Alpha Metallurgical Resources - Earnings Call - Q2 2021

Transcript

Speaker 0

Good day, and welcome to the Alpha Metallurgical Resources Second Quarter twenty twenty one Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Emily Auchlin, SVP, Corporate Communications.

Please go ahead.

Speaker 1

Thank you, Matt, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, Q and A period, our comments regarding anticipated business and financial performance contain forward looking statements, and actual results may differ materially from those discussed. For more information regarding forward looking statements and some of the factors that can affect them, please refer to the company's second quarter twenty twenty one earnings release and the associated SEC filings. Please also see those documents for information about our use of non GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Alpha's Chair and Chief Executive Officer, David Stetson and President and Chief Financial Officer, Andy Edson.

Also participating on the call are Jason Whitehead, our Chief Operating Officer and Dan Horn, Executive Vice President of Sales. With that, I'll turn the call over to David.

Speaker 2

Thank you, Emily, and good morning to everyone on the call. Today, we are pleased to announce another solid quarter of financial performance. The team and I look forward to discussing those results along with midyear analysis of twenty twenty one, how we see the back half shaping up and what we're doing to set ourselves up for an excellent start to 2022. Before we do that, I want to briefly reflect on the significant progress made during the last couple of years and connect those accomplishments to our current circumstances and our vision for the future. Approximately two years ago, Alpha's senior management team came together as a cohesive unit, established a broad vision and strategy for the future success of the company.

The expansive volume of good work that has been done in a relatively short period of time is remarkable. We divested non core assets and set ourselves on a nearly complete pathway to becoming a pure play metallurgical producer. Slabcamp, our last remaining thermal mine, is expected to close roughly one year from now, at which point we'll have no remaining thermal operations. We have strategically fine tuned our metallurgical portfolio with an eye toward longevity and diversity of products, carefully deploying capital to transition away from higher cost mines. This work coupled with the implementation of Jason's vision for a more streamlined enterprise has also yielded a more advantageous cost structure that allows us to weather downturns in the market and capture upside when the markets rebound.

Above all, our team has stayed focused and disciplined in building the strong foundation for our future growth and success. Now we see this work beginning to pay off. In terms of the current market, the Australian PLV Index hit a low for the year in January of approximately $102 with gradual increases throughout the second quarter. This left the Australian linked portion of our portfolio lagging and negatively impacting our overall average cost realizations in the second quarter. However, that index has increased by roughly 115% in just six months to recent levels in the $219 range.

With this rebound in Australian indices and a general positive market environment across the globe, we expect our second half realizations to reflect these much stronger levels. We're increasing our production guidance for the year as we anticipate mining roughly an extra 1,000,000 tons of coal than the midpoint of our prior range. Looking ahead, we've already settled some 22 North American business and expect discussions to begin in earnest in the coming weeks. With demand projections remaining strong for the immediate future, we expect to be able to build our cash balance and aggressively pay down debt. In keeping with my previously stated interest in delevering, we accelerated timeline for completing one of our legacy payment obligations with the West Virginia LCC note.

This occurred subsequent to the quarter close and Andy will cover this decision in more detail. From a high level perspective, I see this as another step in solidifying the organization financially and is further evidence of the executive team's focus on strengthening our balance sheet. Along those lines, our cash management strategy will continue to hinge on the prudent use of funds to help build and maximize value in our organization. In his remarks, Jason will tell you more about our decision to add a fourth section at Road Fork fifty two and why we believe this is advantageous use of our capital that will serve us well and offer expected paybacks in well under six months. In summary, in addition to reporting another strong quarter performance, I think the state of the business is solid and well prepared to capitalize on the current market strength and high demand for met coal that is projected to extend well into the future.

Now for some additional details on operation, turn the call over to Jason Whitehead.

