition, an increase in trade accounts receivable offset by an increase in accrued expenses and other current liabilities as a result of an increase in sales and an increase in operating costs associated with the reinitiation of Mine No. 4 operations in August of 2016.

Net cash used in operating activities was $40.7 million for the three months ended March 31, 2016, and was primarily attributed to a net loss of $61.8 million adjusted for depreciation and depletion expense of $29.0 million, non-cash reorganization items of $18.9 million, amortization of debt issuance costs and debt discount of $10.2 million and accretion of asset retirement obligations of $1.2 million, offset partially by a net decrease in our working capital of $1.6 million. The net decrease in our working capital was primarily driven by higher disbursements for accounts payable and accrued expenses and other current liabilities in the period associated with our purchases from vendors, partially offset by a decrease in trade accounts receivable.

Net cash used in operating activities was $131.8 million for the year ended December 31, 2015, and was primarily attributed to a net loss of $310.6 million adjusted for depreciation and depletion expense of $123.6 million, deferred income tax benefit of $40.8 million, stock based compensation expense of $4.0 million, non-cash reorganization items of $11.6 million, amortization of debt issuance costs and debt discount of $6.8 million, gain on extinguishment of debt of $27.0 million, asset impairment charges of $28.0 million and accretion of asset retirement obligations of $4.3 million, and a net increase in our working capital of $102.3 million. The increase in our working capital was primarily driven by lower disbursements for accounts payable and accrued expenses and other current liabilities in the period associated with our purchases from vendors, as well as a decrease in trade accounts receivable and inventories as a result of lower production and sales volumes due to the decline in met coal prices during the period.

 

76


Table of Contents

Investing Activities

Net cash used in investing activities was $30.9 million for the nine months ended December 31, 2016, primarily as a result of the cash used in connection with the Asset Acquisition and the purchase of U.S. Treasury bills posted as collateral for the self-insured black lung claims that were assumed in the Asset Acquisition of $17.5 million. Net cash used in investing activities was $5.4 million for the three months ended March 31, 2016, primarily due to purchases of property, plant and equipment. Net cash used in investing activities for the year ended December 31, 2015 was $64.2 million, primarily due to purchases of property, plant and equipment.

Financing Activities

Net cash provided by financing activities was $192.7 million for the nine months ended December 31, 2016, primarily due to the proceeds received from the Rights Offerings offset by payments of debt issuance costs. Cash flows from financing activities for Predecessor periods primarily represent net transfers to/from Walter Energy and net payments on debt. As cash and the financing of our Predecessor’s operations have historically been managed by Walter Energy, the components of net transfers to/from Walter Energy include cash transfers from us to Walter Energy and payments by Walter Energy to settle our obligations. These transactions are considered to be effectively settled for cash at the time the transaction is recorded.

ABL Facility

On April 1, 2016, we entered into the ABL Facility with certain lenders and Citibank, N.A. (together with its affiliates, “Citibank”), as administrative agent and collateral agent, with an aggregate lender commitment of up to $50.0 million, at any time outstanding, subject to borrowing base availability. On January 23, 2017, we entered into Amendment No. 1 to Asset-Based Revolving Credit Agreement to, among other things, (i) increase the aggregate lender commitment to $100 million, (ii) reduce the applicable interest rate margins by 100 basis points (“bps”), (iii) permit the corporate conversion and (iv) allow this offering to be consummated without triggering a change of control.

Under the ABL Facility, up to $10 million of the commitments may be used to incur swingline loans from Citibank and up to $50 million of the commitments may be used to issue letters of credit. The ABL Facility will mature on April 1, 2019. As of December 31, 2016, no amounts were outstanding under our ABL Facility.

Revolving loan (and letter of credit) availability under the ABL Facility is subject to a borrowing base, which at any time is equal to the sum of certain eligible billed and unbilled accounts, certain eligible inventory, certain eligible supplies inventory and qualified cash, in each case, subject to specified advance rates. The borrowing base availability is subject to certain reserves, which may be established by the agent in its reasonable credit discretion. The reserves may include rent reserves, lower of cost or market reserve, port charges reserves and any other reserves that the agent determines in its reasonable credit judgment to the extent such reserves relate to conditions that could reasonably be expected to have an adverse effect on the value of the collateral included in the borrowing base. At December 31, 2016, we had $42.3 million of availability under the ABL Facility.

The obligations of the borrowers under the ABL Facility are guaranteed by each of our subsidiaries, and secured by substantially all of our assets. Borrowings under the ABL Facility bear interest at a rate equal to LIBOR plus an applicable margin, which is determined based on the average availability of the commitments under the ABL Facility, and ranged from 300 bps to 350 bps as of December 31, 2016 and subsequent to Amendment No. 1 to the ABL Facility dated January 23, 2017 (the “First Amendment”) ranges from 200 bps to 250 bps. In addition to paying interest on the outstanding borrowings under the ABL Facility, we are required to pay a fee in respect of unutilized commitments, which is based on the availability of the commitments under the ABL Facility, ranging from 25 bps to 37.5 bps. We are also required to pay a fee on amounts available to be drawn under outstanding letters of credit under the ABL Facility at a rate not in excess of 250 bps, and certain administrative fees.

 

77


Table of Contents

We are able to voluntarily repay outstanding loans and reduce unused commitments, in each case, in whole or in part, at any time without premium or penalty. We are required to repay outstanding loans and cash collateralize letters of credit anytime the outstanding loans and letters of credit exceed the maximum availability then in effect. We are also required to use net proceeds from certain significant asset sales to repay outstanding loans, but may re-borrow following such prepayments if the conditions to borrowings are met.

The ABL Facility contains customary covenants for asset-based credit agreements of this type, including among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence of certain indebtedness; (iii) restrictions on the existence or incurrence of certain liens; (iv) restrictions on making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations and asset dispositions; (vii) restrictions on certain transactions with affiliates; and (viii) restrictions on modifications to certain indebtedness. Additionally, the ABL Facility contains a springing fixed charge coverage ratio of not less than 1.00 to 1.00, which ratio is tested if availability under the ABL Facility is less than a certain amount. Subject to customary grace periods and notice requirements, the ABL Facility also contains customary events of default.

The actual fixed charge covenant ratio for the nine months ended December 31, 2016 was 24.17:1.00.

We were in compliance with all applicable covenants under the ABL Facility as of December 31, 2016.

On March 24, 2017, we entered into the Second Amendment to modify certain terms relating to the restricted payment covenant, which provides the Company with improved flexibility to pay dividends, including the Special Distribution.

Promissory Note

As of December 31, 2016, we had debt outstanding of $6.6 million, $2.8 million of which was classified as current, which represents a security agreement and promissory note assumed in the Asset Acquisition. The promissory note matures on March 31, 2019 and bears a fixed interest rate of 4.00% per annum. We are required to make periodic payments of principal and interest over the term of the promissory note. The promissory note is secured by the underground mining equipment it was used to purchase.

Voluntary Employee Beneficiary Association

In connection with the Asset Acquisition, we entered into a new initial CBA with the UMWA pursuant to which we agreed to contribute $25.0 million to a VEBA trust to be formed and administered by the UMWA. We paid $20.8 million in installments during the nine months ended December 31, 2016. Required contributions to the VEBA during fiscal year 2017 are expected to be approximately $4.2 million. Contributions to the VEBA are non-recurring in nature and were immediately expensed and included within cost of sales in the Statements of Operations.

