Alpha Metallurgical Resources Inc., a U.S. supplier of metallurgical products for the steel industry, has responded to a report from what they call “an activist short-selling firm.” According to the company, the report contains “false and misleading characterizations” about Alpha’s business.

Spruce Point Capital Management, a long-short hedge fund, issued a strong sell opinion on Alpha Metallurgical Resources highlighting how it believes the company could face 40%-60% downside risk.

Alpha believes the report was designed for the sole purpose of negatively impacting Alpha’s share price for the short seller’s own benefit.

“We have worked hard to earn a strong reputation for ethical operations and transparent reporting, and these principles remain critically important to all of us at Alpha,” Chair and CEO David Stetson said. “The document released by an activist short seller today is filled with inaccuracies and appears to be fueled by an inadequate understanding of coal mining and our reporting requirements.”

In its report, Spruce claimed that Alpha’s actual revenues from coal sold to Brazil were lower than what was reported. Alpha said export revenue to Brazil exceeded 10% of its total revenue, so Spruce estimated it accounted for a minimum of $226 million and $142 million of export revenue (inclusive of freight) in 2021 and 2020, respectively. “Spruce Point has sourced Brazil import records amounting to 626,000 and 866,000 metric tons shipped in 2020 and 2021,” the report said. “Using published reference prices, we estimate Alpha’s revenues from coal sold to Brazil were closer to $95 to $99 million.”

It also called out what it believed to be “questionable business activities” between Alpha and closely related companies.

Spruce Point said Alpha made numerous reporting changes to how it classified freight and handling revenues and costs. Initially, it allocated all the costs to the trading and logistics segment, then allocated them among its various regional production segments. “Alpha’s freight and handling reporting per ton is suspiciously higher than all of its U.S. reporting coal peers,” the report said.

Spruce Point also questioned Alpha’s stated reserves. At IPO, it said the company promoted 1.3 billion tons of reserves. It acquired 611 million tons from the merger with Alpha Natural Resources in 2018 and divested 733 million tons. It also produced 86 million tons from 2016-2021, the report said. “Yet, after revisions and implementing new SEC reporting guidelines, proven and probable reserves are just 351 million tons,” the report said. Spruce Point also questioned Alpha’s qualified expert that it used for the estimates, claiming that it might not be “independent.”

Spruce Point also claimed that there is evidence showing that Alpha booked revenues from its customers using Dominion Terminal Associates (DTA), which Alpha owns 65%, and avoided recognition of DTA’s operating expenses. “Based on a relative reporting analysis between Alpha (65%) and Arch Resources (35%), it also appears that Alpha may be under-reporting DTA costs,” the report stated.

Spruce Point also felt Alpha’s cash generation shouldn’t be taken at face value. It said 48% of cumulative operating cash flow from 2019-2021 came from tax refunds and interest on NOL carryback claims, “most of which were higher than initial guidance provided in 2019.” It then compared this to other coal companies, Arch and Peabody, which it said generated 12% and 8% of cash flow from refunds, respectively. It said these “one-time” refunds won’t be repeated, and will become a major headwind going forward.

Spruce Point also believes there is evidence of overstated cash, significant cash shortfalls, and substantial “hidden” off-balance sheet debts.

Alpha’s board of directors affirmed its confidence in the company’s management and strategic direction. “On behalf of the entire board, we stand in support of the exceptional management team running Alpha Metallurgical Resources,” Lead Independent Director Michael Quillen said. “Their collective efforts have produced the company’s strong recent quarterly results, a significantly deleveraged balanced sheet, and the establishment of robust shareholder return programs —including our newly increased $600 million share repurchase plan and the establishment of a quarterly dividend.

“Alpha’s board believes the short-seller report is the work of a self-interested activist investor hoping to distort the company’s record for its own gain. It’s our view that Alpha remains well-positioned for long-term success and the board continues to have great confidence in our strategic direction.”