Speaker 3

Thanks, David, and good morning, everyone. As you know, we've made great strides in the last year to streamline and optimize our operations, shifting production to lower cost mines. As David said, this work has already paid off with a much improved cost structure. Our teams delivered again this quarter with met cost of coal sales coming in at $69.94 a tonne, roughly $2 than the prior quarter. Some of the inflationary and supplydemand pressure I mentioned on our last call has continued, but we're keeping our previously announced 2021 cost guidance as we still believe we'll end the year within the range of $68 to $74 a tonne in the Met segment.

Also today, we announced an increase in our production guidance, bumping our overall tonnage up by about 1,000,000 tonnes at the midpoint for the year, reflecting excellent productivity by our miners and our ability to ramp up production quickly when the market demands. Andy will provide more detail on that later. With coal supply expected to remain tight for the near term, we believe we are well positioned for any desired production adjustments to match that increased demand, whether seaborne or domestic. Our existing group of operations offers one of the most diversified portfolios of any coal company, but we're always looking for ways to incrementally add value. We continually analyze potential bolt on or development projects like our most recent Lynn Branch and Rowfork 52 projects, where we can spend a modest amount of capital in a way that offers swift return with long term value.

To that end, we're in the process of adding a fourth supersection at Road Fork 52. It will provide the ability to mine additional low wall coal from an operation that has exceeded productivity expectations since its inception. This section should be up and running by year end, and we're looking forward to putting some additional alpha tonnes into a tight market. We're raising CapEx guidance for the year by $8,000,000 at the midpoint in conjunction with this addition, But the projected payback on this investment is expected to come in less than six months and at today's spot prices, perhaps even in a quarter's time. This makes great sense to us, especially given the current market environment.

And even with the increase, we expect CapEx for the year to come in under $100,000,000 We don't have any other mine development announcements to make today, but there are a few other projects our teams are currently evaluating, and they all have similar CapEx profiles to what I just described for Roadport. Modest spend with a fast return expected on the investment. I will plan to provide more information on future calls as appropriate, but the takeaway here is that Alpha is ready and able to increase production either by augmenting our existing portfolio or investing in cost effective development projects. I'll now turn the call over to Andy for some additional details on our financials for the quarter.

Speaker 4

Thanks, Jason. As we reported in our release this morning, our second quarter adjusted EBITDA was $39,900,000 up nearly 40% from our first quarter figure. Q2 volumes for sales were roughly flat with the prior quarter, but one area we want to specifically highlight is our met segment realizations. On our last call, there was a lot of discussion about the tensions between China and Australia and the various market impacts stemming from that situation, but especially the lag on pricing tied to the Australian indices. While the Aussie and Atlantic indices have found more of an equilibrium in the past few weeks past eight weeks actually, the lag on pricing persisted well into the second quarter and continued to impact our realizations.

To illustrate the magnitude, we introduced a new table in our earnings release to provide additional granularity on our realizations for met shipments in the quarter based on the various market pricing mechanisms. To that table's point, we realized $101.8 per ton on our export business for the quarter that was based on the Atlantic index and other pricing mechanisms. By contrast, our export business linked to the Australian indices yielded realizations of $67.77 due to the index weakness that persisted well into the quarter. Now that the spread between the indices is tied to a more normalized level and effectively at parity, we don't really expect to see much of a variance between the regions going forward. For the Met segment as a whole, our realizations came in at $83.38 per ton, up slightly from first quarter, while realizations dropped slightly within the all other category to $60.45 per ton.

As Jason mentioned earlier, our Q2 met cost of coal sales performance was excellent and pressures, it improved by nearly $2 as compared to Q1, down to $69.94 Costs also improved in the all other category with cost of coal sales down in Q2 from first quarter to $42.77 SG and A excluding non cash stock comp and non recurring items increased from $12,700,000 to $13,700,000 in the second quarter. And we are increasing our full year SG and A guidance largely due to increased corporate insurance costs as well as the adjustment of accruals related to our incentive compensation plan that reflects an improved outlook for the back half of the year. As such, with these recent adjustments, we now expect SG and A for 2021 to be in the range of 48,000,000 to $52,000,000 up from the prior 44,000,000 to $49,000,000 range. Our CapEx for the second quarter came in at $17,600,000 in Q2. And as Jason mentioned, we are increasing our CapEx guidance for the full year from our previous range of 75,000,000 to $95,000,000 to a more narrow window of 88,000,000 to $98,000,000 And of course, this increase is a result of the additional section at Road Fork 52 that Jason discussed, which we obviously believe is a beneficial use of capital and well worth the modest increase in projected spend for the year.

