Core Natural Resources - Earnings Call - Q2 2020

Transcript

Operator (participant)

Good day and welcome to the CIEX and CCR Second Quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I'd now like to turn the conference over to Nathan Martin, Manager, Finance and Investor Relations. Please go ahead.

Nathan Martin (Head of Investor Relations)

Thank you, Cole, and good morning, everyone. Welcome to CONSOL Energy and CONSOL Coal Resources second quarter 2020 earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have outlined in our press releases and in our SEC filings, and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our press releases and furnished to the SEC on Form 8-K. You can also find additional information regarding the companies on our websites, www.consolenergy.com and www.ccr.com.

On the call with me today are Jimmy Brock, our Chief Executive Officer, Mitesh Thakkar, our Chief Financial Officer, and Jim McCaffrey, our Chief Commercial Officer. In his prepared remarks, Jimmy will provide a recap of our second quarter 2020 performance, specific insights on marketing and operations, and an update on our ongoing response to the COVID-19 pandemic. Mitesh will then discuss our liability management program, financial results, cash preservation efforts, and outlook for the remainder of 2020. After the prepared remarks, there will be a Q&A session in which all three executives will participate. With that, let me turn the call over to our CEO, Jimmy Brock.

Jimmy Brock (CEO)

Thank you, Nate, and good morning, everyone. To this point, 2020 has been an extremely challenging year for us, our industry, and the U.S. and global economies. We first dealt with the weak demand early in the year due to a warmer-than-normal winter. Then the COVID-19 pandemic hit us all, with most economies across the world essentially grinding to a halt to try to stop the spread of this disease. This led to an unprecedented destruction in energy demand, specifically in the second quarter of 2020. From a demand perspective, Q2 2020 was the worst quarter that I've seen in my 40+ year career and the most challenging market conditions we've experienced in the 30+ year history of the Pennsylvania Mining Complex. The widespread government-imposed shutdowns caused by the COVID-19 pandemic created an unprecedented decline in energy demand, both domestically and abroad.

In response, we idled our in-law Fort Mine early in the second quarter, ran our Bailey Mine on an as-needed basis, and went into cash preservation mode. I'm proud of how our operations and corporate teams responded as we quickly pivoted and pulled back on discretionary spending in an effort to protect our liquidity. The finance team moved early to secure an amendment to our credit agreement that essentially provides us with eight quarters of covenant relaxation. We'll also preserve full access to our $400 million revolving credit facility. To be able to secure this amendment in a challenging market was extremely impressive. We also want to thank our banking partners and investors for their overwhelming support and belief in us and our business. As always, we continue to place the safety of our employees and their loved ones above all else.

We announced last quarter that we adopted enhanced sanitation and social distancing measures at our operations and implemented staggered shifts, reduced elevator capacities, and mandatory temperature checks at all mine entrance locations across our Pennsylvania Mining Complex. We continue to improve upon these practices every day, and we are proud of the buy-in from the entire Core team and their dedication to safety. We will continue to monitor the risks posed by the COVID-19 pandemic and will take any additional steps that we deem necessary to keep our employees, their families, and the community safe. Before I dive into operational marketing details, let me now provide a brief recap of the quarter. Despite the significant demand decline, we achieved several important goals during the second quarter.

On the safety front, we delivered a very strong performance as our Bailey Mine, Bailey Preparation Plant, CONSOL Marine Terminal, and Itmann Project each had zero recordable incidents. On the operation and marketing fronts, we faced significant headwinds from reduced customer demand. However, we were able to leverage our operational flexibility to help soften the impacts of these declining market conditions. We worked with our customers throughout the quarter to identify solutions to help navigate this extremely challenging situation. These solutions included partial contract buyouts and, in some cases, new future business. On the financial front, as I touched upon already, we completed a timely credit amendment. Additionally, our finance team continued to focus on cost reduction and liquidity conservation, which resulted in limited cash burn despite a significant decline in shipment volumes compared to Q2 of 2019. Now let me provide our second quarter operational performance.

Coal production at the Pennsylvania Mining Complex decreased to 2.4 million tons in Q2 of 2020 compared to 7.2 million tons in the year-ago quarter. The decline was due to a significant reduction in customer demand as most global economies shut down due to the COVID-19 pandemic. We also ran at a significantly reduced operating capacity, seeking to match production with demand. For its share of the Pennsylvania Mining Complex, CCR produced 600,000 tons of coal during Q2 of 2020 compared to 1.8 million tons in the year-ago quarter. On the cost front, our average cash cost of coal sold per ton was $25.90 in Q2 of 2020 compared to $31.07 in Q2 of 2019, as our operations team was successful in keeping tight control over cash expenditures in the quarter.