Restricted Cash

As of December 31, 2016, restricted cash included $2.6 million in other long-term assets in the Balance Sheet which represents amounts funded to an escrow account as collateral for coal royalties due under certain underground coal mining lease contracts.

Short-Term Investments

During the nine months ended December 31, 2016, we purchased $17.5 million in United States Treasury bills with a maturity of six months. These Treasury bills were posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy and its subsidiaries, which were assumed in the Asset Acquisition and relate to periods prior to March 31, 2016.

 

78


Table of Contents

Capital Expenditures

Our mining operations require investments to maintain, expand, upgrade or enhance our operations and to comply with environmental regulations. Maintaining and expanding mines and related infrastructure is capital intensive. Specifically, the exploration, permitting and development of met coal reserves, mining costs, the maintenance of machinery and equipment and compliance with applicable laws and regulations require ongoing capital expenditures. While a significant amount of the capital expenditures required at our mines has been spent, we must continue to invest capital to maintain our production. In addition, any decisions to increase production at our mines or to develop the high-quality met coal recoverable reserves at our Blue Creek Energy Mine in the future could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates.

To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell equity securities. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our current or future debt agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control.

Our capital expenditures were $11.5 million for the nine months ended December 31, 2016, $5.4 million for the three months ended March 31, 2016 and $65.0 million for the year ended December 31, 2015. Capital expenditures for these periods primarily related to investments required to maintain our property, plant and equipment. We evaluate our spending on an ongoing basis in connection with our mining plans and the prices of met coal taking into consideration the funding available to maintain our operations at optimal production levels.

We have a significant capital investment program underway in 2017 to upgrade all key production equipment to further improve efficiency and reliability. Our capital spending is expected to range from $12 to $15 million in the first quarter of 2017 (consisting of sustaining capital expenditures expected to range from $10 to $12 million and discretionary capital expenditures expected to range from $2 to $3 million) and from $97 to $117 million for the full year 2017 (consisting of sustaining capital expenditures expected to range from $61 to $65 million and discretionary capital expenditures expected to range from $36 to $52 million), including discretionary spending that had been deferred in prior years due to the low met coal pricing environment. These amounts do not include any potential spending associated with our Blue Creek Energy Mine should we decide to develop it for production.

Contractual Obligations

The following is a summary of our significant contractual obligations at December 31, 2016. As of the date of this prospectus, since December 31, 2016, no material transactions have occurred that would materially affect the following schedule.

 

     Payments due by Year  
     Total      Less than
1 year
     1 - 3 years      3 - 5 years      More than
5 years
 
     (in thousands)  

Promissory note (principal and interest)(1)

   $ 6,884      $ 3,060      $ 3,824      $ —        $ —    

Minimum throughput obligations(2)

     312,066        35,635        71,683        72,248        132,500  

Royalty obligations(3)

     90,953        4,835        10,684        10,324        65,110  

Black lung obligations(4)

     85,134        1,524        4,139        3,950        75,521  

Asset retirement obligations(4)

     155,978        9,575        11,269        16,161        118,973  

VEBA obligations(5)

     4,167        4,167        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 655,182      $ 58,796      $ 101,599      $ 102,683      $ 392,104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents a security agreement and promissory note assumed in the Asset Acquisition. The agreement was entered into for the purchase of underground mining equipment. The promissory note matures on March 31,

 

79


Table of Contents
  2019, has a fixed interest rate of 4.00% per annum and is secured by the underground mining equipment it was used to purchase.
(2) Represents minimum throughput obligations with our rail and port providers.
(3) We have obligations on various coal and land leases to prepay certain amounts, which are recoupable in future years when mining occurs.
(4) Represents estimated costs for black lung and asset retirement obligations, which have been presented on an undiscounted basis.
(5) We entered into a new initial CBA with the UMWA pursuant to which we agreed to contribute $25.0 million to a VEBA trust formed and administered by the UMWA. The remaining obligation of $4.2 million will be paid within one year.

Off-Balance Sheet Arrangements

In the ordinary course of our business, we are required to provide surety bonds and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds or other acceptable security to secure payment of certain long-term obligations including mine closure or reclamation costs and other miscellaneous obligations. As of December 31, 2016, we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our U.S. mining operations totaling $38.2 million, and $2.1 million for miscellaneous purposes.

Critical Accounting Policies and Estimates

The financial statements are prepared in conformity with GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the period presented. Management evaluates these estimates and assumptions on an ongoing basis, using historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management’s estimates.

We believe the following discussion addresses our most critical accounting estimates, which are those that are most important to the presentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based upon management’s historical experience and on various other assumptions that we believe reasonable under the circumstances. Changes in estimates used in these and other items could have a material impact on our audited and unaudited condensed financial statements. Our significant accounting policies are described in Note 2 to our unaudited condensed financial statements included elsewhere in this prospectus.

Jumpstart Our Business Startups Act of 2012

The JOBS Act permits us, as an “emerging growth company”, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have irrevocably opted out of the extended transition period. As a result, we will comply with new or revised accounting standards applicable to public companies as required when they are adopted.

Purchase Price Allocation of Acquisitions

The application of the acquisition method of accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price consideration. The purchase price of an acquired business is allocated to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. All available

 

80


Table of Contents

information is used to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques, such as discounted cash flows. Third-party appraisal firms are engaged to assist in fair value determination of inventories, mineral interests, property, plant and equipment and any other significant assets or liabilities, including asset retirement obligations and black lung liabilities, when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results of operations.

Coal Reserves

There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves, including many factors that are beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled by our internal engineers and geologists or third-party consultants. A number of sources of information are used to determine accurate recoverable reserve estimates including:

 

    geological conditions;

 

    historical production from the area compared with production from other producing areas;

 

    the assumed effects of regulations and taxes by governmental agencies;

 

    previously completed geological and reserve studies;

 

    assumptions governing future prices; and

 

    future operating costs.

Some of the factors and assumptions, which will change from time to time, that impact economically recoverable reserve estimates include, among other factors:

 

    mining activities;

 

    new engineering and geological data;

 

    acquisition or divestiture of reserve holdings; and

 

    modification of mining plans or mining methods.

Each of these factors may vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues and expenditures with respect to reserves will likely vary from estimates and these variances may be material. Variances could affect our projected future revenues and expenditures, as well as the valuation of coal reserves and depletion rates. As of December 31, 2016, we had 219.5 million metric tons of proven and probable coal reserves.

Asset Retirement Obligations

Our asset retirement obligations primarily consist of spending estimates to reclaim surface lands and supporting infrastructure at both surface and underground mines in accordance with applicable reclamation laws in the United States as defined by each mining permit. Significant reclamation activities include reclaiming refuse piles and slurry ponds, reclaiming the pit and support acreage at surface mines, and sealing portals at underground mines. Asset retirement obligations are determined for each mine using various estimates and assumptions, including estimates of disturbed acreage as determined from engineering data, estimates of future costs to reclaim the disturbed acreage and the timing of related cash flows, discounted using a credit-adjusted,

 

81


Table of Contents

risk-free rate. On at least an annual basis, we review our entire asset retirement obligation liability and make necessary adjustments for permit changes, the anticipated timing of mine closures, and revisions to cost estimates and productivity assumptions to reflect current experience. As changes in estimates occur, the carrying amount of the obligation and asset are revised to reflect the new estimate after applying the appropriate credit-adjusted, risk-free discount rate. If our assumptions differ from actual experience, or if changes in the regulatory environment occur, our actual cash expenditures and costs that we incur could be materially different than currently estimated. At December 31, 2016, we had recorded asset retirement obligation liabilities of $99.1 million, including $3.1 million reported as current.