And the timing honestly couldn't be better for that spend. Turning to the balance sheet and cash flows. We ended the quarter with roughly 20% more in total liquidity as compared to the end of the first quarter. We ended the quarter with $72,000,000 in unrestricted cash and $60,000,000 in availability on our ABL for total liquidity of $132,000,000 Cash used in operating activities for the quarter was $6,000,000 At the end of the quarter, our ABL had $129,000,000 of letters of credit outstanding and no borrowings. As we've already explained in connection with earlier comments, our updated guidance reflects our expectations for how Alpha will round out the year.

We've increased total shipments guidance for 2021 from the prior range midpoint of 15,500,000 tons up to our new range midpoint of 16,600,000 tons. This is now comprised of an expected midpoint of 13,500,000 tons of pure met and a midpoint of 1,600,000 tons of incidental thermal production within the met segment. Our prior guidance for the all other category remains unchanged. Against the midpoint of guidance, around 21% of our met segment or just over 2,800,000 tons is currently unpriced and could be expected to benefit from the improved market environment we're seeing. Of that 21% unpriced in the MET segment, around 18% is committed.

The thermal byproduct portion of the MET segment is effectively fully committed and priced at an average price of $52.68 and we remain fully committed and priced for 2021 in our all other category at an average price of $59.66 As Jason mentioned, our 2021 met cost guidance remains unchanged as does the all other category with range midpoint costs of $71 and $47 per ton respectively. As I mentioned on prior calls, we still expect to receive the NOL carryback tax refund of around $70,000,000 sometimes in the back half of this year. Additionally, subsequent to the end of the second quarter, Alpha made a $21,000,000 payment to eliminate the West Virginia portion of the Lexington Coal Company note one year ahead of schedule. We also negotiated return of $14,000,000 in related surety collateral, meaning the early payment also allowed us to extinguish this liability at a lower net cash outflow than we previously expected and had disclosed. Finally, a comment on cash allocation strategy as we move forward into strong markets with an anticipation of additional free cash flow.

We've been pretty clear over the past several quarters about our intention to build cash balances and aggressively pay down debt, but I want to reiterate those two items as our highest financial priorities. Our focus is on strengthening the balance sheet, deleveraging the enterprise, both of which we believe will maximize shareholder value over both the short and the long terms. So with that, I'll turn the call over to Dan Horn for market analysis and sales outlook.

Speaker 5

Thanks, Andy, and good morning. In my remarks, I will share a few additional observations about the year so far, what we have to look forward to in the back half and the way we're starting to think about 2022. The second quarter was another solid period for our sales team. While you've already heard some commentary on the significant shift in the Australian indices in recent weeks, there are a couple of additional areas that I want to highlight in this regard. Although our contracts tied to Aussie indices weren't as lucrative in the first half of the year as they would have been on another pricing mechanism, I am proud to say that we continue to fulfill our contract obligations to our customers.

We have long standing and in some cases decades long relationships with customers around the globe and in markets where metallurgical coal demand is expected to continue climbing for many years to come. We've also seized some opportunities created by the Chinese ban on Australian coal. While China has not historically been a destination for office products, we found great acceptance of our high quality coals at multiple Chinese steel mills. Therefore, we have built on these initial shipments into the country early this year and several of our recent vessels were actually larger than shipments sold earlier in the spring. Including business recently agreed upon but not yet shipped, Alpha has sold approximately 1,000,000 tons of coal into China this year with a significant possibility of more to come.

