HOME

FA Alpha Daily

This company is supplying the coal needed for the supply chain supercycle

Decades of underinvestment have left U.S. infrastructure crumbling, but a massive rebuilding effort is underway. Steel production is set to soar as roads, bridges, and factories are upgraded—driving demand for key raw materials like metallurgical coal. Warrior Met Coal (HCC) is positioned to benefit, supplying the high-quality coal essential for traditional steelmaking. In today’s FA Alpha Daily, we explore how Warrior’s expansion plans and disciplined strategy could fuel long-term growth.

FA Alpha Daily
Powered by Valens Research

We have been talking about how big the Supply Chain Supercycle will be, and each day we see more proof that that’s the case.

The supply chain has seen underinvestment and aging infrastructure for over two decades. As a result, the U.S. infrastructure, both public and private, has slowly deteriorated.

More than 7% of bridges are structurally deficient, and there is a water main break every two minutes, resulting in billions of gallons of treated water lost daily.

Corporate assets are also aging, with the average age of assets at their oldest level in over 20 years.

The ratio of net to gross property, plant, and equipment (PP&E) has declined from nearly 59% in 2001 to currently 54%. It will take over $500 billion to bring asset values back to 2001 levels.

This lack of investment has constrained supply chain capacity and efficiency.

The pandemic exposed vulnerabilities as outdated infrastructure struggled to meet surging demand. It was a wake-up call for much-needed upgrades.

The $1.2 trillion Bipartisan Infrastructure Law aims to rebuild aging infrastructure across the United States.

This investment is expected to generate sustained demand for industries involved in next-generation infrastructure over the next 10 years.

We are making our supply chains more efficient and resilient by renewing our infrastructure.

Lots of companies have already started plans to bring their manufacturing facilities home to be closer to the customer.

However, this is only the start of a decade of increasing infrastructure spending.

In order to discover investment opportunities, we should be looking at where the money flows as investments ramp up.

All the arrows lead in one direction. These companies need materials to build new facilities and infrastructure, especially steel.

That means we need more products that go into steel, like metallurgical coal. Metallurgical coal is used in basic oxygen furnaces (“BOF”) to make steel initially.

This is great news for Warrior Met Coal (HCC)

The company operates mines to produce coal and sells it to steel manufacturers all around the world.

It also sells natural gas, which is extracted as a byproduct of coal production.

While the market often fixates on price swings and potential policy changes in the coal industry, Warrior’s strategy of delivering specialized, high-quality metallurgical coal positions it well against short-term volatility.

A key aspect of the company’s business is its focus on export markets. Much of the coal it produces heads to fast-growing regions like India and South America, where steel remains a critical part of infrastructure and manufacturing.

This global reach helps the company maintain strong operating margins, as it serves customers who rely on its premium coal to make steel products for building projects, automobiles, and various industrial applications.

Though coal markets can experience cyclical downturns, Warrior’s ability to operate efficiently and control costs has enabled it to withstand these cycles better than many of its peers.

Central to the company’s outlook is the Blue Creek growth project, which is expected to boost its production capacity significantly by the end of the decade.

Once fully operational, the mine is poised to add up to 4.8 million short tons of high-quality coal annually, allowing the company to tap further into robust steel demand worldwide.

This expansion is designed with careful attention to cost management, ensuring that the project remains on budget and schedule.

By ramping up production at a time when many steel-producing regions are still expanding, Warrior could be well placed to capture additional market share.

Another factor that sets the company apart is its disciplined use of capital. Historically, Warrior has deployed funds toward operational improvements, new developments, and returns to shareholders.

This measured approach has allowed it to stay nimble, especially during periods of lower coal prices.

In a commodity market, a conservative capital strategy can make the difference between riding out a downturn and suffering damaging losses.

That resilience shows in the company’s strong track record of maintaining healthy margins through various phases of the commodity cycle.

With all of these factors and the Supply Chain Supercycle, we will see more demand for steel and, therefore, for metallurgical coal. 

Warrior has already started to benefit from these trends by achieving a strong 21% Uniform return on assets ‘’ROA’’ and 27% asset growth.

However, the market doesn’t seem to recognize how long these investments will continue.

The stock trades at only 16.1x Uniform price-to-earnings “P/E”, which might be very low for a company that expects increasing demand in the upcoming years.

Our EEA model clearly shows this.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 6% from 21% last year.

The market is also concerned about the eventual rise of “green steel” technologies, which aim to reduce or eliminate coal in steelmaking. 

However, these methods are still in the early stages and face challenges related to profitability and large-scale implementation.

Meanwhile, infrastructure projects and industrial development continue to rely on conventional steel production methods. As a result, demand for metallurgical coal remains intact for the foreseeable future.

Warrior’s combination of premium product focus, expanded production plans, and capital discipline places it in a favorable position.

Its strategy highlights the importance of maintaining low operating costs and targeting export markets that need consistent supplies of high-grade metallurgical coal.

If steel demand remains resilient, Warrior could see growth that outpaces market expectations.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

Today’s analysis highlights the same insights we share with our FA Alpha Members. If you want to an get in-depth analysis of market trends and uncover undervalued stocks, become an FA Alpha Member today.

Subscriptions & Services

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at +1 630-841-0683