Black Lung

We also have significant liabilities for uninsured miners’ black lung benefit liabilities that were assumed in connection with the Asset Acquisition. The recorded amounts of these liabilities are based on estimates of loss from individual claims and on estimates of incurred but not reported claims determined on an actuarial basis from historical experience using assumptions regarding rates of successful claims, benefit increases and mortality rates.

Black lung benefit liabilities are also affected by discount rates used. Changes in the frequency or severity of losses from historical experience and changes in discount rates or actual losses on individual claims that differ materially from estimated amounts could affect the recorded amount of these liabilities.

Income Taxes

As a result of the Asset Acquisition, we have significant federal NOLs of approximately $2.2 billion, which expire predominantly in 2034 through 2036. We also have significant state NOLs of approximately $2.5 billion, which expire predominantly in 2029 through 2031.

We believe the utilization of these NOLs, subject to certain limitations, will significantly reduce the amount of federal and state income taxes payable by us for the foreseeable future as compared to what we would have had to pay at the statutory rates without these NOL benefits. Under Section 382 of the Code, these NOLs could be subject to annual limitations and further limitations, as described below, if we were to undergo a subsequent ownership change in the future. To the extent we have taxable income in the future and can utilize these NOL carryforwards, subject to certain limitations, to reduce taxable income, our cash taxes will be significantly reduced in those future years. Notwithstanding the above, even if all of our regular U.S. Federal income tax liability for a given year is reduced to zero by virtue of utilizing our NOL, we may still be subject to the U.S. Federal Alternative Minimum Tax and to state, local or other non-Federal income taxes. See “Risk Factors—Risks Related to Our Business—We may be unable to generate sufficient taxable income from future operations, or other circumstances could arise, which may limit our ability to utilize our significant tax NOLs fully or maintain our deferred tax assets.”

GAAP requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are required to be reduced by a valuation allowance if it is “more likely than not” that some portion or the entire deferred tax asset will not be realized. As of December 31, 2015, the Predecessor had valuation allowances totaling $139.5 million primarily for deferred tax assets not expected to provide future tax benefits. In our evaluation of the need for a valuation allowance on our U.S. deferred tax assets, we considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, carryback of future period losses to prior periods, projected future taxable income, tax planning strategies and recent financial performance. Based on our review of all positive and negative evidence, including a three year U.S. cumulative pre-tax loss, we concluded that a valuation allowance should be recorded against our deferred tax assets that are not expected to be realized through future sources of taxable income generated from carrybacks of future period losses, scheduled reversals of deferred tax liabilities and tax planning strategies. As a result, a valuation

 

82


Table of Contents

allowance was recorded to reflect the portion of the U.S. federal and state deferred tax assets that are not likely to be realized based upon all available evidence. If we later determine that we will more likely than not realize all, or a portion, of the U.S. deferred tax assets, we will reverse the valuation allowance in a future period. All future reversals of the valuation allowance would result in a tax benefit in the period recognized.

Accounting for the Impairment of Long-Lived Assets

Mineral interests, property, plant and equipment and other long-lived assets are reviewed for potential impairment annually or whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. We periodically evaluate whether events and circumstances have occurred that indicate possible impairment and, if so, assessing whether the asset net book values are recoverable from estimated future undiscounted cash flows. Testing long-lived assets for impairment after indicators of impairment have been identified is a two-step process. Step one compares the net undiscounted cash flows of an asset group to its carrying value. If the carrying value of an asset group exceeds the net undiscounted cash flows of that asset group, step two is performed whereby the fair value of the asset groups is estimated and compared to its carrying amount. The actual amount of an impairment loss to be recorded, if any, is equal to the amount by which the asset’s net book value exceeds its fair market value. Fair market value is generally based on the present values of estimated future cash flows in the absence of quoted market prices. Estimates of future undiscounted cash flows are based on assumptions including third-party global long-term pricing forecasts for each product, anticipated production volumes based on internal and external engineering estimates, capital spending, and operating costs for the life of the mine or estimated useful life of the asset. The estimates of operating cost include labor, fuel, explosives, supplies and similar other major components of mining or gas costs.

Due to market volatility associated with global met coal supply and demand as well as actual mine operating conditions experienced in the years being forecasted, it is possible that the estimate of undiscounted cash flows may change in the near term resulting in a potential need to write down the related assets to fair value, in particular the assets associated with purchased coal reserves. The undiscounted cash flows are dependent upon a number of significant management estimates about future performance and changes in any of these assumptions could materially impact the estimated undiscounted cash flows of our asset groups. The primary uncertainty however pertains to future sales prices. The uncertainty and variability in pricing are described in “Risk Factors” and the uncertainty and variability surrounding coal reserves are described in “Coal Reserve Information.”

Recently Adopted Accounting Standards

A summary of recently adopted accounting pronouncements is included in Note 2 to our audited financial statements included elsewhere in this prospectus.

Internal Controls and Procedures

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain provisions of Section 302 of the Sarbanes-Oxley Act. Beginning with our annual report on Form 10-K for the year ending December 31, 2018 (subject to any change in applicable SEC rules), Section 404 of the Sarbanes-Oxley Act will require that we include management’s assessment of our internal control over financial reporting in our annual reports. In addition, Section 404 will require that our independent registered public accounting firm attest to our internal controls upon us ceasing to qualify for an exemption from the requirement to provide an auditor’s attestation on internal controls afforded to emerging growth companies under the JOBS Act.

Material Weaknesses in Internal Control Over Financial Reporting

Prior to the Asset Acquisition, we were a newly formed company that acquired its operating assets from Walter Energy, which had recently filed for bankruptcy. This resulted in our accounting and financial reporting

 

83


Table of Contents

function having limited accounting and financial reporting personnel and other resources with which to address our internal controls and procedures. In connection with the audits of the financial statements of our Predecessor, our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses resulted in material adjustments to the financial statements of our Predecessor which were corrected in the historical periods presented.

The two material weaknesses identified related to our Predecessor’s internal control over financial reporting:

 

    Financial close processes: This material weakness relates to the Predecessor’s design and operation of the account balance reconciliation process, including the performance and preparation of accounting reconciliations and the adequacy of the review of such account balance reconciliations.

 

    Process to estimate asset retirement obligation costs: This material weakness relates to the Predecessor’s calculation of asset retirement obligations and ineffective coordination between operational and accounting personnel to determine the appropriate asset retirement obligation.

Each of these material weaknesses could, among other things, adversely impact our ability to provide timely and accurate financial information or result in a misstatement of the account balances or disclosures that could result in a material misstatement to our annual or interim financial statements that would not be prevented or detected. Please see “Risk Factors—Risks Related to Our Business—We have material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which could cause investors to lose confidence in our financial reporting and, as a result, materially adversely affect the trading price of our common stock.”

