Miami Beach, Florida--(Newsfile Corp. - December 3, 2019) - It's no secret that some of the most lucrative and consistent ventures for investment have been the play through the resources of nature. From petroleum to fossil fuels and other minerals, asset rich basins have provided some companies the opportunity and leverage to expand their business models and financial interests exponentially. American Resources Corporation is poised to join that club. (NASDAQ: AREC)
In fact, American Resources Corporation (ARC) is already on their way as one of the few companies actively developing innovative methods to extract and monetize high-grade metallurgical carbon without the casualty of environmental destruction. Instead, this company is filling both global demand and remaining environmentally conscious in how it does business. And, the rewards of appealing to both interests may set the stage for rapid and near-term revenue growth from the high-quality, carbon metallurgy market.
Moreover, by evaluating the entirety of the company, investors may find that not only is American Resources Corporation in the right market at the right time but that there is an apparent disconnect between intrinsic value and the company's current market cap. Here's why.
Exploiting Demand While Maintaining Environmental Integrity
Positioned well within a growing market for their products, American Resources Corporation is a high-end supplier of raw materials to the ever-rising global infrastructure marketplace. The company operates under a simple mission; extract, process, refine, transport, and market metallurgical carbon to steel industries worldwide to satisfy the burgeoning demand in the infrastructure market. Why is their product so valuable? Because over 74% of the total amount of steel in the world has an irreplaceable ingredient - metallurgical carbon. More importantly, ARC has access to tons of it.
And, with the US holding the title as the producer of the highest quality met carbon, what better place to target investment than the metallurgical carbon mining and refining companies. After all, it's perhaps the only real way to get exposure to the mining industry without the negative repercussions associated with some companies in the coal sector. Moreover, American Resources is executing its strategy on the understanding that metallurgical carbon is a vital raw material in the infrastructure industry; however, it is also very versatile, and serves as an active ingredient for products other than steel. And, even as met carbon is a raw material for production, it is also one of the finished products of coal. Thus, not all coal is dirty. In fact, coal should be more properly recognized as a natural and dynamic mineral resource where, during its refining, several important products are formed - one of which is specialty carbon.
Notably, that specialty carbon is the principal constituent of the fuel used in producing cement. Thus, specialty carbon is a vital ingredient to roughly 88.5 million tons of cement manufactured in the United States during 2018. Hence, for that market alone, billions of dollars in revenues are up for grabs. Beyond being a vital ingredient to produce both industrial supplies and fuel, specialty carbon is also utilized in technology-driven applications from computer chips to cell phones, air filtration, silicon metals, and even the transport sector. Thus it's safe to say that the resources of coal have infiltrated diverse industries in the world. Therefore, investing in its parent product, metallurgical carbon, may present a significant step in the direction of lasting wealth. And, that makes American Resources Corporation an intriguing consideration.
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American Resources Taps Huge Opportunity In Metallurgical Carbons
As it stands, the market is more than flourishing, and surging demand took a market worth millions a few decades ago to billions by 2019. Moreover, it's a market that promises longevity and pricing power to the well-managed company, which may bode well for American Resources Corporation as they exploit their potential from their current market position, their strategy to explore niche opportunities and their already deployed operational team that has broken ground on four open mines with another thirty-five idle mines under their control.
To lay bare the competitive landscape, the carbon industry is saturated with little fragments of large players and a handful of small players who are deficient of adequate capital to operate. Hence, because American Resources is already extracting, processing and selling carbon, they are well ahead of potential competitive headwinds and are further insulated by the significant barriers to entry into the sector. Moreover, because American Resources sits well-positioned to capitalize on the current advancements which the metallurgical carbon market has been experiencing, they may ultimately benefit from the expected boom forecasted between the years 2019-2023. Presently the total market is estimated to be worth well over a staggering $179.71 billion. With an expected compound annual growth rate of 3.2%, the global metallurgical carbon market is anticipated to hit $239.34 billion by the year 2026. In essence, the time to invest and potentially "steel" the future is now.
Lowest Cost Operator In The Sector Brings Compelling Opportunity
Notably, American Resources is one of the lowest-cost producers of metallurgical carbon resources used in the production of steel for the burgeoning infrastructure market. There is a significant distinction that needs to be understood, though, noting that not all coal mining companies are created equally.
American Resources should not be characterized as a company that mines coal for fuel. This is because it doesn't incorporate environmentally detrimental methods in its mining processes. They also do not produce conventional coal products like fuel or other flammable hydrocarbons. But, just because they don't focus on traditional coal operations, don't consider them a small enterprise. As it stands today, the company owns five mining complexes all within the Central Appalachian Basin, located primarily within eastern Kentucky and Western Virginia.
Extremely attractive is that American Resources is operating as a self-sufficient corporation, and owns all the infrastructure utilized in the diverse stages of production and logistics. This ownership brings with it the leverage and capacity to expand its production at its already approved mines. Currently, the company holds roughly forty hard to get production permits central to all five of their processing and logistic complexes, with plans to bring more of their permits into production in 2020 and beyond.
These permits and capital assets add another component to the American Resources Corporation's competitive advantage. Primarily, they allow the company to maintain pricing power over competitors by controlling the ability to increase its operating margin during expansion as an economy of scale. The company is further strengthened by seasoned management that understands the value of their assets and, more importantly, how to strategically utilize them to build shareholder value through a disciplined business plan.
The American Resources Mining Assets Deliver Value
As earlier stated, the company has five operational subsidiaries where its mining and production activities take place. It's important to note that all the company's operations are not controlled by union influence and that its platforms are highly scalable and are currently running profitably at less than 25% of their nameplate capacity.