The adjustments we made to our operations allowed us to reduce our overall average cash cost of coal sold per ton on our producing assets and to partially mitigate the financial impact of the reduced production volume. The improvement was primarily driven by lower mine maintenance and supply costs, contractors and purchase service costs, and subsidence expense. The Core Natural Resources Marine Terminal had a throughput volume of 1.6 million tons during the quarter compared to 3.7 million tons in the year-ago period. Despite a decline in shipments, our terminal revenues for the quarter were only modestly impaired at $15.9 million compared to $16.7 million in the year-ago quarter. However, cash operating costs were improved at $3.8 million versus $5 million in the year-ago period, as the terminal employees also successfully limited their cash expenditures in Q2 of 2020.

Let me now provide an overview of the coal markets and an update on our sales performance and accomplishments. There is no sugarcoating how difficult the second quarter of 2020 was from a demand perspective. After a tough start to the year, where coal demand was impacted by mild winter weather and low natural gas prices, we were then hit with the widespread government-imposed shutdowns of nonessential businesses due to the COVID-19 pandemic. On a year-to-date basis, these shutdowns peaked in the second quarter as most global economies essentially shut down for multiple months to curb the spread of the coronavirus. This resulted in an unprecedented decline in energy demand, as an increase in residential energy consumption could not nearly replace the decrease in the industrial demand. On the power price front, average PJM West day-ahead power prices were 28% lower in Q2 of 2020 compared to Q2 of 2019.

Additionally, Henry Hub natural gas spot prices averaged $1.70 per million BTU during the quarter, which was down 34% compared to Q2 of 2019. These low natural gas prices and the overall demand decline resulted in a substantial reduction in coal burn in the U.S., which led to increased coal inventories for our customers. Similar to the first quarter of 2020, this translated into reduced demand for our coal and led us to complete several contract buyouts in the second quarter, as we sought to help our customers manage their inventory levels. We leveraged our strong contracting position in the quarter to negotiate these buyouts, which involved the early termination of a portion of several customer contracts in exchange for payment of certain fees to us during the second quarter and contributed $30.1 million to our miscellaneous other income.

These substantial buyouts were key to helping us limit our operating cash burn in the quarter. On a positive note, the EIA is estimating a significant domestic supply response in 2020 and projects a 29% decline in U.S. coal production versus 2019. Additionally, low natural gas and crude oil prices have led to reduced activity and capital expenditures for E&P companies. IHS Markit reports that active U.S. gas rigs stood at 76 in early July, down from 174 a year ago and down from more than 200 active rigs in January of 2019. As a result, several industry observers now expect natural gas prices to rise above $3 per million BTU in 2021 as gas production declines due to the lack of capital spending. This is leading to forecasts of an additional 100 million-125 million tons of incremental domestic coal burn in 2021.

Finally, we believe the lack of investment across the coal space will limit the coal industry's ability to quickly ramp back up to meet this demand. This could be a very advantageous situation for us, as we prioritize keeping our mines well-capitalized in strong markets, which gives us the ability to scale up very quickly. On the export front, we began the year with the intent to ship 9 million-10 million tons export in 2020. Through the first quarter, we were on pace to accomplish that with 2.4 million tons shipped. However, in the second quarter, we shipped roughly 800,000 tons. This was entirely caused by the worldwide economic shutdown created by the COVID-19 pandemic. It is important to note that these tons were not replaced by other tons or other fuels. They were lost due to unprecedented demand destruction.

As global demand begins to recover and India's retail season restarts as monsoon season comes to an end, demand for our product remains strong. We have started receiving inquiries again, and we expect steady recovery for the second remainder of the year. From a marketing perspective, it is encouraging to see that demand for our coal has steadily improved month over month since May, which was the lowest point of demand for our coal this year. This recent demand improvement has allowed us to restart one longwall at our in-law Fort Mine after it was idled for most of the second quarter. We continue to maintain 100% of our existing customer base and have begun to see improvement from a contracting perspective beyond 2020. We announced this morning that during the second quarter of 2020, we successfully contracted 4.3 million tons for the 2021 through 2024 period.

We are now 49% contracted for 2021, assuming a 26 million ton run rate and not including any potential 2020 deferrals. We are also fully contracted for 2020, but we understand the significant uncertainties that will exist in the marketplace. We will remain flexible and will continue to work closely with our customers to manage our respective contractual obligations. With that, I will now turn the call over to Mitesh to provide the financial update.

Mitesh Thakkar (CFO)

Thank you, Jimmy, and good morning, everyone. Let me start by providing an update on our liability management program and credit facility amendment. I will then review our financial results for Q2 2020 and touch upon our cash preservation efforts and second half 2020 outlook.

