CTRA - Contura Energy

[peterHK]

I am a self admitted bagholder on this one, but as it's been SO beaten up I thought I'd mention it.

 

On today's $980mn market cap CTRA will do ~$250mn of free cash to the equity. They have  a $250 million buyback authorization and the CFO said on the last call that the math shows pretty clearly buybacks are the things to do.

 

90% of their EBITDA comes from met coal, the rest comes from thermal & shipping, but those businesses are fairly marginal in terms of profitability. This is the largest coal producer in the US, so there are some scale advantages there, but relative to other places in the world, it's not low cost. Met coal is a decent business: it's unattractive environmentally, nobody is bringing on supply, India is ramping up buying, and China demand is relatively stable.

 

The CEO who led this into bankruptcy was recently fired/moved on, and the board is comprised of the bondholders in the bankruptcy. My guess is they aren't pleased with how this has turned out as shares have gone nowhere for years. The old CEO (who was an empire builder; part of why the company went bankrupt in the first place) did a very stupid acquisition in acquiring the old assets that were separated in the badco post BK (Contura was the goodco), but that's now sunk cost. My sense is that the CFO is actually a decently sharp fellow, and he's in charge now, so i think the risk of more incredibly stupid things being done are low.

 

Cap structure right now is ~$980mn of equity, $1.3bn of liabilities (debt & ARO/pension) offset by $480mn of restricted and unrestricted cash. Some of that restricted cash will become unrestricted over time.

 

I think the company will do ~$250mn of FCF this year, $225 next year, $175 the year after that and maybe $100-125 after that as I assume met prices fall ~15% from today. That means in the next 3 years they'll generate most of the market cap in cash. Of course with any commodity company, it's all up in the air.

 

Right now the warrants (CNTWW) are a little cheap, and adjust their terms in the case of a dividend, so capital returns will accrue to you regardless of the form.

 

Today, based on a DCF of the cash flows outlined above, with a terminal value on $100mn of FCF using a 10% WACC and -5% terminal growth, I get ~$60 in value for the company. If they use all their cash flows to buy back shares, then by next year this is a $70 stock. In that case the warrants are more than a double. I think at today's prices the risk of a permanent capital loss is probably fairly limited, so risk reward here is favorable, but moreso on teh warrants at $16 if you can get them there, than on the stock.

 

Q1 was sort of an ugly quarter, lot of one time issues, so if cash generation is better in Q2, and they announce a large buyback, there's your catalyst that could send this to $60.

 

This isn't an investment, it's a case of mispricing I think, but this is not a company I would hold for the LT: it's a capital intensive deep deep cyclical in an industry that is not particularly attractive. My own cost base is in the $60 range, so I won't make money on this (I don't think), but there's an opportunity to take it from here and make a decent go of it I think.

 

Warrants: https://seekingalpha.com/article/4204351-contura-energy-warrants-double-discounts-2_5x-returns

CTRA: https://seekingalpha.com/article/4183154-contura-energy-astonishing-50-percent-fcf-yield-management-intends-pay-shareholders

VIC Writeup: https://www.valueinvestorsclub.com/idea/Contura_Energy_Inc/8166326954

 

 

 

[cameronfen]

Bagholder on this as well. 

[valuedontlie]

That's a pretty steep fall-off you're predicting over the next few years...

 

Whenever I see these situations I wonder to myself if large special (i.e. variable) dividends are the way to go... if, as you say, in 3-4 years they are still generating decent cash flow, then you'll at least have received nearly the entire share price in cumulative dividends while still holding on for some smaller terminal value in the future...

[peterHK]

That's a pretty steep fall-off you're predicting over the next few years...

 

Whenever I see these situations I wonder to myself if large special (i.e. variable) dividends are the way to go... if, as you say, in 3-4 years they are still generating decent cash flow, then you'll at least have received nearly the entire share price in cumulative dividends while still holding on for some smaller terminal value in the future...

 

Consensus assumes a pretty steep fall off, and indeed there's a very good question about whether met coal prices can stay where they are. I don't want to bank on it but certainly if they do, this stock is absurdly cheap today.

 

Regarding dividends, I think at this share price it actually makes way more sense for them to buy back shares. They can finance the buybacks with debt at like 8%, and the shares are trading at a 25%+ FCF yield, so the spread on that creates enormous value for every share you buy.

[Dalal.Holdings]

Regardless of what consensus thinks about coal prices, supply is coming offline and demand likely growing/stable:  metallurgic coal will still be needed, particularly in emerging places like India with steel needs.

 

Seems like an asymmetric play here with some downside protection given the relatively cheap value. Barring a global recession, this might not be a bad bet. Coal supplies getting tighter and should there be some kind of supply disruption, met coal prices could soar in a squeeze type situation.