At the time that the material weaknesses occurred, Walter Energy, the parent of our Predecessor, was in bankruptcy. Many of the employees directly involved in the Predecessor’s account reconciliation process and calculation of the asset retirement obligation had been terminated or had resigned. Many routine and non-routine functions were reassigned to a limited number of financial reporting personnel. Further, during this time, GAAP financial statements were not being prepared for purposes of public disclosure and filing with the SEC.

We are currently in the process of remediating these material weaknesses. Following the closing of the Asset Acquisition on March 31, 2016, our management implemented a new ERP system, re-designed certain controls and hired additional personnel, which includes a Chief Financial Officer (“CFO”) effective January 1, 2017, in order to improve our internal control over financial reporting. Management expects to make further changes to remediate the material weaknesses that have been identified. These matters have required, and will continue to require, a significant amount of management time, resources and money. Specific aspects of our remediation plan include:

 

    the implementation of the new ERP system described above;

 

    training users on our ERP system and associated controls;

 

    redesigning and implementing internal controls over the account balance reconciliation process and the process of preparing estimates, including asset retirement obligations, which require significant judgment;

 

    assessing competencies of accounting and finance personnel with responsibilities for financial accounting and reporting, and developing ongoing training programs;

 

84


Table of Contents
    recruiting and hiring accounting and finance personnel, including a new CFO, with the appropriate accounting and reporting technical skills to execute and support financial reporting responsibilities; and

 

    recruiting and hiring additional finance personnel to support internal control documentation, testing and monitoring of controls.

We have devoted a significant amount of time and resources to the analysis and preparation of our financial statements. Accordingly, management believes that the financial statements, included elsewhere in this prospectus, fairly present in all material respects, our financial condition, results of operations and cash flows for the periods presented.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected or that judgments in decision-making are not based on faulty input.

Our independent registered public accounting firm has not yet performed an audit of our internal control over financial reporting and is not required to report on management’s assessment of our internal control over financial reporting until we are no longer an emerging growth company.

Qualitative and Quantitative Disclosures about Market Risk

Commodity Price Risk

We are exposed to commodity price risk on sales of coal. We sell most of our met coal under fixed price supply contracts primarily with pricing terms of three months and volume terms of up to one year. Sales commitments in the met coal market are typically not long-term in nature, and we are, therefore, subject to fluctuations in market pricing.

We enter into natural gas swap contracts to hedge the exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the our forecasted sales. As of December 31, 2016, we had natural gas swap contracts outstanding with notional amounts totaling 7.9 billion British thermal units maturing in the fourth quarter of 2017. Our natural gas swap contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Statements of Operations.

We have exposure to price risk for supplies that are used directly or indirectly in the normal course of production, such as diesel fuel, steel, explosives and other items. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers. We historically have not entered into any derivative commodity instruments to manage the exposure to changing price risk for supplies.

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of trade receivables. We provide our products to customers based on an evaluation of the financial condition of our customers. In some instances, we require letters of credit, cash collateral or prepayments from our customers on or before shipment to mitigate the risk of loss. Exposure to losses on receivables is principally dependent on each customer’s financial condition. We monitor the exposure to credit losses and maintain allowances for anticipated losses. As of December 31, 2016 (Successor) and December 31, 2015 (Predecessor), we did not have any allowance for credit losses associated with our trade accounts receivables.

 

85


Table of Contents

Interest Rate Risk

On April 1, 2016, we entered into the ABL Facility that bears an interest rate equal to LIBOR plus an applicable margin, which is based on the average availability of the commitments under the ABL Facility, ranging currently from 200 bps to 250 bps. Any debt that we incur under the ABL Facility will expose us to interest rate risk. If interest rates increase significantly in the future, our exposure to interest rate risk will increase. As of December 31, 2016, a 100 bps point increase or decrease in interest rates would increase or decrease our annual interest expense under the ABL Facility by approximately $1.0 million.

Seasonality

We do not have a seasonal business cycle. Our revenues and operating profits are generally derived evenly throughout the months of the year.

Impact of Inflation

While inflation may impact our revenues and cost of sales, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

 

86


Table of Contents

INDUSTRY OVERVIEW

Overview of the Met Coal Industry

Met coal, which is converted to coke, is a critical input in the steel production process. In particular, coke is used as a fuel and a reducing agent in steel blast furnaces to convert iron ore to iron and subsequently to create steel. Met coal is a form of hard bituminous coal, which is distinct from softer bituminous and non-bituminous forms of coal that are used to generate electricity.

Met coal is both consumed domestically in the countries where it is produced and exported by several of the largest producing countries. Met coal is primarily exported into the seaborne market, which is projected to account for 89% of met coal exports in 2016, with the remainder exported by land.

Met coal, and in particular HCC, is a scarce commodity with large scale mineable deposits limited to specific geographic regions located in the Eastern United States, Western Canada, Eastern Australia, Russia, China, Mozambique and Mongolia. As of 2016, China is estimated to be the largest producer of met coal, with 99.9% of its output consumed by domestic steelmakers. The next four largest producers of met coal in 2016 are expected to be Australia, the United States, Canada and Russia. According to Wood Mackenzie, in 2016, these four countries are expected to account for 96.3% of total seaborne exports, with Australia being the largest player, responsible for 66.6% of total seaborne exports. In 2016, the largest importers of seaborne met coal are expected to be Japan, China, India and Europe, accounting for 73.6% of total seaborne met coal imports.

Met coal is predominately sold in three forms, HCC, SSCC and PCI, with HCC being the most valuable. Unlike SSCC and PCI, HCC currently has no substitutes and must be used in the production of steel by the blast furnace method. For each type of coal, various specifications can affect price, including the volatility, strength, fluidity, swell and ash content. HCC with low volatile matter and limited swell is required for blending with coal with less desirable qualities. The majority of met coal sold in the seaborne market is priced with reference to a quarterly benchmark HCC price typically set between major Australian suppliers and major Japanese steel mill consumers. The benchmark product is premium HCC sold FOB from ports on the east coast of Australia, and is similar to the coal that we produce at our two mines. HCC is also traded on less liquid spot and forward markets, which provide indicators of future quarterly benchmark price settlements.

Benchmark HCC prices have strengthened significantly since the beginning of 2016. For example, the first quarter 2017 benchmark HCC settlement price of $285 per metric ton represents a 252% increase compared to the first quarter 2016 benchmark HCC settlement price of $81 per metric ton. In addition, met coal spot prices reached $315 per metric ton on November 8, 2016. The recent rise from historic lows was driven largely by supply disruptions in Australia and government policies in China that curbed domestic supply, at a time when demand for met coal was more robust than had been expected. Furthermore, met coal suppliers were unable to respond quickly to the rise in benchmark prices, leading market tightness to persist into the first quarter of 2017.