As we have stated all year, our top priority for 2020 was to remain laser-focused on improving the risk profile of our balance sheet by reducing our outstanding debt and creating long-term value for our Core Natural Resources shareholders and unit holders. In the near term, we also realize how important liquidity is during these uncertain times. Since the beginning of 2020, we have taken several steps to reduce our outstanding debt and capture the arbitrage that exists between different financing costs while maintaining strong liquidity. Let me now summarize some of our key liability management initiatives since the beginning of the year. In the first quarter, we significantly reduced spending on our Itmann Project, which deferred $25 million of CapEx.

We then diverted that spending towards buying back approximately $43 million of our second lien notes at a significant discount of par value, which helped reduce our leverage and reduced annual interest expense by nearly $5 million. In the second quarter, we suspended CCR's cash distribution to all unit holders, which resulted in annual cash conservation of approximately $22 million for Core Natural Resources and approximately $58 million for CCR. Due to our willingness to keep the mines well-capitalized in strong markets, as we did in 2018 and 2019, we are now able to reduce capital spending at the Pennsylvania Mining Complex to $75 million this year, an approximately 50% decline from 2019 levels. On the financing front, we raised approximately $29 million of capital through a sale lease back and multiple finance leases in the first half of 2020.

Last but not the least, we proactively worked with our banking partners and Term Loan B investors to amend our credit facility early in the second quarter, which effectively provides us with eight quarters of covenant relaxation while also providing continued access to our $400 million revolving credit facility. We also added additional flexibility to repurchase our outstanding second lien notes without a leverage test. During this unprecedented demand decline brought on by the COVID-19 pandemic, keeping full access to our revolving credit facility cannot be understated. I thank our bank group for working with us as we navigate these challenging market conditions. Additionally, our credit amendment also included amending the affiliate loan facility between CCR and Core Natural Resources, which in turn also provides CCR with eight quarters of covenant relaxation and continued access to its $275 million intercompany loan with Core Natural Resources.

Given the uncertainty in the marketplace, continued access to liquidity and financial flexibility will be paramount for both companies moving forward. Although the amended credit agreement also allows us to repurchase up to $25 million of our second lien notes without a leverage test, we did not execute any buybacks in the second quarter. Given the uncertainty created by global economic shutdowns, we decided to preserve our cash. However, we still retired $14 million of our outstanding debt in the second quarter of 2020 through required amortizations. In the quarter, we made repayments of $7.2 million, $6.3 million, and $700,000 on our asset-backed financing arrangements, Term Loan A and Term Loan B, respectively. Our goal is to have a significantly lower level of debt before our 2024 Term Loan B matures, and we will continue to strive towards that goal.

With that, let me now recap our second quarter 2020 results and review Core Natural Resources first, then CCR. Core Natural Resources reported a second quarter 2020 net loss attributable to Core Natural Resources shareholders of $18 million, or $0.69 per diluted share, compared to net income of $43.3 million, or $1.56 per diluted share in Q2 2019. Core Natural Resources also reported Q2 2020 adjusted EBITDA of $34.2 million and organic free cash flow of negative $24 million, which compares to $112.9 million and $34.8 million, respectively, in the year-over quarter. The significant decline in our earnings metrics compared to the year-over period is the result of the unprecedented demand decline we experienced in the second quarter. In Q2 2020, we used $4.7 million of net cash flow on operations and spent $19.3 million on capital expenditures. As a result, Core Natural Resources ended the second quarter with negative $24 million of organic free cash flow.

Our cash flow from operations included a working capital use of $19 million due to a significant decline in our accounts payable balance and a $10 million semiannual interest payment on our second lien notes. We ended the quarter with cash and cash equivalents of $33 million, down from $78 million at the end of the quarter. Notable cash outflows during the quarter included approximately $19 million in cash interest payments, approximately $14 million in mandatory debt payments, and approximately $8 million in transaction costs related to the recently discussed amendment to our credit agreement. We also incurred $31.8 million in cash idle costs in Q2 2020. However, our $30.1 million in contract buyouts essentially offset this expense. After accounting for these items, we had a net cash burn of approximately $4 million in the quarter.

This also accounts for all capital expenditures and working capital adjustments, as well as the remainder of the operating cash flow. While the quarter was ultimately disappointing from a shipment and cash flow generation standpoint, it was encouraging to see the response of the team and its ability to manage and preserve cash when times were tough. At the end of the quarter, we were in full compliance with our credit covenants and currently maintain full access to our revolving credit facility. Now, let me update you on CCR. This morning, CCR reported a net loss of $7.9 million, Adjusted EBITDA of $6 million, and distributable cash flow of negative $4.7 million for the second quarter. This compares to net income of $14.4 million, Adjusted EBITDA of $27.6 million, and distributable cash flow of $16.8 million, respectively, in the year-over quarter.

