Description

Thesis

ANR, Inc. represents an excellent risk/reward that vastly underprices its interests in a collection of thermal (steam) and metallurgical (coking) coal assets.

ANR, Inc. is a post-bankruptcy equity, stemming from the old Alpha Natural Resources (former ticker ANR). Alpha Natural filed for bankruptcy in 2015 and emerged on July 26, 2016 - the majority of its "good" assets were combined to form Contura Energy, Inc. (ticker: CNTE), while its "bad" assets were left behind to form ANR, Inc. While CNTE has traded publicly for several months, ANR, Inc. is now just doing so.

In a complex and sluggish series of events, holders of Alpha Natural unsecured claims received common stock in ANR, Inc. (among other things). This stock now represents a roughly 44% equity interest in ANR, Inc. Holders of Alpha Natural first lien paper, and a small portion of Massey secured claims, received preferred shares that represent the remainder of ANR, Inc.'s equity. Notably, the preferred and common shares are treated equally, i.e., the preferred stock is not senior to the common, it merely receives a larger percentage of the company's first $75M of distributions. So the common' stock's ownership percentage slowly slides higher as the combined equity value of ANR, Inc. increases.

To complicate matters, ANR, Inc.'s common stock trades as what has been referred to as a "strip" where the OpCo and the HoldCo are represented by two different stocks, tickers ANNNC and ALHA, respectively. These two stocks combined represent one share of common stock and should be considered "one stock" - I recommend interested parties buy them in tandem.

After a few years of depressed pricing for coking coal, a number of factors have conspired to cause a "super spike" in pricing from a recent low of roughly $90 per ton to recent quotes pushing $300/t. While coking coal prices have since come down from these lofty levels, I expect the new baseline pricing to be well above recent lows as significant supply has come offline permanently.

The numbers

1- ANR, Inc. is expected to have roughly $125M of net debt upon emergence, consisting of roughly $250M of cash, $75M of debt and $300M of ARO liabilities.

2- I conservatively estimate ANR, Inc. will ship 12M tons going forward, split 50/50 between coking coal and steam coal. I assume the company is EBITDA breakeven on the steam coal side, with the main lever being coking coal pricing.

3- For 2017, I assume an annual coking coal price of $175 per ton, which generates EBITDA of roughly $300M for ANR, Inc. For 2018, I assume an annual coking coal price of $130 per ton, which I estimate will generate $150M of EBITDA.

4- Current net debt of $125M flips to net cash of $75M by the end of 2017 as the company generates free cash flow over the course of 2017.

Valuation

At a current strip price of $20 (ANNNC and ALHA shares combined), the common stock market cap is $140M - this represents roughly 44% of ANR, Inc.'s total equity value (again, the % ownership for the common shares goes higher as the total equity value of ANR, Inc. increases). This implies a market cap of $320M for ANR, Inc., and an enterprise value of $245M by year end 2017, which computes to an EV/2018E EBITDA multiple of 1.6x.

Assuming the company can be awarded a 3x EV/EBITDA multiple, which represents a deep discount to comparable market multiples, the shares would be worth $33. Further, I believe my assumptions on the trading multiple, as well as coking coal pricing in 2018 and beyond, are conservative. If that is the case, upside to this $33 price is significant.

Catalyst

1- Many Alpha Natural unsecured note holders are awaiting their ANR, Inc. common stock distributions, which are expected any the coming days. This should increase ANR's trading liquidity and general public awareness

2- Confirmation of my assumptions, all taken from the publicly filed Alpha Natural bankruptcy docket and SEC filings, should occur once ANR, Inc. begins to report earnings and makes other disclosures as a publicly-traded, standalone entity