On Thursday, Citi made a significant adjustment to its stance on Warrior Met Coal (NYSE:HCC) stock, shifting the rating from Neutral to Buy. The firm also increased its price target for the coal producer, setting it at $75.00, a notable rise from the previous $60.00 target.
The positive revision comes as Citi acknowledges the incorporation of additional volumes from the Blue Creek project, estimated at an increase of 4 million tons, into Warrior Met Coal's valuation. The analyst at Citi expressed a positive outlook on metallurgical coal, particularly as a beneficiary of anticipated growth in Indian steel production.
Warrior Met Coal, alongside Arch Resources, is recognized for its potential to generate a sustainable free cash flow (FCF) yield of 5-25% with benchmark metallurgical coal prices ranging between $200 and $300 per ton.
The new price targets reflect a 10% FCF yield based on an approximate price of $225 per ton for Warrior Met Coal, translating to $185 per share for Arch Resources and $75 per share for Warrior Met Coal, adjusted from a previous valuation based on 5 times the estimated 2024 EBITDA.
The adjustment in the stock's outlook and price target indicates Citi's confidence in Warrior Met Coal's future financial performance, particularly in light of the market dynamics and the company's strategic initiatives. The upgrade suggests that investors may also see the stock as a more attractive investment opportunity in the metallurgical coal sector.
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