In Q2 2020, CCR generated $6.5 million in net cash from operating activities, which included a $2.8 million improvement in working capital. After accounting for $4.1 million in capital expenditures and $1.6 million in finance lease payments, we were able to modestly reduce our outstanding debt on the intercompany loan with Core Natural Resources by $1 million in the second quarter. Nonetheless, due to the continued reduction in the trailing 12-month EBITDA, CCR finished the quarter with a net leverage ratio of 2.9x. Now, let me move on to providing some color on what we expect for the remainder of 2020. Given the difficulty in forecasting the duration and severity of the COVID-19 pandemic and the resulting economic slowdown and energy demand decline, our 2020 guidance remains suspended at this time. However, let me provide some qualitative guidance and comments on how the third quarter is progressing.

On the operational front, you may have noted that for much of the second quarter, Enlow Fork was idled, and the Bailey Mine ran sporadically. We are pleased to announce that one longwall at the Enlow Fork Mine resumed operation in July. Also, one longwall at the Bailey Mine and one longwall at the Harvey Mine ran consistently in July. This allowed us to ship more coal in July than we shipped in May and June combined. Earlier this month, we also restarted our fourth longwall, which is the second longwall at the Bailey Mine. We expect August to be significantly improved compared to July, even though we have two longwall moves scheduled for the month. It seems like shipments are now returning to more normalized levels, but a lot of uncertainty still exists.

With COVID infections still arising domestically and globally, we remain cautious and will continue to remain market-driven. Staying focused on cost containment and managing liquidity will be our top priorities. On our last earnings call, we laid out some targets which called for nearly $100 million in cash savings. These targets included SG&A cash interest and tax-related spending, as well as nearly $50 million reduction in capital expenditures versus 2019 figures. We have made good progress on these fronts, and we believe we can achieve an additional $25 million reduction in capital expenditures compared to 2019 levels. As we prioritize cash preservation, we also expect a $13 million reduction in cash SG&A expense, which is above the $8 million-$10 million target we laid out last quarter. Let me now provide some additional color on our liquidity position. We ended the quarter with $346 million of liquidity.

The reduction in liquidity compared to the first quarter was driven by reduced cash on the balance sheet and an $8 million reduction in availability under our securitization facility. As you can imagine, availability under our securitization facility is a function of qualifying accounts receivable outstanding, and in this case, was based on the receivables outstanding at the end of May, which was a very low shipment month. We anticipate that August will be a significantly higher shipment month compared to May and that the availability under the securitization facility will also increase, acting as a tailwind for liquidity at the end of Q2 2020. Another potential source of liquidity and cash flow for Core Natural Resources could come from certain transactional opportunities. We are currently pursuing several such opportunities that could bring in significant additional cash flow and EBITDA contribution during the second half of 2020.

Given the nature of these ongoing negotiations, we will not be able to disclose any additional information about these opportunities at this time. Stay tuned. With that, let me turn it back to Jimmy to make some final comments.

Jimmy Brock (CEO)

Thank you, Mitesh. Before we move on to the Q&A session, let me take this opportunity to lay out some of our priorities for the remainder of 2020 and address our plans for navigating the uncertainty we're facing in the current economic climate. First and foremost, safety will remain our top focus, and we will continue to adhere to our adjusted procedures and protocols in order to keep everyone safe and prevent any unnecessary exposure to COVID-19. We will continue to focus on implementing our enhanced cleaning and disinfecting practices at our mines, both on the surface and underground. Our corporate staff has proven its ability to work remotely very effectively.

I continue to be impressed by our employees and their willingness to embrace these adjustments. I thank them for continuing to place safety above all else. For 2020, our major focus of strengthening our balance sheet and bolstering our liquidity will be paramount as we navigate these uncertain times. In order to maximize our liquidity and ensure compliance with our covenants, we will take an all-hands-on-deck approach, and we will remain laser-focused on managing the things that are within our control. This involves adjusting our cost structure and operating schedules to best align them with demand and preserve margins, working closely with our customers to manage shipment and inventory levels, as well as contractual obligations, maintaining operational flexibility and limiting any discretionary spending. We will continue to pull as many levers as possible to strengthen our balance sheet and preserve cash flow.

Also, if we begin to see sustained demand and as market conditions warrant, we expect to revert to our strategy of opportunistically taking advantage of the significant discount in the process of our debt securities. All of these things are within our control, and we believe we have the tools necessary to manage our way through this market. Finally, we have begun to see improved demand beyond 2020 and are currently 49% contracted for 2021, assuming a 26 million-ton run rate and not including any potential 2020 deferrals. We are also fully contracted for 2020, but we'll remain nimble and willing to work closely with our customers as we weather this storm together.

