No. of Recommendations: 4
Alpha Metallurgical Resources (AMR) is a coal miner and most of you are probably familiar with it from the Charlie Munger investment in 2023, a couple of months before his 100th birthday. Please forgive any errors in this write up. I am not a professional analyst. I started looking at the company a few days ago. But do let me know about any errors and more importantly your thoughts and views on AMR as an investment.
Why would anyone want to invest in a coal miner? If you are new to this, the thesis goes like this. They produce metallurgical coal (largest U.S. met producer) which is an important input in steel making. 25% domestic and 75% exported around the world and have a nice balance of the various types of met coal (High Vol-A 34%, High Vol-B 31%, Mid Vol 21% and Low Vol 14%). Alpha owns 65% interest in DTA coal export terminal, enhancing access to key export markets and diversifying its customer base. AMR has a new mine (Kingston Wildcat) coming online in Q2 producing Low Vol in demand product. (Low Vol stands for low volatility. “The molecular structure of Low Vol is dominated by heavy, complex, interconnected rings of carbon, rather than loose, volatile hydrocarbon chains. It takes far more energy to break these aromatic rings, which is why they resist vaporizing and remain behind as a solid”).
AMR’s mining operations are primarily in the Appalachian coal basin within the U.S. This region has the types of met coal that are useful in the production of high-quality steel, acting as a bonding agent. It is a commodity and AMR is a price taker but there is a demand for what they have.
AMR has a market cap of $2.23 billion and has net cash of $358m. Banks no longer lend to coal produces. Companies like AMR need to have strong balance sheets to survive the lean periods. Management “target minimum liquidity of $250-$300m”. Forward-contracting domestic volumes a year ahead provides AMR with predictable near-term cash flows, but it does not eliminate downside risk. The company's financial performance remains fundamentally tied to highly volatile global export indexes, meaning a downturn in international steel demand or unexpected spikes in mining costs can still severely compress margins.
It is currently close to breakeven. Historic Free Cash Flow is quite incredible but merely demonstrates the extreme operating leverage in a business like this, under different pricing environments for met coal, a double-edged sword.
2020 $(28.2m)
2021 $85.0m
2022 $1,300m (This is not a typo. That’s one point three billion!)
2023 $575.0m
2024 $348.6m
2025 $(20.4)m
2026 Q1 $(11.6)m
Capital allocation has been attractive to shareholders. The money from the 2022 boom was used to wipe out debt and retire 32% of the company’s shares outstanding.
What caused the boom in 2022? AMR hit the jackpot: sanctions on Russia coal sent met coal prices vertical. Prices have since come back down as Russia moved supplies to India and China. Prices are currently up 26% on last year due to weather related disruptions in Australia’s Bowen Basin. All kinds of future unknowns are going to happen, causing met coal price volatility.
There is no end to the variables and discussion on the dynamics of the global met coal market. The impression I get is broadly this.
Australia is the big producer with 45 – 50% share of annual met coal exports globally. Australia is closer than the U.S. to the biggest importers, so the shipping costs put AMR at a cost disadvantage, which is more pronounced currently with the war in Iran and oil price. The
Australian mines are largely surface mines making extraction cheaper than AMR’s underground mines.
In a commodity business, you usually want to be the low-cost producer to enable you to survive weak pricing environments. AMR is not even the low-cost producer in the U.S. let alone the global met coal market. Normally at this point, it would be sensible to stop and move on to something else. But Charlie Munger put $50 million of his own money into this in the second half of 2023: it can’t be that big of a dud surely? Extract from newspaper reports at the end of this “report”. It looks like Charlie doubled his money on AMR and the price has since come back down to around what he paid.
Some of the possibilities for what is going on include:
1. At the time Charlie bought, AMR was printing money. He could see that the cashflows were huge versus the market cap and the company was returning the funds to shareholders via buybacks. The balance sheet was going to be strong: a critical factor. AMR are a well run company with seasoned management. The ESG crowd has pushed investors away. The global economy was still going to need steel. There is a green recycled steel but there is not enough of it. Met coal is essential to the steelmaking process that enables global infrastructure growth and that includes wind turbines and electric vehicles as well as the rise of emerging economies. When asked if recycled steel was a threat, I believe Charlie exclaimed: horse feathers! The emerging economies like India need green steel using met coal. It’s possible that he would not like it today. He might not like that it is currently in the breakeven zone and the state of the global economy, with the oil shock amongst other headwinds, he might pass. We will never know.