 

87


Table of Contents

Some of the factors that caused the recent rise in spot market pricing to above $300 per metric ton have eased, resulting in a decline in spot market prices to below $200 per metric ton. We believe this decline has been driven by (i) the temporary relaxation by the Chinese government of policies that were aimed to reduce domestic coal production and (ii) the resumption of production at Australian mines that had faced supply disruptions. Notwithstanding the recent pullback, spot market prices remain more than approximately 89% higher than the first quarter 2016 benchmark HCC settlement price of $81 per metric ton. The second quarter 2017 benchmark is expected to be set in April 2017. Of note, as of March 21, 2017 the 2018 and 2019 forward contracts are approximately 50% higher than in April 2016. The following table shows changes in these various HCC price indicators in the past year:

 

($ / metric ton)

   April 2016      March/April 2017(1)      % Change  

HCC Benchmark price

   $ 81.00      $ 285.00        252

HCC Spot price

   $ 85.90      $ 153.30        78

2018 HCC forward contract

   $ 93.50      $ 148.45        59

2019 HCC forward contract

   $ 90.50      $ 135.75        50

Source: Bloomberg.

(1) Current prices as of 3/21/2017; historical prices as of 3/22/2016 for HCC spot and benchmark prices, and 4/25/2016 for the 2018 and 2019 forward contracts, as this is the earliest available data.

The following chart shows the inflation-adjusted benchmark HCC settlement price since 2005 (reflecting annual prices prior to 2010, when quarterly pricing began) and the inflation-adjusted average quarterly spot market HCC price since 2010 when a daily trading market for met coal was first developed.

Inflation-adjusted historical HCC prices ($/metric ton)

 

LOGO

 

Source: Bloomberg.

We believe there are a number of structural developments in the industry, both on the supply and demand sides that suggest prices are unlikely to return to levels seen in the first quarter of 2016 in the near-term.

On the supply side, the industry has experienced a net reduction in total seaborne met coal exports in recent years. Wood Mackenzie estimates that from 2013 to 2016, seaborne met coal exports declined from a peak of

 

88


Table of Contents

302 million metric tons to 278 million metric tons, an 8.2% decline. This reduction in supply has been accompanied by a shift in the mix of key producing regions. According to Wood Mackenzie, from 2011 to 2016, producers in Australia are estimated to have increased seaborne met coal exports by an expected 51 million metric tons, or 37.8%. This increase in exports at a time of multi-year declines in benchmark HCC prices eventually resulted in significant supply rationalization by higher cost met coal exporting regions. For instance, in the United States, seaborne exports will have declined from a peak of 60 million metric tons in 2013 to an expected 33 million metric tons in 2016, a 45.3% decline. In Canada, Wood Mackenzie predicts that seaborne exports will decline from a peak of 34 million metric tons in 2013 to an expected 25 million metric tons in 2016, a 26.9% decline.

From 2016 to 2020, Wood Mackenzie forecasts relatively limited growth in global seaborne exports at a CAGR of 1.0% per annum. Consistent with Wood Mackenzie’s outlook for supply, we believe that much of the decrease in met coal production is likely to persist despite currently elevated prices, and reflects an extended period of underinvestment in the industry, mine-life extension and infrastructure constraints in Australia and Canada, as well as the permanent closure of higher cost mines globally. Wood Mackenzie notes that while current pricing would make restarting certain previously idled mines profitable, they only expect to see a very modest supply response in 2017.

On the demand side, Wood Mackenzie expects demand from blast furnace steel producers to stabilize in 2016 compared to 2015, following a 2.5% decline from 2014 to 2015, which was the first year-over-year decline since 2009. While China was the primary driver of growth in global steel production in the recent past, going forward, Wood Mackenzie expects global steel growth to be driven in large part by India and non-Japan Asia, netting a forecasted CAGR for global steel production of 0.9% from 2016 to 2020.

Seaborne Met Coal Supply Dynamics

Met coal sold into the global seaborne market is primarily produced in four countries, Australia, the United States, Canada and Russia. According to Wood Mackenzie, in 2016 these four countries are expected to account for 96.3% of total seaborne exports, with Australia, the largest supplier, responsible for 66.6% of total 2016 seaborne exports. The following chart shows historical and forecast exports of seaborne met coal in these countries.

Seaborne met coal exports by key regions (Millions of metric tons)

 

Seaborne exports                                                                     CAGR  

(Millions of metric tons)

  2011A     2012A     2013A     2014A     2015A    

 

    2016E     2017E     2018E     2019E     2020E     ‘11 – 16     ‘16 – 20  

Australia

    134       145       169       184       184           185       184       179       180       180       6.6     (0.7 %) 

United States

    59       59       60       43       36           33       35       32       28       27       (11.3 %)      (4.3 %) 

Canada

    26       30       34       30       27           25       25       25       25       25       (1.0 %)      0.4

Russia

    11       13       20       22       23           25       27       29       30       32       17.5     6.7

Other

    21       23       19       15       12           10       11       21       24       24       (13.4 %)      24.0

Total

    252       270       302       294       282           278       283       286       288       289       1.9 %      1.0

% growth

      7.1 %      11.9 %      (2.7 %)      (4.1 %)          (1.6 %)      2.0 %      0.9 %      0.8 %      0.5 %     

% total Australia

    53.2     53.7     56.0     62.6     65.1         66.6     65.1     62.8     62.6     62.3    

% total US

    23.6     21.8     19.7     14.7     12.7         11.7     12.4     11.1     9.8     9.5    

% total Canada

    10.4     11.1     11.3     10.3     9.6         9.0     8.9     8.8     8.8     8.8    

% total Russia

    4.4     5.0     6.6     7.4     8.3         8.9     9.5     10.0     10.3     11.1    

% total Subset

    91.6     91.6     93.6     95.0     95.8         96.3     96.0     92.8     91.5     91.6    

 

Source: Wood Mackenzie Coal Markets Tool.

In Australia, exports of seaborne met coal are expected to be 185 million metric tons in 2016, representing a 0.5% increase since 2014. This relatively flat production profile over the past few years is in sharp contrast to the

 

89


Table of Contents

37.1% increase in production between 2011 and 2014. Wood Mackenzie believes this trend of relatively flat production will continue in the near-to medium-term, as few new met coal projects are in the development pipeline and existing mines will have to contend with reserve degradation, depletion and mine infrastructure constraints.

In the United States, exports of seaborne met coal are expected to be 33 million metric tons in 2016, representing a 45.3% decrease from a peak export level of 60 million metric tons in 2013 due to meaningful mine supply rationalization from high-cost mines in response to weaker met coal prices. According to Wood Mackenzie, of the 21 million metric tons of U.S. met coal capacity that has come offline since 2013, 10 million metric tons are the result of mine closures or idled mines that Wood Mackenzie forecasts to remain closed. A further 11 million metric tons are the result of lower tonnages from existing operations or suspended operations that may restart. While these operations could potentially increase production in response to recent moves in benchmark HCC prices, Wood Mackenzie believes that capital considerations to support such increases, as well as their higher quality-adjusted cost structures relative to global competitors, will likely require greater certainty of a longer-term, higher realized met coal price before such producers can justify re-starting.

Canadian exports of met coal have also declined from a 2013 peak of 34 million metric tons to an expected 25 million metric tons in 2016 due in part to the idling or closure of higher cost mines. Wood Mackenzie expects only an additional 0.3 million metric tons of Canadian exports in 2017 compared to 2016. Recent announcements regarding idled western Canadian mines such as Brule and Wolverine suggest the potential for higher incremental production if benchmark HCC prices remain elevated; however, these mines are not currently included in Wood Mackenzie’s forecasts.