In summary, our key priorities for the remainder of 2020 are: first, to ensure the health and safety of our workforce, their families, and the communities in which we operate amidst the ongoing COVID-19 pandemic. Secondly, to safely and compliantly produce our high-quality coal at the lowest possible cost. Third, to continue to prioritize our liquidity through cash preservation and controlling the things that are within our control. Fourth, to continue to improve our balance sheet and manage our liquidity. Finally, to work with our customers to ensure that the long-term nature of our relationships continue as we navigate this pandemic together. One final item before we move on to the question-and-answer portion of today's call. As disclosed in our 10Q filing this morning, it is with mixed emotions that I announce that my good friend and colleague, Jimmy McCaffrey, is retiring.

Jim's contributions to the success of Core Natural Resources over the last 40+ years have been remarkable and significant. While I am certainly thrilled for Jim and his family, I will miss his experience and wisdom. With that, I will now turn the call over to Jim for a few comments.

Jim McCaffrey (Chief Commercial Officer)

Thank you, Jimmy, and good morning, everyone. After nearly 44 remarkable years with Core Natural Resources and this great industry, I have elected to retire October 1st, 2020. This decision does not come lightly. I had plans to retire on two previous dates, but both times, Jimmy encouraged me to stay. As many of you know, back in 2015, I was diagnosed with Parkinson's disease. At that time, Jimmy and I agreed that if my health faltered, I could not move on.

I am not running away from this market or this company, but I feel myself slowing down, and others see this too. It is time, and we have a succession plan in place that allows me this opportunity. In fact, I have great confidence in the future of Core Natural Resources. Therefore, I feel it is best to leave the marketing and sales to Bob Braithwaite and Dan Connell, who are extremely talented and capable. I also consider this combination to be the very best in the business, along with our experienced marketing team. I still expect to spend some time around the business, and I still hope to see my many friends in the coal community. I am fortunate that these friends include coworkers, analysts, investors and bankers, suppliers and vendors, transportation partners, our great customers, and yes, even competitors.

I want to thank Jimmy and all of the women and men of Core Natural Resources for a great career and even a better life. Finally, I want to thank the American coal miner, particularly those at our Pennsylvania Mining Complex. These men and women have been the true heroes of my life and should be celebrated as the American heroes that they truly are. God bless you all. I hope to see you further on up the road.

Jimmy Brock (CEO)

Thank you, Jim, and congratulations to you and your family. We will now move to the Q&A session of our call. Cole, could you please provide the instruction to our callers?

Operator (participant)

Absolutely. We will now begin the question-and-answer session. If you would like to ask a question, you may press star and one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star and two. Our first question today will come from Lucas Pipes with B. Riley. Please go ahead.

Lucas Pipes (Managing Director)

Hey, good morning, everyone. In particular, Jim, I will be missing you on these conference calls and your insights throughout the year. Congratulations on the entire Mintis spot. Jim, maybe kind of turning to the market first, kind of what's your sense for the appetite? There were some comments along those lines in prepared remarks, but when you think about the sales book today and where it stands for 2021, what needs to happen to make sure that all pumps are put to bed? I have a few follow-ups from there. Thank you.

Jim McCaffrey (Chief Commercial Officer)

First of all, as we've stated in our remarks, June was certainly better than May, and July is better than June.

We anticipate that August will be better than July. The weather that we have had, the good summer weather, the slow increase in the gas price has benefited most of our customers, all of our customers. We are seeing a much better burn, much better capacity factors today than we saw just a few months ago. That is encouraging. As Jimmy said, in the 49% that we have sold for 2021, we do not have any carryover in that number. We are anticipating that our domestic customers are going to take all of their shipments, or at least the vast lion's share. Now, again, there is a lot of uncertainty due to the COVID situation, but that is our view today. On the international front, we see inquiries picking up.

From the time we took this company on the road, we said that we had the capability of pivoting from the export market to the domestic market and back again better, more cost-effectively, and more efficiently than anybody else in the business. That has not changed. What changed in the second quarter was there was no place to pivot to. There was just no place to go. The international markets just kind of sank, and we're starting to see those rebound now. We're seeing activity in India. We think that as the year moves on or into next year, we'll see some opportunity in Europe again and in Southeast Asia. We're seeing that. We're fully contracted for the rest of the year, but our clarity is not perfect in terms of those international marketplaces just yet.

We think as we get into the third quarter and get to the next call, we'll be able to provide a lot more clarity than we can today. I'm encouraged by the last several weeks and the last month in the marketplace. I appreciate that, Caller. You mentioned you're fully committed for the second half. Would you be able to share a number in terms of tons of coal committed? If there's any pricing around that, I would certainly appreciate that as well. Most importantly, I'm kind of looking for your committed volumes for the second half of the year. I can imagine that they're quite elevated, kind of given what has been happening in the first half of the year. I learned a long time ago I don't belong in the prediction business, and this year is tougher to predict than ever.

