With investors having already taken delivery of stockings full of coal from Santa in 2018, they are apparently not in the mood for any more. But that’s what my recommendation for 2019 produces, explains Tom Bishop, a small cap expert and editor of BI Research.
However, we are not talking about the much maligned thermal coal being replaced by natural gas in power plants. Instead Ramaco (METC) — my favorite aggressive pick for 2019 — produces the harder (coking) coal used in making steel, where demand is just fine. In fact spot pricing is very strong.
Last year the company was a relative newbie on the block and was signing contracts for $78 a ton on average for delivery in 2018. And even at that price, prior to a structural problem in early November that effected a key conveyor into its Elk Creek coal prep (washing) plant, temporarily shutting down shipping from Elk Creek, estimates for 2018 were around $0.90, growing to $1.95 next year.
This strong growth was based on an increase in production and especially a $34 increase (about 43%) in the average contracted price for coal in 2019 — and the stock was trading around $8 to $9 a share. The company expected it would take about 2 months to get the conveyor work-around completed and cleaning and shipping operations back to normal.
Though the company said that the coal held back during this 2-month shutdown of shipping at the end of 2018 (about 200,000 tons or 10% of production) will now ship in 2019 instead (adding to 2019 prospects), for good measure analysts not only dropped their Q4 estimate, they dropped the estimate for 2019 as well, from $1.95 to $1.70 (which has since inched back to $1.79).
Perhaps this was in case repairs slip into January. But hey, whether it’s $1.79 or $1.95 or something north of that, investors have slashed the stock price to $4.60 — despite the temporariness of this problem — and that’s less than 3 times 2019 earnings.
Of course, this was compounded by a brutal correction in the stock market during Q4, especially here in December, which then combined with yearend tax loss selling. But that has just added to the opportunity here.
Once management announces that Elk Creek is up and shipping again (expected at any time) and tax loss selling winds down, I expect METC shares should make a strong recovery.