Russia is the one significant region that has shown a steady increase in exports in recent years. These increases have been supported by the sharp decline in the Ruble and proximity to Asia. Wood Mackenzie expects Russian seaborne exports of met coal to be 25 million metric tons in 2016, representing a 124.1% increase from 11 million metric tons in 2011. Wood Mackenzie forecasts Russian seaborne export growth to slow to a CAGR of 6.7% from 2016 to 2020. Of note, Russia has a relatively small market share of global exports of seaborne HCC.

 

Seaborne HCC exports              
(Millions of metric tons)    2016E      % of total  

Australia

     103        60.7

United States

     28        16.5

Canada

     23        13.6

Russia

     8        4.5

Other

     8        4.7

Total

     170        100.0

Source: Wood Mackenzie.

 

90


Table of Contents

Recent Historical and Forecast Exchange Rate vs. the US Dollar

Foreign exchange rates are a significant factor in the cost competitiveness of seaborne met coal suppliers, as benchmark HCC prices (and therefore, the revenues of met coal exporters) are set in U.S. Dollars.

 

     10 year average
2007 - 2016
   Forecast
Exchange rates
2017E
   2017E vs. 10 year average
weakness / (strength)
vs. US Dollar
 

Australian Dollar

   AUD 1.13    AUD 1.37      21 % 

Canadian Dollar

   CAD 1.10    CAD 1.26      14 % 

Russian Ruble

   RUB 37.16    RUB 62.08      67 % 

Chinese Yuan

   CNY 6.62    CNY 6.75      2 % 

New Zealand Dollar

   NZD 1.36    NZD 1.44      6 % 

Vietnamese Dong

   VND 19,752    VND 23,063      17 % 

South African Rand

   ZAR 9.45    ZAR 14.70      56 % 

Source: Bloomberg (historical exchange rates), Wood Mackenzie (2017 forecast exchange rates).

The U.S. Dollar appreciation has provided an advantage to non-U.S. met coal exporters relative to U.S. met coal exporters, as foreign producers’ costs are largely denominated in their local currencies, in contrast to U.S. producers, whose costs and revenues are in U.S. Dollars. To the extent that foreign currencies revert to their recent historical means and strengthen relative to the U.S. Dollar, non-U.S. met coal producers’ margins would be pressured, as their revenues would be reduced relative to their costs. In particular, higher cost non-U.S. suppliers could be challenged to sustain their production in a normalized foreign exchange environment, leading to a reduction in supply that would be supportive of met coal prices.

Met Coal Demand Dynamics

Demand for met coal is driven by steel production, particularly relating to production utilizing the basic oxygen / blast furnace method. According to Wood Mackenzie, global steel production is expected to be 1.63 billion metric tons in 2016, up from 1.54 billion metric tons in 2011, representing a CAGR of 1.4%. Global steel production is expected to increase to 1.69 billion metric tons by the end of 2020, with 72.3% of that production coming from blast furnaces.

The following table shows historical and forecast production levels of crude steel by production method.

Crude steel production by method (Millions of metric tons)

 

Steel production by type                                                               CAGR  

(Millions of metric tons)

  2011A     2012A     2013A     2014A     2015A     2016E     2017E     2018E     2019E     2020E     ‘11 – 16     ‘16 – 20  

Basic Oxygen / Blast Furnace

    1,066       1,101       1,188       1,239       1,208       1,211       1,218       1,212       1,220       1,224       2.6     0.3

Electric Arc Furnace

    456       450       445       432       412       413       425       437       449       462       (1.9 %)      2.8

Open Hearth Furnace

    18       12       11       9       7       8       8       8       7       7       (13.9 %)      (3.8 %) 

Total

    1,540       1,563       1,643       1,679       1,627       1,633       1,651       1,656       1,676       1,693       1.4 %      0.9 % 

% growth

      1.5 %      5.2 %      2.2 %      (3.1 %)      0.4 %      1.1 %      0.3 %      1.2 %      1.0 %     

% BOF / BLF growth

      3.2 %      7.9 %      4.3 %      (2.5 %)      0.3 %      0.5 %      (0.5 %)      0.7 %      0.4 %     

Source: Wood Mackenzie Steel Long Term Q3 Outlook.

 

91


Table of Contents
Seaborne HCC imports              
(Millions of metric tons)    2016E      % of total  
Europe      36        21.0
India      34        20.0
Japan      28        16.5
China      28        16.4
Other      45        26.1
  

 

 

    

 

 

 

Total

     171        100.0

Source: Wood Mackenzie.

Growth in total steel production over the past five years has been predominantly driven by China. Going forward, however, Wood Mackenzie expects the key global steel production growth markets to be India, the Middle East and Africa. These markets are expected to increase their steel production to support ongoing industrialization and, as they do, increase their domestic per-capita steel use. For example, India’s expected 2016 per capita steel use is 61.5 kilograms per person compared to 484.9 kilograms per person in China.

Wood Mackenzie also expects steel production in Europe to show modest annual growth from 222 million metric tons in 2016 to 237 million metric tons in 2020, a CAGR of 1.6%. Key drivers of this growth are approximately 2 million metric ton increases from each of Germany, Italy and France.

The following table shows historical and forecast production levels by region of (i) total crude steel production and (ii) crude steel production using the basic oxygen/blast furnace process.

Crude steel production by region (Millions of metric tons)

 

Steel production by all methods in key countries / regions                                   CAGR  

(Millions of metric tons)

  2011A     2012A     2013A     2014A     2015A     2016E     2017E     2018E     2019E     2020E     ‘11 – 16     ‘16 – 20  

Europe

    252       242       238       235       225       222       225       229       234       237       (2.5 %)      1.6

Japan

    108       107       111       111       105       104       101       98       96       95       (0.7 %)      (2.3 %) 

India

    74       78       82       87       89       96       97       99       100       101       5.3     1.3

China

    702       731       813       830       809       817       813       801       805       805       3.1     (0.4 %) 

South Korea

    69       69       66       72       70       68       67       68       68       69       (0.2 %)      0.3

Brazil

    35       35       34       34       33       31       32       33       33       34       (2.6 %)      2.3

Other

    300       301       300       311       295       295       315       328       340       353       (0.4 %)      4.5

Total

    1,540       1,563       1,643       1,679       1,627       1,633       1,651       1,656       1,676       1,693       1.2 %      0.9 % 

% growth

      1.5 %      5.2 %      2.2 %      (3.1 %)      0.4 %      1.1 %      0.3 %      1.2 %      1.0 %     
Basic Oxygen / Blast Furnace steel production in key countries / regions                             CAGR  

(Millions of metric tons)

  2011A     2012A     2013A     2014A     2015A     2016E     2017E     2018E     2019E     2020E     ‘11 – 16     ‘16 –20  

Europe

    137       133       135       135       130       130       136       138       140       142       (1.1 %)      2.3

Japan

    83       82       86       85       81       81       79       78       76       75       (0.5 %)      (2.0 %) 

India

    24       25       35       37       38       43       45       47       49       52       12.6     4.8

China

    631       666       742       779       757       763       757       745       747       745       3.9     (0.6 %) 

South Korea

    42       43       40       47       49       47       47       47       48       48       2.3     0.4

Brazil

    26       26       25       26       26       24       25       25       26       26       (1.9 %)      1.9

Other

    261       259       260       265       257       254       265       269       275       280       (0.6 %)      2.5

Total

    1,066       1,101       1,188       1,239       1,208       1,211       1,218       1,212       1,220       1,224       2.6 %      0.3 % 

% growth

      3.2 %      7.9 %      4.3 %      (2.5 %)      0.3 %      0.5 %      (0.5 %)      0.7 %      0.4 %     

Source: Wood Mackenzie Steel Long Term Q3 Outlook.