It's impossible to predict how long this window of opportunity will last, but we continue to evaluate this new market for us and sell additional tons if it makes sense. While the FOB and CFR indices are currently at high levels, it's also important to note that these so called headline prices are often substantially different from the netbacks at the mine report, especially considering that the freight costs to get a product across the world are not insignificant. Even still, this has been very good business for us, and I applaud my team for their flexibility and willingness to think creatively to help out and mitigate some of the negative impacts of the Chinese Australian trade tensions with new advantageous business. As you've heard already, we plan to produce more coal this year than we previously guided, and we're pleased to have some additional tonnage to offer to our customers, especially given the strong demand environment for metallurgical coal and the tightness of current supply. Economic indicators continue to signal positive conditions for the near term, with the most recently reported U.

S. Steel mill capacity utilization at 85%. Globally, the World Steel Association crude steel production statistics show year over year growth of 11.6% in June. India showed growth of 21.4 while China increased 1.5% over the period long ago one period a year ago. Regionally, North American and European crude steel production increased 45.234.7%, respectively, against the year ago period.

All of these are signs of strength in Alpha's key markets. Turning specifically to next year. As David mentioned, we've settled a couple of pieces of North American business for 2022 and continued discussions with others. While we obviously will not be providing further details while negotiations are ongoing, we can say that this business was concluded at market prices well above our 2021 settlements. We are also strategically evaluating our product mix and continuing the most advantageous destinations for these products in 2022.

While we have historically placed roughly onethree of our business into the domestic market in a given year, we might decide to adjust that percentage depending on how the export demand shapes up. Regardless, we look forward to having plenty of our high quality coal to sell. And based on what we're seeing on our current conversations, we believe that 2022 should be a good year for us. This concludes our prepared remarks for the quarter. Operator, we are now ready to take questions.

Speaker 0

If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Nathan Martin with The Benchmark Company. Please go ahead.

Speaker 6

Hey, guys. Good morning, and thanks for taking my questions.

Speaker 2

Good morning, Nate.

Speaker 6

Really appreciate the extra color this quarter on the net side with the breakdown of funds shipped at different price realizations. So maybe we'll kind of start there. How

Speaker 5

should we

Speaker 6

think about that split maybe in the back half of the year? You know, is it fair to assume domestic kind of stays pretty pretty ratable? You know, and then on the export side, you know, obviously, as you guys pointed out, you know, Australian length of time kind of hurts you in the second quarter with this depressed pricing. But since then, the index is is more than doubled. You know, we talked in the past about moving some business away from that index with contractual loss.

You know, you guys have about 21% of your net production on price as you just pointed out. So, again, you you covered a little bit of this in your prepared remarks just now, but maybe you can give us a little more color on which markets you're targeting or have shown interest. Anything within there? Sure,

Speaker 5

Nick. Well, I guess, broadly speaking, we're targeting all of them. We expect continue to ship into India and other markets at high levels. But as I mentioned, China is an interesting target right now. The industry is kind of rebalancing themselves.

We'll just have to look among the best opportunities there. We're still selling additional spot tons into Europe, South America as well, and some additional domestic met. So I it it truly is an all of the above situation right now, but we'll we'll look for where the realizations are the best.

Speaker 6

Got it. Thanks, Sam. So yeah. I mean, I guess it's the the allure of the Chinese benchmark pricing is not quite the same as the amount closer to parity, I guess, to the Aussie index. But I guess kind of looking at the full year, net shipment guidance increased.

Can you guys maybe talk about where those tons are coming from or maybe even the cadence you expect in the third and fourth quarters? Obviously, you announced the plan to add that fourth section at Row 452. Sounds like that should be online by the end of the year. What kind of incremental times are you expecting there? I don't think we highlighted that at all.

Then should that help lower overall net segment costs as well? And is it correct to maybe assume that, that production kind of is additive to next year as well?

Speaker 3

Hey, Nate. This is Jason. I think a good portion of our increase in guidance has just come from productivity from the current operations being slightly above what was expected. With respect to Row 452 in the fourth section, it will be up and running by the end of the year. And it will be more or less at a full run rate by first of the year.