2. AMR, like its U.S. competitors, is a “swing producer” taking advantage of price spikes in the global markets. The U.S. has a 14 – 16% share of the global met coal export market. Management can idle mines when prices are low and they can wait it out with their balance sheet. International sanctions, trade policies and weather are impossible to predict but supply and demand volatility is probably going to happen for whatever reasons. This argument probably only holds water up to a point. I imagine in a global recession and crashing met coal prices, AMR can’t stop completely and would start to bleed. Then it becomes a question of how long can they survive. It is encouraging that current management understand the business they are in and are balance sheet focused.
3. I get the impression that AMR is a medium cost producer within the US but that they have high quality met coal that is part of the equation for global steel producers. “AMR’s low-vol and mid-vol coals possess incredibly high coke strength after reaction. Australian premium coking coals are exceptionally strong but they behave differently when melting. Steel mills use AMR’s Appalachian coal as a bridge or balancing agent in their ovens to achieve the exact expansion and fluidity properties needed to protect the structural walls of the muli-billion-dollar blast furnace.” While Australia has a massive proximity advantage for steelmakers in Europe and South America, the U.S. East Coast is closer. Countries and companies like to diversify the source of vital industrial inputs.
4. There is a long-term supply and demand imbalance that will result in higher prices. On the demand side, India is committed to producing increasing volumes of steel for years into the future. Although China has recently pulled back and is sourcing from Mongolia. On the supply side, ESG has pulled the shutter down on new supplies but that can change as governments change.
Given the importance of the future price of met coal, maybe the way to think about an investment in AMR is that its like a call option on the price of met coal. My next assignment is to model the expiry date on that option under different prices for met coal. AMR Director, Kenneth Courtis (former Goldman Sachs), has been buying the shares aggressively as recently as 12th May 2026 buying $2.84 million worth, taking his ownership to $175 million. He must like the odds. Same for Charlie’s friend Mohnish Pabrai, who has a large stake and has been adding recently.
My personal main worries are threefold:
1. Clearly there are experts on met coal and I am not one of them. Not sure it’s smart to play cards when I am the patsy at the table. Being a medium cost producer worries me. The world can probably get along fine without AMR. That said, they are currently part of the global supply chain. Every chance that continues. I guess I could argue I am coat tailing Charlie, assuming things have not changed dramatically since he invested in 2023. The last time I copied Mohnish, who is a very successful and kind man, it was a company called Delta Financial Corporation in August 2007. A subprime lender which quickly went to zero.
2. I am worried about the global economy and the stock market. If I buy this and we go into a recession, it could be a very hard few years watching them fight for their lives and a share price that could go much lower. Then again, I have been predicting a global recession every year for several decades. As I get older that seems to become more convincing. One of these years, I will be right!
3. The price spike in 2022 causing abnormal profits, feels like a moth to the flame and there are dangerous bias at work. It was a short-term spike and seems highly unlikely to reoccur to that degree. The reality is this is a company with an enterprise value of around $2 billion and it is currently not making any money. That said, maybe with its strong balance sheet it can survive a recession and depressed steel demand and then make decent money and return it to shareholders.
In conclusion, if I am being honest with myself, I am interested for one reason and one reason only. Charlie Munger bought it. That’s not good enough. I should take Charlie’s inversion mental model and properly look at what happens to AMR during a deep and protracted global recession. Properly understanding the downside is likely the best strategy here. The up side is obvious.
“In the year before he died, Munger made one of the most unexpected trades of his career: a more than $50 million paper gain from two coal companies he had largely avoided for six decades. He saw producers like Consol Energy and Alpha Metallurgical Resources trading at inexpensive levels in 2023, despite long-term industry scepticism, and decided the setup could be attractive. Consol doubled before his death, Alpha surged, and friends note the combined gains crossed the $50 million mark."
