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Investing.com -- Moody's (NYSE:MCO) Ratings has confirmed the B1 corporate family rating (CFR) for Warrior Met Coal (NYSE:HCC), Inc., also known as Warrior. The B1-PD probability of default rating (PDR) and the B1 rating on its senior secured notes were also affirmed. The Speculative Grade Liquidity Rating (SGL) remains at SGL-1, with a stable outlook.
The B1 CFR for Warrior is supported by its high-quality, low-cost metallurgical coal assets. The company operates two coal mines in Southern Appalachia, which produce low-vol and high-vol A hard coking coal. Warrior's operation history, precautionary measures, and benchmark-quality coal allow the company to generate good margins, even in a weak pricing environment.
Warrior is currently developing its Blue Creek met coal reserves, with longwall production expected by 2026. The company has a solid setup with long-term contracts for exporting out of the Port of Mobile in Alabama. Most of its clients are blast furnace customers in Europe, South America, and Asia. Warrior's limited legacy liabilities and strong liquidity compared to many coal industry peers support its operations.
However, the rating is limited by operational concentration, as the company operates fewer mines compared to its US rated peers, and the inherent volatility of metallurgical coal prices.
The development of Blue Creek reserves will increase Warrior's production capacity by 60%, with an estimated production capacity of around 4.8 million short tons per year of low-cost high-vol-A metallurgical coal. The total capital expenditure (capex) associated with the project is around $995 million to $1.075 billion. Warrior has spent nearly $600 million on the project as of September 2024, with 2025 expected to be another capex-heavy year. The company has been funding this project with internally generated cash flow, and it is expected to fund the remainder of the spending similarly.
Based on a met coal price assumption of $225 per metric ton, Warrior's 2025 EBITDA is expected to be around $320 million. The company is likely to experience a free cash flow burn of around $140-150 million, mainly due to elevated capex associated with Blue Creek development. Beyond 2025, Warrior is expected to return to positive free cash flow generation, aided by higher production levels and reduced capital spending needs. Moody's adjusted leverage is expected to be around 0.5x over the next 12-18 months.
The SGL-1 rating reflects Warrior's strong liquidity to support operations over the next 12-18 months. As of September 30, 2024, the company had about $746 million of available liquidity, including $583 million of cash and cash equivalents, $49 million of long-term investments, and about $113.5 million of availability under its $116 million asset-based revolving credit facility. The company is expected to burn around $140-150 million in free cash flow in 2025, funding the Blue Creek development with cash on hand and internally generated cash flow. The credit agreement contains a minimum fixed charge coverage ratio of 1.0x that is only tested when excess availability falls below certain thresholds. This covenant is not expected to be tested in the near term.
The stable outlook reflects Moody's view that Warrior can remain profitable even in a weak and volatile met coal price environment, and fund the remainder of its capex requirement for Blue Creek with cash on hand and internally generated cash flow over the next 12-15 months.
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