Nominally speaking, I think it would add about 400,000 tonnes of 100,000 incremental tonnes across the portfolio.

Speaker 6

And that's low vol, correct, Jason? So I guess that would kind of help your mix a little bit.

Speaker 3

It is low vol. And I think you asked question about how it would contribute to cost. And Road Fork is basically at the midpoint of our guidance. So it's incrementally, it should be helpful. But I don't think you'll materially see it in overall numbers.

Speaker 6

Got it. That's helpful. And then again, another great cost quarter. In fact, I guess the other thermal categories are back to back, 43 plus or minus quarters, which is below your full year guidance. So, you know, kudos to Jason and the team.

You know, obviously, you guys maintained the full year guidance on both met and other thermal costs. Is there, you know, as we look at the second half, is there anything, you know, you guys say that could, you know, cause these numbers to differ materially either one way or the other in 3Q or 4Q? And maybe higher royalties if prices stay where they are today, but any longwall moves? You mentioned inflation a little bit, labor costs, etcetera. Any color there?

Speaker 3

Yes. We're all room and pillar operations, no longwall moves for us. But I think more or less the supplydemand pressure that we're seeing has mostly been offset with improved productivity. So therefore, I think we're able to maintain our guidance that we gave at the start of the year.

Speaker 6

That's fair, Jason. I apologize for the long haul question. So I guess just maybe maybe final question for for Andy. You know, congrats on on paying off the LCC liability early. You know, as we think about some of the other, you know, legacy liabilities you guys have, you know, is there anything else out there maybe that you're working on or or could attack to reduce future cash outflows there?

Any thoughts? Appreciate it.

Speaker 4

Yes. Thanks, Nate. We're constantly evaluating the balance sheet just to try to pick off some items where it makes sense. Now we're kind of getting to the point where the all of the bankruptcy related items and the other peripheral below the line items are wrapping up at the end of next year. And so we're close enough now where there's probably not too much more to be done in that regard.

And that's why we're focusing so heavily on potentially preparing for some pretty aggressive debt reduction because it seems to be the best bang for our buck as far as really achieving and capturing some shareholder value. So I think that's probably the last big lick of non debt related liabilities that we'll be able to attack for now. But again, if an opportunity pops up, we're constantly looking at the balance sheet for other pockets that we may be able to take out.

Speaker 6

Great. Thanks for that, Andy. And I'll leave it there, guys. Again, as always, appreciate your thoughts, and best of luck in the second half.

Speaker 4

Thanks, Nate. Appreciate you, Nate.

Speaker 0

Our next question will come from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 7

Hey, good morning, everyone. I'll take another crack at Nate's first question. I also really appreciated the met segment sales table. And you have these three categories, export, other pricing, domestic, export, Australian Index. And assume domestic, well, that's not going to change much kind of Q3 versus Q2 or Q4 versus Q2, just given the nature of it.

But can you provide some thoughts as how export other pricing mechanisms, export Australian index, what those numbers might look like Q3, Q4? Would really appreciate your thoughts. Well,

Speaker 5

Lucas, can do the math and do the percentage increase in the indices. They're up quite a bit quarter over quarter there. But just to give you, I guess, a sense that the Aussie indices pricing number that you saw there in the current month, you put the math to it, you'd probably come up with a number that looks like $70 a ton higher than that right now. Indices are way up. So it's a big increase.

Speaker 7

Terrific. So so kind of kind of $1.40 per short ton at the mine gate q q three is is a reasonable number for

Speaker 5

It's for for I'm I'm looking at the indices today. You know, I'm it's a it's a guessing on and I'm there's a freight component involved in there that is moving quite a bit these days as well. But yes, that's a good guess.

