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8-K - CURRENT REPORT - American Resources Corp | arec_8k.htm |
Exhibit 99.1
July
26, 2018
2018
Letter to Shareholders
Dear
Shareholders:
I am
pleased to provide the first, of what is expected to be an annual,
shareholder letter detailing our developments and progress over the
past year and our expectations for the upcoming year. American
Resources Corporation, through our wholly-owned subsidiary, Quest
Energy Inc., is focused on increasing coal production in the
Central Appalachian Basin through a combination of expanding its
currently producing coal mines, bringing its existing idled,
permitted mines back into production, and strategically acquiring
additional permits, and operations. Throughout this process, we are
fully-committed to our proven business model to be one of the
safest, lowest-cost, and most efficient coal mining companies in
our space.
When
the management team founded the company in early 2015, we set out
to pull from our combined expertise in restructuring inefficient
businesses and our prior first-hand experiences in managing coal
mining operations over the last decade. Our mission was to
opportunistically identify (1) good operations that could be
acquired in an accretive manner that have sizable organic growth
opportunities, (2) mismanaged operations where we can use our
collective experience to “right-size” the operations,
and (3) operations that can be completely restructured, resulting
in expanding margins and quickly made into a productive asset. From
this systematic restructuring process, our operations emerge
stronger and able to withstand coal supply and demand cycles.
Though this company is still relatively young, we have already
implemented our strategy and we’re beginning to see the
intended results.
Over
the past year, American Resources has brought five new mines into
production and purchased another metallurgical coal mine, in
addition to its already-producing metallurgical coal mine, Mine
#15, at our subsidiary, McCoy Elkhorn Coal. High-Vol metallurgical
coal contains certain characteristics, such as fluidity, not
typically found in all coals, and for that reason, metallurgical
coal sells at a premium to compliant thermal coal (which is used in
electricity generation).
Across
the company, we intend to have a strong mix of metallurgical,
thermal, and specialty coal production, thereby capitalizing on the
various strengths of each coal market. Currently, metallurgical
coal production accounts for approximately 70% of our revenue, with
gross target margins of approximately 25%. As our business grows,
company-wide, we anticipate metallurgical coal to be a majority of
our coal production, and targeted margins for all our operations to
be in the 24%-29% range.
With
that in mind, I will summarize what our company has accomplished
over the past year:
●
In late summer of
2017, we restarted production at the idled Access Energy
underground mine at our Deane Mining subsidiary, which allowed us
to also restart the adjacent coal processing facility as well. We
started shipping to domestic and international thermal customers
shortly thereafter and are working to expand production at Access
Energy with additional equipment purchased this
summer.
●
During the summer
of 2017 we continued development work at our Carnegie 1 underground
mine at McCoy Elkhorn, which was a previously idled mine when we
acquired it. Production from Carnegie 1 is now being used to blend
with McCoy Elkhorn’s Mine #15 to produce a High-Vol
“B” metallurgical coal product that we ship to both
domestic and international customers. We continued to work on
lining-out production at Carnegie 1, which is in the Lower Alma
coal seam, throughout the first part of 2018 and anticipate it to
be a significant driver of our profitability as production
increases.
Page 2
●
In early summer of
2018, we started production on our Razorblade Surface mine, a
greenfield project in multiple coal seams, including the Hazard 4
Rider, Whitesburg, Amburgy, and Hamlin coal seams. We currently
operate this mine as a contractor model, whereby the cost of coal
extraction is fixed on a “per-ton” basis. The coal
produced from this mine is trucked directly to the preparation
plant or rail loadout at our Deane Mining subsidiary, less than a
mile from the mine.
●
In early summer of
2018, within the same property as the Razorblade Surface mine, we
operate the Jeffery Mine which utilizes a modified Jeffery Miner,
combined with a bridge system, as a low-cost high wall miner. We
are currently producing on the Hazard 4 coal seam and may be able
to utilize it on other seams and projects in the future. Similar to
the Razorblade Surface mine, coal from this job is shipped directly
to Deane Mining’s CSX train loadout, less than a mile from
the mine. We believe we are the first and only operator in the
country to get such a mining system fully acknowledged and accepted
by federal and state regulators.