With that said, the first subsidiary is the MCCOY ELKHORN COAL LLC. Located in Pyke County, Kentucky, this subsidiary performs high-quality metallurgical carbon mining, processing and transportation operations. This state of the art facility has two operational mines with five more in development and anticipated to come online over the next 18 months. The McCoy Elkhorn Coal LLC has significant deposits of metallurgical carbon to feed the complex for decades.
Recently acquired this past September, the PERRY COUNTY RESOURCES LLC, located near the town of Hazard, Kentucky, produces metallurgical carbon products for steel makers worldwide as well as specialty stoker-sized products for a variety of industrial customers. The Company is currently implementing its strategic restructuring plan, since acquiring the complex, to boost efficiencies and profitability for this first-class operation.
Next is the DEANE MINING LLC, which deals in metallurgical carbon, PCI, as well as other industrial and specialty products. This Letcher County, Kentucky located mining subsidiary is fully equipped with state of the art processing and logistics infrastructure and a number of mines that can be brought into production in short order, and has significant carbon deposits even beyond the areas of development.
Moving on, the WYOMING COUNTY COAL LLC, which, as the name implies, is located in Wyoming County, West Virginia. This facility has two permitted underground mines and a deposit base to feed the complex with the highest quality of metallurgical carbon on the market which commands the largest premium. These mines are not yet operational, but they've been cleared and permitted for mining and have significant expansion possibilities. The Company has this slated for its 2021 growth phase.
Lastly, the KNOTT COUNTY COAL LLC subsidiary, in eastern Kentucky, has significant carbon deposits and is fully equipped with a modern processing facility and logistics infrastructure to bring future enhancements to the Company's production profile.
Taking the sum of the parts, each of these subsidiaries plays a vital role in the overall asset value of the American Resources Corporation. From the minerals to mine infrastructure, facilities, to the processing and handling of each of these subsidiaries, the potential recoverable assets from all subsidiaries are estimated to have a cumulative replacement value of over $327,650,000, an amount not reflected in the company's current market cap. Moreover, with the foreseen developments and rising demand in the industry, this value may ultimately increase substantially.
An Opportunity From A Well-Positioned, Well-Managed Company
Recognizing the assets and potential growth of American Resources Corporation is only one aspect that makes the company attractive. The metallurgical carbon marketplace is a second reason to appreciate the opportunity.
There is little dispute that the specialty market is well aligned for growth. In fact, evidence of a sharp rise in global demand for metallurgical coke (carbon) is apparent, and experts in the industry expect that 84 million tons of additional global coking carbon capacity per annum will be needed by the year 2025 just to satisfy the estimated demand. With that being said, American Resources Corporation, being one of very few operators with substantial planned growth in their metallurgical carbon pipeline, may emerge as a key supplier to satisfy the growing need of the global coking carbon market.
Even better, market data indicates that the annual seaborne demand for coking carbon is expected to increase an average of 1.5 percent per year through 2025. Thus, rising from 330 million tons currently to 368 million tons in the year 2025. And, as the demand grows, the market may realize strains from mine depletion, with experts in the industry suggesting that mine depletion will reduce annual output by 2% per year, or approximately 46 million tons by 2025. But, American Resources sees it differently and believes that an even greater revenue opportunity will be born from the potential gap of 84 million tons, which will need to be filled with new mine capacity as well as expansion by 2025.
According to American Resources, the mineral-rich assets in its portfolio represent a prime growing source of met carbon supply to fill the global market demand.
Import and Export Market Bring Significant Market Opportunity
American Resources Corporation may also benefit from the import/export market. In terms of exports, two major coking carbon markets are equal to the task, those being Australia and the US. With the lack of pipeline developmental projects in Australia, coupled with their logistical issues, the Australian coking carbon suppliers will definitely struggle to meet the under-supplied market gap. However, the US market is more mature, with the majority of production coming from the Central Appalachian Basin, which is in the American Resources wheelhouse.
On the import end, a significant opportunity comes from India. India is on the fast track of becoming the world's leading coking carbon importer. This, of course, is thoroughly utilized by the country in diverse sectors and to upgrade their infrastructure. India's indigenous carbon quality is graded as poor; hence, not much quality coking carbon is produced in India. This doesn't stop the Indian government from targeting 330 million tons of steel mill capacity by the year 2030, meaning that future coking carbon imports are a guarantee for India. With these imports, India has substantially increased its hot metal production from 55 million tons in 2013 to 78 million tons in 2018, more of which is expected in the future. India's need is American Resources' gain.
Finding Value In An Emerging Metallurgical Growth Opportunity
Successful long term investors often have two things in common. First, they are optimistic about their premises. And, second, they have data to back up their thesis. It's even better when there is shared optimism between investors and the companies they consider for investment purposes.
American Resources Corporation appears to check off all of the right boxes to place themselves in the category as a considerable value opportunity. First, they are exploiting a market that is experiencing rapid and sustainable growth. Second, the steel market and the metallurgical carbon market are expected to surge as global infrastructure projects continue. And, third, the company is already operating as a low-cost producer of a valuable global asset with margins that compare to other leaders in the industry.
Markets rotate and sectors come in and out of focus. But, by breaking from the herd, sometimes the best investment returns are made by those that capitalize on opportunities from the obvious. For American Resources Corporation to be valued at an approximate market cap of roughly $18 million and at the same time hold estimated assets in excess of $327 million, the disconnect is obvious.
But, the one thing that markets do repeatedly is correct. And, in this case, bringing intrinsic value and rational capitalization tables together may be in order. And for American Resources Corporation shareholders, once these two metrics align, significant shareholder value may be realized.
Soulstring Media Group
Disclaimer: This article should not be considered as investment advice. Author does not hold a position in American Resources Corporation stock and has no plans to initiate a new position within 72 hours after publication of this article. For full disclaimers, including compensation received for professional services, please click here.
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