Speaker 7

Got it. And the export other pricing, would those be kind of high vol a into Europe? Would those have moved quarter over quarter or versus spot, whatever? Kind

Speaker 5

of across the board on that, Lucas. We're moving all grades, high vol, mid vol, low vol into all the markets, whether it's China, you know, Europe. You mentioned Europe. Europe, we are definitely shipping additional tons or two. So, again, I'm not trying to evade it, but it's it's just all of the above.

Speaker 7

And and you touched on the convergence of the Aussie index to some of the others. So if if if I were to conclude from the earlier question on the Aussie pricing that this export other pricing mechanisms is also around 140, would you say, Lucas, do the math again? Or would you say that's about the right ballpark?

Speaker 5

I think you got to go. Well, you're probably close. Probably a little higher on the other. I mean, the Aussie indices are still there. As Andy pointed out, there's a lagging factor there.

We're not completely climbed out of that lagging period yet on those. So I don't have a number to give you, but I think the other non Aussie linked pricing is going to be a bit stronger.

Speaker 7

A bit stronger. Terrific. Very helpful. Really appreciate that. And since we are in such a role on the pricing side, I think I'd going.

Domestic contract season seems like it's right around the corner now. What's your read of the market there? Would appreciate any color you can share. Thank you.

Speaker 6

Well, it's important that

Speaker 5

a couple of settlements here. I'm not gonna go into any detail at all on those. We're it's just the major negotiating period is coming up here in the coming weeks. But I guess we want a little extra color. What I what I will say from our conversations is with the steel industry running very well and the coke plants and blast furnaces trying to run as hard as they can, they are and will be looking for the higher quality coking coals this year.

So I think a lot of the attention will be on what I call the higher rank coals, meaning low vol, medium vol, also on the lower sulfur coals going forward. So that's been our experience here in our early discussions.

Speaker 7

And then on the pricing side, there's been a fairly narrow range over the last few years in terms of domestic pricing. Would you say this is a year where pricing could break out to the upside given what's going on in the international markets? Thank you for your your thoughts on that.

Speaker 6

I mean, as I as

Speaker 5

I point out, so far what we've seen is pricing for '22 much, much higher than '21. I'm not gonna get any more granular than that. But and within a band, you know, I don't know that there's domestic's grades are all over them. You know, they're not all over the map. They were last year, they were probably within a $10 or $15 band.

I suppose that's possible. I don't know any reason why it wouldn't be similar going forward in 2022 as far as the range.

Speaker 7

Got it. And with that band, you mean a spread between High Vol A and High Vol B, for example?

Speaker 5

Well, yes, again, it's a little early to comment and put a lot of thought into that. Know, in our portfolio, we have some very good, very high quality low sulfur high vol Bs that I'm not I'm not even willing to say that that's the spread on A versus B, to be honest with you. Truly depends on the product rate.

Speaker 7

Got it. Got it. Super helpful. Really appreciate your thoughts on this. Last question from me.

Congratulations on the cost performance, especially during this inflationary environment. And to the team, you commented on the inflationary pressures. Anything that gives you particular cause for concern? Is it steel for roof bolts? Is it fuel?

Is it labor? Which one gives you the most headache? This

Speaker 3

is Jason. I would say yes to all of the above, everything that you mentioned there,

Speaker 4

and they seem to be coming up

Speaker 3

really proportionally with one another. But again, as I said before, I think the productivity from the guys in the field, they're really running well enough to where it's pretty well offsetting that and we're able to maintain the guidance that we previously gave.

Speaker 7

Terrific. Well, thank you very much. Really appreciate it and best of luck.

Speaker 4

Thanks, Lucas. Thanks, Lucas.

Speaker 0

Concludes our question and answer session. I would like to turn the conference back over to David Setson, CEO, for any closing remarks.

Speaker 2

Thank you. In closing, I want to thank everyone for joining the call this morning, and we reiterate our excitement about the coming year. Our team will continue to build on foundational changes we've made in recent quarters and we think we're very well positioned for the future success. We look forward to checking back with you at the end of next quarter and everyone have a wonderful and great day. Thank you all so much.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.