This morning Allegiance Coal (AHQ) released a truly terrible announcement. We had been expecting AHQ to announce record coal volumes and the company’s previous problems in ramping up production were behind them and cash flow and profitability would start.
The complete opposite was true with the company announcing a strategic review because they have been unable to successfully ramp up production to previous expectations.
Legacy coal sales contracts at New Elk, coupled with production constraints, staffing issues, and poor logistics performance in transporting coal to port, have meant that the mine is running at an operating cash flow loss which has significantly constrained cash flow.
The most concerning statement in the information released is “it is currently unclear if Black Warrior or New Elk have the capability to meet, within a material margin, previously advised target production rates.”
With comments like the above, the investment thesis for this company is breaking down.
What is difficult to take is that the company provided guidance in the March 2022 quarterly report that showed everything was on track. This is in contrast to AHQ ‘s rhetoric with Actual Numbers released today
For instance, in relation to the March update and guidance for theNew Elk mine, it was stated“April is already on track to exceed that and reach more than 200,000 tonnes of ROM production in the June quarter”
Today’s update highlights actual ROM production was 135,163 tonnes – a miss of 33%.
Similarly, in regards to the March update and guidance for the Black Warrior mine, it was stated “we currently expect ROM production to exceed 150,000 tonnes for the June quarter yielding around 110,000 tonnes of saleable coal.”
Todays update highlights actual ROM production was 84,828 tonnes with saleable coal of 52,669. This was a miss of 48% on saleable coal.
This news was released to the market this morning at 9.57 am, and the shares started trading for the day at 10.12 am. Unfortunately, this did not give us enough time to fully digest the news and make a recommendation to exit at the opening price, with the share price now trading at $0.205 and the share price down some 62.5% from the close yesterday.
The question now is what we should do i.e. hold and wait for the outcome of the strategic review or exit take the loss on move on.
Whilst we could hold to see what plays out, the key risk is not knowing how long it will take for the company to start executing to the market’s expectations (if it ever does), so, we don’t want funds tied up waiting for a company to execute. That said, exiting would free up funds to be used on the next leaders once the market starts to turn.
TRADE ACTION
Exit at market
The loss of the model portfolio if sold at $0.20 will be $7,325.