[valuedontlie]

I hear that argument a lot on the dividends vs. buybacks... it just seems too tough a call to look out a few years in these declining businesses and say confidently that it's the right choice... Outerwall (i.e. redbox) was a great example of buying back stock hand over fist at a high FCF yield yet the stock was a dog for years until it got bought out... at a price that was flat over a 6-ish year period nonetheless...

 

If cash flow drops by 50-60% in 2-3 years then buying shares at today's 25% FCF yield doesn't equate to a great plan... just my preference...

 

I'd buy a heck of a lot more secular decliners if they simply paid out all earnings as dividends in a variable fashion until they went kaput...

[peterHK]

The other wrinkle that just came up is $247mn of ARO liabilities that CTRA basically transferred to Blackjewel which has now gone bankrupt. THe permits are still held by Contura, meaning that they're likely still on the hook for this liability.

 

More good news lol.

[Foreign Tuffett]

Good Twitter thread on this name

 

https://twitter.com/PythiaR/status/1149851632537968640

[FF4F]

Do you have a good information source to keep an eye on Met coal prices (and to a lesser extent Thermal coal prices)?

 

I am no expert at Coal, and there seem to be a lot of different price points, and not a lot of free available data sources to monitor them...

 

What do you use?

 

Cheers

JG

[peterHK]

They all trade somewhat differently, but the closest thing I've found is this:

 

https://www.cmegroup.com/trading/energy/coal/australian-coking-coal-platts-low-vol-swap.html

[FF4F]

Thanks!

 

And any idea what specifically is going on today that is causing the sell-off....seems overdone, but agree with over posters here that this will always be cheap untill they start doing buybacks, or paying dividends.

 

I also find this site usefull for coal: https://www.metalbulletin.com/steel/steel-raw-materials/coking-coal.html

[peterHK]

Probably the Blackjewel liabilities?

 

From their 10-k "On December 8, 2017, Contura closed a transaction (“PRB Transaction”) with Blackjewel to sell the Eagle Butte and Belle Ayr mines located in the PRB, including applicable permits. Alpha similarly sold properties for which the permits are in the process of being transferred. During the permit transfer period we must maintain the required reclamation bonds and related collateral, which are off-balance sheet arrangements. A local citizens organization filed objections to the permit transfer with the Wyoming Environmental Quality Council in November, 2018. The objections are scheduled to be heard in May, 2019. The Company believes that the objections are without merit. If the permit transfer process is not completed as expected, however, or if there are complications in connection with the process, we will remain obligated to maintain these bonds and collateral, which could materially and adversely affect our business and our results of operations."

 

It's worth noting that these are bonded with collateral, meaning the gross liability is $247, but net it is likely smaller than that. Further, these are usually structured as payment streams so the actual impact to Contura is probably limited.

 

But this does go to show: they paid $198mn for ANR. This liability likely destroys that equity, and Crutchfield clearly did not do DD on selling the mines to Blackjewel as if he had he might have thought twice about the counterparty risk.

 

If anything, Blackjewel's bankruptcy is not as huge a net negative as well as there's now a large thermal producer offline, which helps thermal prices. CTRA makes very little from their thermal business, so higher prices are a nice little bump.

[FF4F]

It's worth noting that these are bonded with collateral, meaning the gross liability is $247, but net it is likely smaller than that. Further, these are usually structured as payment streams so the actual impact to Contura is probably limited.

 

Would you be willing to elaborate?

 

The hard collateral seems to be fairly limited (Some ranch real estate, presumably worth 30M). There also seem to be some 220M in third party-bank issued sureties. However, will these sureties pay-out because Blackjewel is now bankrupt, or does the performance obligation still lie with Contura as the holder of the Permits in your opinion? (Press coverage seems to imply the latter, as they say Contura is still 'on the hook'. In which case, I assume, the surety bonds only pay out when Contura can't) 

 

Wrt the payment stream characteristic: I assume you mean that the discounted value of the liability is smaller because it will be paid out over a couple of years? This would reduce the potential to give capital back to shareholders by ~ 225-240M in 3-4 years, with presumably the majority of that front loaded, so discounted at 10% perhaps 180-200M hit to current value?

 

From that perspective, It seems fair that the company lost ~20% since late June (other miners ~ 5%). The 15% difference implies market cap loss of ~150M. With stated liabilities as described above, that is still a little less than what the present value of the blackjewel liability comes down to.

 

However, if they manage to operate the mine break-even, they could push those liabilities out, and thereby earn 10-20% on cash payments that are deferred.