 

92


Table of Contents

Wood Mackenzie’s outlook for demand of seaborne met coal is in line with its relatively stable outlook for global crude steel production. In recent years, the four largest importers of seaborne met coal have been Japan, China, India and Europe. According to Wood Mackenzie, these four regions are expected to account for an aggregate of 73.6% of the estimated 278 million metric tons of global seaborne met coal imports in 2016.

China has been a primary driver of global seaborne met coal import demand weakness over the past several years following its approximately 2000% increase in seaborne met coal imports from 2008 to 2013, when it peaked at 77 million metric tons. For 2016, Chinese imports of seaborne met coal are expected to be 40.6% below 2013 peak levels. These declines have coincided with expected declines in Chinese domestic steel production from 2014 to 2016. Wood Mackenzie forecasts Chinese steel production to modestly decline between 2016 and 2020.

Over the next several years, Chinese steel mills may increase their reliance on met coal from the seaborne market relative to domestic met coal production and landborne met coal imports from Mongolia, as the Chinese government has voiced its intent to reduce domestic coal production capacity over the past twelve months.

In early 2016, Beijing announced a 276 work day limitation on the annual operating days for coal mines, as well as a plan to close over 1,000 coal mines within the year. These supply reductions contributed to the 2016 increase in both met coal and thermal coal prices. In October 2016, Chinese authorities suspended the 276 workday limitation. The Chinese government in March 2017 announced plans to reduce coal production capacity by a further 150 million metric tons per year. While it did not reinstate the 276 workday limitation, Beijing retains the option to do so in the future.

Additionally, Chinese authorities have been implementing plans to move steel production capacity from inland areas to port areas. We expect that should the Chinese government continue to pursue these policy objectives, it could be supportive for Chinese imports of seaborne met coal due to the closer proximity of these mills to Chinese east coast port facilities as well as the continued reduction of domestic coal production capacity.

Wood Mackenzie’s projections for Chinese HCC production and demand through 2021 indicate that China will continue to have a structural need for over 30 million metric tons per year of imported premium HCC. Chinese steelmaking capacity is being relocated away from inland Chinese cities and towards larger facilities in coastal areas.

Steel mills in inland China tend to be smaller and therefore relatively less efficient and more polluting. As Chinese met coal is mostly mined from inland locations and landborne imports are sourced primarily from Mongolia, we believe that the relative increase in steel production capacity in coastal China should make seaborne met coal imports more competitive on a delivered basis. Finally, Chinese officials have announced their intention to increase the proportion of steel produced from larger, more efficient blast furnaces, which require higher quality coals with higher coking strengths.

Japan is also a key driver of met coal seaborne demand as it is currently the largest importer of seaborne met coal. Importantly, Japan is also a consumer of premium HCC coal that it predominantly sources from Australia due to Australia’s proximity. Notwithstanding this proximity, Japanese steel mills have publicly indicated that they are seeking to diversify a portion of their supply away from Australian suppliers for their premium low-vol met coal requirements. This could benefit us, as we are one of the few non-Australian producers of met coal with similar characteristics to Australian premium HCC.

Europe is our key end-market and has shown more stable demand dynamics in recent years. Wood Mackenzie expects that Europe will account for 19.5% of expected seaborne met coal imports in 2016. Although relatively flat since 2010, Wood Mackenzie expects European seaborne met coal imports to rise at a CAGR of 4.5% through 2020, exceeding steel production growth as seaborne imports displace domestic and landborne sources. New blast furnace facilities in Turkey are also expected to contribute to this growth.

 

93


Table of Contents

India is also viewed as a key growth market for the seaborne met coal industry. Indian seaborne met coal demand is expected to have grown at a CAGR of 8.3% from 2011 to 2016, and is projected to continue at a CAGR of 3.5% through 2020. This is in line with India’s increasing overall steel production, as well as its growing use of blast furnace technology, which Wood Mackenzie projects to grow from 33.8% of Indian domestic steel production in 2010 to 51.0% by 2020.

The following chart shows historical and forecast demand by key region in terms of seaborne met coal imports.

Seaborne met coal imports by key regions (Millions of metric tons)

 

Seaborne imports                                                               CAGR  

(Millions of metric tons)

  2011A     2012A     2013A     2014A     2015A     2016E     2017E     2018E     2019E     2020E     ‘11 – 16     ‘16 – 20  

Japan

    60       61       62       59       57       56       56       55       54       53       (1.4 %)      (1.3 %) 

India

    33       36       36       41       45       48       51       54       55       56       8.3     3.5

China

    31       48       77       62       45       46       43       41       39       37       7.9     (4.9 %) 

South Korea

    32       32       31       35       38       35       35       35       34       34       2.0     (0.8 %) 

Brazil

    17       16       15       15       17       17       17       17       17       18       (0.3 %)      0.9

Europe

    57       53       54       56       57       54       58       60       62       64       (0.9 %)      4.5

Other

    22       25       27       27       23       21       23       24       26       27       (1.1 %)      6.5

Total

    252       270       302       294       282       278       283       286       288       289       1.9     1.0

% growth

      7.1 %      11.9 %      (2.7 %)      (4.1 %)      (1.6 %)      2.0 %      0.9 %      0.8 %      0.5 %     

% total Japan

    24.0     22.4     20.6     19.9     20.1     20.2     19.8     19.2     18.8     18.4    

% total India

    12.9     13.4     12.0     14.0     16.1     17.5     18.1     18.8     19.1     19.2    

% total China

    12.4     17.9     25.5     20.9     16.1     16.5     15.2     14.2     13.6     12.9    

% total South Korea

    12.7     11.8     10.3     12.0     13.6     12.7     12.3     12.1     11.8     11.8    

% total Brazil

    6.8     5.9     4.9     5.2     6.0     6.1     6.0     6.0     6.0     6.1    

% total Europe

    22.4     19.5     18.0     18.9     20.0     19.5     20.6     21.1     21.5     22.2    

% total Subset

    91.2     90.9     91.2     91.0     91.9     92.4     91.9     91.5     90.8     90.6    

 

Source: Wood Mackenzie Coal Markets Tool.

Overview of the U.S. Met Coal Market

The U.S. met coal market had historically been viewed as the swing supplier in the global seaborne market, since U.S. mines are more adversely affected by changes in benchmark HCC prices than mines in Australia and Canada. This is due to the United States’ relatively larger number of higher cost mines compared to Australia and Canada. According to Wood Mackenzie, the United States is expected to produce 55 million metric tons of met coal in 2016, down 33.9% from 83 million metric tons in 2012, reflecting meaningful mine supply rationalization in response to weaker met coal prices. Of the United States’ expected production of 55 million metric tons, 18 million metric tons (33.6%) are expected to be consumed domestically and 33 million metric tons are expected to be exported through the seaborne market to international blast furnace steel producers, with the balance shipped to Canada. In line with falling overall production, U.S. seaborne exports of met coal in 2016 are expected to be 45.3% lower than peak export levels of 60 million metric tons in 2013. In 2015, U.S. met coal exports were primarily directed to Europe (49% of total U.S. met coal exports), South America (14.7%), and Japan (12.4%).