Setting the buyouts aside, we had 25 million tons contracted for this year. That has not changed. We expect to get the value out of our contracts, and we expect to deliver the value that our customers expect from their contracts. That is what we are looking at, Lucas. I appreciate that.

Lucas Pipes (Managing Director)

Thank you. I have a question for Mitesh and maybe the broader team as well. On the transactional opportunities, I appreciate you do not want to kind of get too much into the weeds, but could you provide a rough zip code in terms of dollar amount you are looking for, kind of either on a single transaction or the aggregate? Any just kind of ballpark would be really helpful. Thank you.

Mitesh Thakkar (CFO)

Lucas, like I said, there are multiple opportunities. It is not one or two, so it is hard for me to predict.

I mean, all of them could execute. Some could happen in the second half. Some could happen in the first half of next year. It's hard to put a timeline and schedule around it. I think it's fair to say these are meaningful opportunities and not just, for lack of a better word, small amounts we are talking about here.

Lucas Pipes (Managing Director)

Kind of where would you put the threshold of meaningful? Tens of millions? Hundreds of millions?

Jimmy Brock (CEO)

I think you could say tens of millions. The one good thing about it, Lucas, is these opportunities that are out there fit well within our strategy, doesn't really affect the core part of our business. We believe that moving forward, it's a very high likelihood at least half of these will happen. That's about all we can say at this point. Very helpful.

Lucas Pipes (Managing Director)

I appreciate that information very much. Jim, again, congratulations. I will miss you. To everyone, best of luck. Thank you.

Thanks, Lucas. Our next question will come from Mark Levin with Benchmark Company. Please go ahead.

Mark Levin (Managing Director)

Okay, great. Yeah, first things first. Jim, congratulations. We're going to miss you very much. I hope you enjoy retirement. I can't tell you how much I've enjoyed getting to know you over the years and wish you all the best.

Jim McCaffrey (Chief Commercial Officer)

That's very kind of you, Mark. Thanks.

Mark Levin (Managing Director)

Absolutely. I know the sales team is in good hands with Bob and Dan. I'm sure you've trained them very well. Let me move first to a question for Mitesh, if I can. Mitesh, are you confident?

I know you lowered the CapEx guidance again, and I know there are a lot of different moving pieces, but do you feel at this point you guys will be able to generate at least break-even organic free cash flow in the second half of the year?

Mitesh Thakkar (CFO)

Mark, like Jim said, there are a lot of moving parts with respect to shipments and everything else. Yes, it is possible that we are going to have free cash flow in the back half of the year. Again, everything depends on the shipments. As we sit today and the looking glass that we have, although it is not as clear, I think that is definitely what we are shooting for here.

Mark Levin (Managing Director)

Okay, great.Related to that point, and maybe this is for Jimmy, if you're comfortable, what were you if you just kind of take you to the July or the August kind of production run rates, would you be comfortable maybe sharing what those annualized to? Just trying to get a feel for obviously, it doesn't look like you'll hit 25 million tons this year, but just trying to figure out what the operations are running at on an annualized basis to get a feel for kind of how far along you guys are post the trough.

Jimmy Brock (CEO)

Yeah, Mark, I would say it's kind of hard even for us to annualize the numbers today, but it is encouraging. As Jimmy McCaffrey stated earlier, we did restart our fourth longwall this morning.

As we move forward, if we continue to get these inquiries and we see some of the inventory levels coming down, and obviously with the burn capacity of what it has been the last two months, we are very hopeful that we can get back to somewhat of a normal run rate in the second half of the year. There are a lot of uncertainties that are still tied to that. One is our export is a big piece of our business, so what happens there with the COVID-19 situation and others is a big part of it. We are encouraged that moving forward, we will be able to get back to somewhat of normal operations that we have had. We certainly like to see the natural gas prices moving higher. That should help even further going into 2021.

For the second half of this year, as Mitesh said in his remarks, it's very hard to give a whole lot of quantitative guidance just due to all the uncertainties that are there.

Mark Levin (Managing Director)

That makes sense. Maybe I'll ask a qualitative question then. Obviously, natural gas prices have moved a lot higher. If you look at kind of the calendar 2021 prices, they're even higher than that. We've clearly seen a lot of NAP production go lower. I guess that's the good news. On the bad side, I guess there's still a lot of inventory still sitting on the ground, maybe record inventory.

If the present dynamic were to continue, meaning gas prices where they are right now or getting better as the contracts kind of move into the future and production kind of stays where it is, and if the weather's normal, I realize three major issues there. How long do you think it would take to get the market back to some sense of supply-demand balance if you had to venture a guess from what you see?