 

So to conclude, the market does not seem to overreact, and if anything, a mine closing scenario that would lead to pay-out in the next 3-4 years does not yet seem to be fully priced in (versus price levels of late June - Not saying those represent fundamental value or anything).

 

Thanks in advance

 

Edit: yes Contura will likely pay for it - unless a new operator comes in. Based on wording, it does not look like they are thinking of operating the mines themselves.

 

"As Blackjewel's bankruptcy process unfolds, we continue to believe that the best scenario for all stakeholders would be for Blackjewel, or an alternate third-party operator, to secure appropriate financing to run these mines and maintain the employment of the operating team for the foreseeable future," said Andy Eidson, interim co-chief executive officer. "As such, we will continue to work proactively with Blackjewel's new leadership, the State of Wyoming, and other involved parties to help move this process toward a positive outcome."

 

"Irrespective of arriving at a preferred solution that allows for the continued operation of the Belle Ayr and Eagle Butte mines, Contura fully intends to honor our obligations as permit holder for these mines,"

 

 

https://www.prnewswire.com/news-releases/contura-provides-update-on-ceo-search-300887360.html

 

 

 

[NoCalledStrikes]

Bagholder.

 

Couple thoughts:

I don't see any reason the higher BTU Cloud Peak mines which were not operating at capacity can't supply the needs of all the low sulfur coal clients. Unless Contura pays some one to reopen the mine, it's staying closed.

Animosity towards BlackJewel in local papers is off the chart.  Contura is inheriting a hot mess and accountability on parties that can pay for cleanup will be high.

Moving the former ANR PRB mines closures up 15-20 years, is the same as vaporizing 150 million.

If another shoe is to drop, I predict it would be declining met prices. 

The incoming CEO's negotiating leverage for his new contract couldn't be higher right now.

[NoCalledStrikes]

With the appointment of Stetson, we may have seen the low today.  His merger of legacy ANR into CTRA at a raised price under threat of a counter bid from an unqualified buyer was certainly more ingenious than anything the CTRA management ever did.  He also got a great entry price for his new CTRA options:)

[FF4F]

Sky seems to be falling.

 

I believe today's decline is due to some panick selling in Coal futures.

 

How do longer term holders view the situation? Are there chances for CTRA to return some capital like HCC has been doing given current Met/Thermal coal prices?

 

 

[Foreign Tuffett]

How are ya'll handling all the various idiosyncratic liabilities (asset retirement, acquisition-related, workers' comp and black lung) when modeling this?

 

At first glance, it's difficult to figure out when cash will actually go out the door for these, with the recent PBR mines situation being a good example of some of the possible concerns here.

[peterHK]

I treat them all as debt.

 

Also I sold my shares. Had enough of this.

[Foreign Tuffett]

Earnings out.

 

1) Expensive debt in this interest rate environment

 

"On June 17, 2019, the company completed a new, 5-year $561.8 million second lien facility to refinance its existing Term Loan B. The interest rate is LIBOR plus 700bps for the two years after closing and increasing to LIBOR plus 800 bps thereafter, with a LIBOR floor of 2.00%."

 

 

2) Lowering volume guidance

 

"The company is lowering its total 2019 coal shipments guidance to a range of 23.9 million to 25.6 million tons, from the previously announced range of 24.6 million to 26.7 million tons. CAPP – Met coal guidance is reduced to a range of 11.5 million to 12.0 million tons, from 12.2 million to 12.8 million tons due to softer market conditions"

 

 

3) Looks like they beat on revenue? Only 3 analysts cover the company, so estimates may not have been terribly good.

 

https://seekingalpha.com/news/3491593-contura-energy-posts-mixed-q2-results-cuts-coal-shipment-outlook

[peterHK]

Big red flag was the new CEO's vision to acquire things. Capital return STILL not announced.

[Philbert77]

I just dumped my shares of CTRA. I am so sick of bad management. Why is everyone trying to build an empire instead of running a profitable business?

[heth247]

Anybody like CTRA at this price and believe in a recovery of met coal prices by year end?

[cm2]

I think its really interesting and warrants could be VERY cheap here

 

Steel production starting to ramp way up

[valueinvestor]

I bought some during the pandemic, as mentioned in the other thread it’s like Pabrai’s bet on Teck Resources. I don’t think there is a smoking gun to know where prices will be but typically you’re betting against near 100% where out of every downturns, companies like these tend to do well. Also the set up is better than teck, where they’ve brought a new ceo that has a history of being shareholder friendly. I haven’t really delved into much, as it’s a 1% portfolio allocation for me.

 

However if you want something that’s much safer, but lower reward, I would recommend SRL.

 

[valueinvestor]

Any reason why this is up almost 30% past two days?