According to Wood Mackenzie, 10 million metric tons of U.S. met coal capacity reductions since 2013 are the result of permanent mine closures. As noted earlier, Wood Mackenzie does not expect the United States to increase exports through 2020. Wood Mackenzie believes capital considerations to re-start idled U.S mines, as well as their lower margins relative to global competitors, will likely require greater certainty of a longer-term, higher met coal price before owners of idled mines can justify re-starting.

 

94


Table of Contents

According to Wood Mackenzie, the five largest U.S. exporters of met coal in 2016 are expected to be Alpha Natural Resources, Inc., Blackhawk Mining, LLC, Arch Coal, Coronado Coal, LLC, and Warrior Met Coal, LLC. These five producers are expected to account for approximately 64.3% of U.S. met coal exports in 2016. Wood Mackenzie projects that for 2017, we will be the largest U.S. met coal exporter by tonnage due to our restart of the longwall systems we idled in the first half of 2016.

Overview of the European Steel Market

European steel mills typically source coal from a number of met coal producers in an effort to optimize the coal blend in their blast furnaces. According to Wood Mackenzie, in 2015, European met coal imports (both seaborne and landborne) came 32.8% from Australia, 28.1% from the United States, 21.1% from Russia and 18.0% from the rest of the world. Our largest competitors in the European market are exporters from Australia and Russia. For 2016, the largest met coal producers from Australia are expected to be BHP Billiton Ltd. (in alliance with Mitsubishi Corporation), Anglo American Plc, Peabody Energy Corporation and Rio Tinto Plc. The largest met coal producers from Russia for 2016 are expected to be EVRAZ plc., PAO Mechel, UK Kuzbassrazrezugol OAO, Sibuglemet Holding and PAO Severstal.

Competitive Dynamics

Substantially all of our met coal sales are exported. Our major competitors also sell into our core geographic end-markets of Europe and South America. We compete with producers of premium met coal primarily from Australia, while also competing, to a lesser extent, with met coal producers from Canada, Russia and the United States. The principal factors on which we compete are coal prices at the port of delivery, coal quality and characteristics, customer relationships and the reliability of supply. Of note, the benchmark quality met coal produced by us and select Australian mines have very high coking strengths as indicated by coke strength after reaction (“CSR”) scores compared to other low-vol met coals from U.S. mines. This contributes to our very high price realizations relative to the HCC benchmark, including a 99% average gross realized price (excluding the effect of tons contracted for sale in prior quarters) in 2016. This is in significant contrast to other U.S. met coal producers, which we believe sell a relatively higher proportion of lower rank coals to domestic steel producers.

U.S. met coals with lower CSR scores are most easily sold to U.S. steel mills, which are comparatively older and smaller than their European, Asian and Brazilian counterparts and have lower coking strength requirements. As such, we believe that other U.S. met coal producers are particularly impacted by the competitiveness and financial health of the U.S. steel industry. Conversely, our coals are competitive with coals from Australian mines, and are more exposed to the global economy and worldwide demand for steel. In this vein, we believe that we may be able to market our coal to Japanese steelmakers that have indicated a desire to diversify away from Australian met coal producers.

We believe that we are uniquely advantaged to sell to our primary European customer base relative to other North American met coal producers due to (i) the superior quality and higher strength of the coal produced at our Mine No. 4 and Mine No. 7; and (ii) our freight cost advantage from the Port of Mobile, Alabama, which, according to Wood Mackenzie, enables us to deliver our product to the European market in approximately two weeks, in contrast to the approximately five weeks required to ship HCC from Australia to the European market. We are similarly able to access key Brazilian ports in two weeks.

 

95


Table of Contents

BUSINESS

Our Business

We are a large scale, low-cost U.S.-based producer and exporter of premium met coal operating two highly productive underground mines in Alabama, Mine No. 4 and Mine No. 7, that have an estimated annual production capacity of 7.3 million metric tons of coal. According to Wood Mackenzie, in 2017, we are expected to be the largest seaborne met coal supplier in the Atlantic Basin, and a top ten supplier to the global seaborne met coal market. As of December 31, 2016, based on a reserve report prepared by Marshall Miller, our two operating mines had approximately 107.8 million metric tons of recoverable reserves and, based on a reserve report prepared by Norwest, our undeveloped Blue Creek Energy Mine, contained 103.0 million metric tons of recoverable reserves. The HCC we produce at Mine No. 4 and Mine No. 7 is of a similar quality to coal referred to as the “benchmark HCC” produced in Australia, which is used to set quarterly pricing for the met coal industry.

Our operations are high margin when compared to our competitors. According to Wood Mackenzie, in 2017 our overall operations are expected to be positioned in the first quartile (18th percentile) based on “Operating Margin” as defined by Wood Mackenzie, among mines operated by U.S. seaborne met coal exporters. In addition, according to Wood Mackenzie, in 2017 our overall operations are expected to be positioned in the second quartile (33rd percentile) based on Operating Margin, among all mines operating in the global seaborne met coal market.

We believe our high margin operations relative to our competitors are a direct result of a combination of factors, notably our (1) highly productive mining operations, (2) high-quality coal products, (3) close proximity and efficient access to the Port of Mobile, Alabama and (4) seaborne freight advantage to reaching our primary end markets:

 

    We employ a highly efficient longwall mining method with development support from continuous miners at both of our operating mines. This mining method, together with a redesigned flexible mine plan developed and implemented around the time of the Asset Acquisition, new logistics contracts and a new initial CBA with the UMWA, has enabled us to structurally reduce the operating costs at our Mine No. 4 and Mine No. 7, while also increasing our ability to adjust our cost structure with respect to the HCC benchmark price. We believe the step-down in costs and greater variability in our cost structure relative to Walter Energy equip our operations to endure adverse price environments and generate strong cash flows in favorable price environments.

 

    Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and low-to-medium volatility. These qualities make our coal ideally suited as a coking coal for the manufacture of steel. As a result of our high quality coal, our realized price has historically been in line with or at a slight discount to the HCC benchmark, which helps drive our high operating margins.

 

    Our two operating mines are located approximately 300 miles from our export terminal at the Port of Mobile, Alabama, which we believe to be the shortest mine-to-port distance of any U.S.-based met coal producer. Our low cost, flexible and efficient rail and barge network underpins our cost advantage and dependable access to the seaborne markets. Furthermore, in the event of lower coal prices, we have a variable transportation cost structure that results in lower cash requirements.

 

    We sell our coal to a diversified customer base of blast furnace steel producers, primarily located in Europe and South America. We enjoy a shipping time and distance advantage serving customers throughout the Atlantic Basin relative to competitors located in Australia and Western Canada.

To complement our highly efficient, low-cost operations, we have the ability to quickly adjust our production levels in response to market conditions. Our mine plan was redesigned and implemented around th