●
In summer of 2018,
we also started production on our newly-acquired Wayland Surface
mine. While that operation is leased through our third operating
subsidiary, Knott County Coal, the coal is transported, processed,
and sold to various customers of our Deane Mining complex, along
with the coal produced from the Razorblade Surface and Access
Energy mines.
●
Finally, in spring
of 2018, we acquired the PointRock surface mine as part of our
McCoy Elkhorn Coal subsidiary. The PointRock mine has several seams
of High-Vol “A” and “B” metallurgical coal,
including the Lower Alma, Upper Alma, Cedar Grove, and Pond Creek
coal seams. Currently we are doing some development work at the
mine as part of our acquisition restructuring to get the operations
prepared for highwall mining and auguring, in addition to contour
and area mining. Similar to our Carnegie 1 mine, we anticipate the
coal from PointRock to be blended with our current production at
McCoy Elkhorn to both enhance the volume out of that complex and
strengthen the qualities of metallurgical coal sold from McCoy
Elkhorn.
With
the ownership of a substantial number of other idled, permitted
coal mines throughout our three operating subsidiaries (McCoy
Elkhorn Coal, Deane Mining, and Knott County Coal), we have
significant continued organic expansion ability of high-quality
metallurgical, high BTU & low sulfur thermal, and
industrial/specialty coals. Over the next twelve months, we look to
capitalize on this in several meaningful ways:
McCoy Elkhorn Coal: Over the next year, we anticipate
continuing expansion of our production at both Mine #15 and
Carnegie 1 mine. We continue to perform face-up work on our second
underground mine in the Lower Alma coal seam called Carnegie 2 and
anticipate production to start at the end of 2018 or early 2019. At
that point, we anticipate starting the face-up work on our third
permitted underground mine in the Lower Alma seam called Carnegie
3. Carnegie 1, 2, and 3 all access the same large boundary of Lower
Alma coal, which is high-quality High-Vol “B”
metallurgical coal. Furthermore, we anticipate our PointRock
surface mine, that was acquired in early 2018, to be in production
later this year. Finally, as part of our work over the next twelve
months, we anticipate working on permitting an underground mine in
the Upper Alma coal seam, which has demonstratable High-Vol
“B” metallurgical coal characteristics similar to our
Carnegie mines, as well as evaluating the mine plans for our
permitted Upper Alma mines adjacent to the Carnegie
mines.
Deane Mining: We have made major strides to increase our
production at all of our properties that feed the Deane Mining
complex. We have acquired additional equipment for the Access
Energy mine that should start to increase production at the mine
substantially over the next several months. At the Razorblade
Surface mine, we have just commenced production and anticipate
increasing production substantially in the coming months, alongside
production from the Jeffery Miner. Over the next twelve months, we
anticipate making substantial progress on bringing our idled Love
Branch underground mine into production, beginning with some
permitting work to change the orientation of the mine plan. Located
in the Elkhorn 3 coal seam, we anticipate the coal quality to be
very similar to our existing Access Energy underground mine.
Additionally, we have begun preliminary planning and development on
our permitted mine in the Elkhorn 2 seam called Access North. Being
a large boundary of high-quality coal, we expect Access North to be
a significant contributor to our base production at the Deane
Mining complex for many years to come. We are also evaluating the
potential to access a large boundary of premium Lower Elkhorn coal
through the same Access North permit.
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Knott County Coal: In addition to the currently-producing
Wayland Surface mine, we are working on modifying the permit for
another surface mine in the Hazard 4 coal seam called Topper. With
significant contour, area mining, auguring, and highwall mining of
the Hazard 4 throughout our reserve area in Knott county, we
anticipate substantial long-term production potential out of our
upcoming Topper surface mine. We are in the planning phase of
starting our greenfield Bill D underground mine in the Elkhorn 3
seam as well as reopening the idled Classic underground mine, also
in the Elkhorn 3 seam. Furthermore, given its close proximity to
our Supreme Energy coal preparation plant and Bates Branch rail
loadout at Knott County Coal, we are evaluating the possibility of
restarting those processing and rail loading operations should the
coal volumes justify those operations.