Jimmy Brock (CEO)

My best guess at this time, if I were trying to give you a straight answer, which I will, Mark, is somewhere between three to six months. I think if you look at our domestic customers that are here, they're somewhat getting back to normal faster than we anticipated. That's because of the weather and the burn, obviously.

I would think it's probably going to be three to six months before we see those inventory numbers levelize to a number that we feel comfortable forecasting going forward.

Mark Levin (Managing Director)

Yeah, that's great. Great help. Last and final question for Mitesh, just so I think I heard it correctly, but I just want to make sure. Did you mention in your remarks, Mitesh, SG&A going forward kind of at the $8 million-$10 million level? Did I hear that right?

Mitesh Thakkar (CFO)

No, I think what I suggested, actually, that was the remark I made in comparison to last year, that earlier we forecasted an $8 million-$10 million decline. Now we are forecasting a $13 million decline. On a quarterly basis, I think, Mark, you're still in the zip code, but it's in a different way than I positioned it.

Mark Levin (Managing Director)

Got it.

I got it. Perfect. Great. Thank you for the clarification. Absolute best of luck, particularly Jim.

Thanks, Mark. Thanks, Mark.

Operator (participant)

Our next question will come from Matthew Fields with Bank of America. Please go ahead.

Mathew Fields (VP and Senior Relationship Manager)

Hey, everyone, and best of luck in retirement, Jim. Thank you, Matt. I wanted to ask about bonding requirements, first of all. Some of your peers have sort of mentioned discussions with insurance companies heading into the third quarter requiring some increased collateralization. Have you had similar discussions about that into August?

Mitesh Thakkar (CFO)

You're talking about surety bonds, right?

Mathew Fields (VP and Senior Relationship Manager)

Yeah.

Mitesh Thakkar (CFO)

Yeah. I think you might have noticed for the quarter, we did not see any increase in the bonding requirements. I mean, we did have calls with a lot of our surety providers, even while we were going through the amendment of the credit facility and stuff like that. Generally, everybody's comfortable.

We are not seeing any significant increase there. You have some where you could see, for different reasons, somebody needing more collateral, somebody giving up some collateral. We are seeing some natural churn, but not any significant increase.

Mathew Fields (VP and Senior Relationship Manager)

Okay. Thanks for that. That's helpful. Then on the transactional opportunities, it sounds like you're saying sort of a lot in the tens of millions. Nothing like any kind of major sale leasebacks of your infrastructure facilities, like CMT or something like that?

Mitesh Thakkar (CFO)

No. These are more like asset sales, right of ways. We own a lot of land. There are some land transactional opportunities, those kind of stuff.

Mathew Fields (VP and Senior Relationship Manager)

Okay. Is a sale or sale leaseback of Consolidated Marine Terminal at least on the discussion block? Because you're producing a $40 million EBITDA, at least now.

Obviously, we'll see what the future holds, but that's a pretty valuable asset that could reduce a lot of your debt load.

Mitesh Thakkar (CFO)

It is not part of the opportunities that we were talking about, but we are a public company, and we are open for business. We look at everything possible. If there is an opportunity there, we'll definitely consider it.

Jimmy Brock (CEO)

Yeah, I'll add to that. It's a business strategy move. We've had several inquiries about the Baltimore terminal that we have evaluated over time. Keep in mind, that's also a critical piece of our business as well. It would have to be something very attractive for both of us, and we still would have to have a way to use that terminal in our business going forward. Okay, that's fair. Lastly, just a follow-up on the new credit agreement.

Mathew Fields (VP and Senior Relationship Manager)

Just I want to make sure I'm reading it right. It seems like you don't have any more capacity this year for second lien repurchases, but you refresh $25 million on January 1st, 2021. Is that the right way to think about it? Because you're not under two times net leverage.

Mitesh Thakkar (CFO)

I think the $25 million refers to the way it was structured is we had a share repurchase bucket of $25 million, which is annual. We have not used any of that this year. And what we did is we created an ability to buy back our second lien through that share repurchase bucket. The share repurchase is subject to leverage test, but the second lien is not. So we can do second lien buyback through that bucket.

Mathew Fields (VP and Senior Relationship Manager)

Okay. All right. And that's a one-time as opposed to the $25 million annual.

Mitesh Thakkar (CFO)

No, it's an annual bucket. It's an annual bucket.

It refreshes every year.

Jimmy Brock (CEO)

Got it. All right. That's what I thought. Okay. Thanks very much, and good luck in the back half here.

Jim McCaffrey (Chief Commercial Officer)

Thank you, Matthew.

Operator (participant)

Once again, if you'd like to ask a question, please press star then one. Our next question will come from Nick Jaruzic with Stifel. Go ahead.

Nick Jaruzic (Analyst)

Hi. Thanks for taking the questions. The first one with the 2021 contract book. Directionally, can you give us a sense for whether pricing was up or down or flat on a like-for-like basis?