During
the first quarter of 2018 the company generated total revenue of
$7.35 million from its mining and processing operations. The
revenue generated was primarily from our McCoy Elkhorn Mine #15
underground mine and our Deane Mining Access Energy underground
mine. As you can see throughout this letter, over the course of the
last four months we have invested considerable resources on
equipment and infrastructure used to expand the production at both
of these operations and expect to begin seeing benefits of such
investment in the third and fourth quarter of this coming year.
Furthermore, in addition to Mine #15 and Access Energy being in
operation during the first quarter of this year, we have commenced
operations at four other mines since the beginning of July. As a
result, we can realistically expect to see a significant jump in
revenues during the 3rd and 4th quarter of this year, from having
two mines generating $7.35 million in revenue in Q1 2018 to having
expanded production at those mines and having the other four mines
that are ramping up production currently. Overall, we are very
pleased with the rate of our organic growth and anticipate being
able to surpass or exceed that rate of growth in the future with
the opportunities we have with our current ownership of mining
permits.
From a
sales perspective, our coal sales are currently strong and demand
for our coal remains robust. We continue to expand production at
all our locations in order to participate in additional coal sales.
We have been invited to participate in the 2019 request for
proposals from all of the major North American metallurgical coal
purchasers, and we continue to develop and strengthen our
international coal sales and relationships.
With
respect to potential acquisitions, we are evaluating several
opportunities of a wide-ranging geographic footprint and
operational size (from acquiring permits to tuck-into our current
operations, to larger acquisitions that involve entire operating
complexes). In each case, our acquisition targets are specifically
identified to allow us to remain true to our corporate philosophy
of remaining one of the lowest-cost, most efficient coal producers
in Central Appalachia. While our ability to consummate these
transactions depends on many factors, including successful
negotiations and having additional capital to put towards
development of these mines, we remain optimistic and confident that
we will see some of these opportunities come to fruition in the
future and become a significant contributor to our overall
operations and profitability. We believe our acquisition pipeline
will remain robust for many years to come.
Given
our strategy of building, acquiring and increasing efficiency of
operations, we have overcome many hurdles and challenges that come
with operating a rapidly-growing coal mining operation. As with any
business, we expect to face additional hurdles in the future and
believe it’s how we continually react and adjust that
separates us as a company and advances our business forward. We are
incredibly excited about our progress as a company to-date and the
potential growth we have going forward. While we have grown rapidly
in an industry that has seen relatively little investment for
expansion, we remain focused on our core values as a company and
have well-placed confidence that we are executing to become one of
the preeminent players in the Central Appalachia coal
market.
Lastly,
and most importantly, we wish to thank all of our hard-working,
dedicated men and women that help to make our company better each
and every day. We fully appreciate that coal mining is not an easy
job and without everyone’s commitment to our team and
adherence to our company culture, there would be no doubt we would
not have the opportunities available to us today. We look forward
to growing our team as we expand our operations.
We look
forward to updating our shareholders on our progress.
Sincerely,
Mark
Jensen
Chief
Executive Officer
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Special Note Regarding Forward-Looking Statements:
This
shareholder letter contains forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties, and other important factors that could cause the
Company’s actual results, performance, or achievements or
industry results to differ materially from any future results,
performance, or achievements expressed or implied by these
forward-looking statements. These statements are subject to a
number of risks and uncertainties, many of which are beyond the
control of the Company. The words “believes”,
“may”, “will”, “should”,
“would”, “could”, “continue”,
“seeks”, “anticipates”,
“plans”, “expects”, “intends”,
“estimates”, or similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain such identifying words. Any
forward-looking statements included in this press release are made
only as of the date of this release. The Company does not undertake
any obligation to update or supplement any forward-looking
statements to reflect subsequent events or circumstances. The
Company cannot assure you that the projected results or events will
be achieved.