Jim McCaffrey (Chief Commercial Officer)

We're in the middle of several negotiations. From a competitive point of view, I don't really want to discuss price, but I will say this. If you look at the published markets, Coal Desk and Evolution primarily, the tons we've booked are better than the published markets have advertised.

Nick Jaruzic (Analyst)

Okay. All right.

For 2021 CapEx, how can we think about that relative to the 2020 spend?

Mitesh Thakkar (CFO)

Obviously, we do not have a 2021 guidance out there for CapEx, but depending on how the market conditions play out, I think we are going to be market-driven. We obviously deferred a lot of the CapEx, particularly on the growth side this year. If the market turns out to be one where we are able to go back into some growth CapEx here, that will probably move the needle. I think on the maintenance side, this year, we are demonstrating our ability to run at a very low level of maintenance CapEx. We have done that in the past. We will have to see how the balance of 2020 plays out to give you a better color. We can continue to run on the maintenance CapEx if we need to.

Jimmy Brock (CEO)

One thing I'll add to that, Nick, is we said many times before that we are well-capitalized in the Pennsylvania Mining Complex. We are, and that our capital spend would be tied to the demand and how we run and operate the coal mines. That has certainly been the case as the volume pulls back. Even in years past, you've seen us adjust that capital spend to come back. The one benefit I'll say that you get from that moving forward is we learn from every one of these exercises. We like to think that our capital stays around $4 a ton moving forward. The team has done a really good job of balancing that, and we think we can do it moving forward. Okay.

Nick Jaruzic (Analyst)

Final question, just on the excoal contracts and the discussions there. Is there any update you can provide?

Jim McCaffrey (Chief Commercial Officer)

Let me say this. We have booked some tons for the second half, both with Xcoal and with some third-party players. All those tons have been booked on a spot basis, but by no means are we willing to give up on the Xcoal contract for this year or in the future. We expect to get our value out of the contract. Xcoal expects to deliver it, and we should have more clarity about that as we get into the next quarter.

Mitesh Thakkar (CFO)

Okay. Nick, was your question more on 2021?

Nick Jaruzic (Analyst)

You have the volume contract with Xcoal and then the terminal contract as well. That is what I was asking about.

Mitesh Thakkar (CFO)

Are you asking about renewal, or are you asking about the existing contract?

Nick Jaruzic (Analyst)

Renewal.

Mitesh Thakkar (CFO)

Okay.

Jim McCaffrey (Chief Commercial Officer)

As far as renewal, both those discussions have kind of meshed together, Nick, but we will be continuing to talk to Xcoal. One thing we will be paying attention to is if we want to keep the same concentration level that we've had in the past. Again, stay tuned.

Nick Jaruzic (Analyst)

Okay. Thank you.

Operator (participant)

Our next question will come from Michael Diaz with Vertical Research.

Please go ahead.

Michael Diaz (Analyst)

Good morning, everybody, and Jim God speed.

Jim McCaffrey (Chief Commercial Officer)

Thank you,Mike.

Michael Diaz (Analyst)

For Jimmy or Jim, could you just maybe update us on, as your customer base for your coal, your thoughts, trends, what you're hearing about plant closures, load factors, and looking maybe two, three years out? Do you still have a pretty secure visibility on your ability to serve those types of customers?

Are some of those customers looking at what's going on from the supplier sector side certainly wanting, after we get through this uncertainty on demand, wanting to get more aggressive with partnering with youas we get out the other side of this?

Jimmy Brock (CEO)

I would say, to start out, we are certainly concerned with the closure of power plants, particularly the ones that have been accelerating. When you go back to our original strategy that we want to serve these core must-run power plants, we still feel very good about the relationship with those customers.

We've been able to ship to them, and we believe that if we can have a normal summer followed by a normal winter, maybe even followed by a normal summer after that, and we can get these gas prices back up to acceptable levels, then we think we're going to remain a part of that energy mix. We feel pretty good about where we are there with these customers. That is one thing, and that is why the export market is very important to us as well. We continue to believe that we're going to be able to provide a low-cost fuel and be a part of the energy mix going forward.

Michael Diaz (Analyst)

Let me just add on to that briefly, Mike. We announced this morning that we booked 4.3 million tons in the second quarter for 2021, and those 4.3 million tons extended from 2020-2024.

Obviously, we've booked some term business there. We're deep in conversations with a couple of other key customers about term business. There's a lot of uncertainty in the marketplace, but I'm relatively optimistic that we will find a way to get those done, and they will be beneficial to both us and the customer.

I appreciate that. Just my follow-up would be your updated thoughts on Itmann, pace of where you are, obviously, with the slowing down opportunity from a spending side. The market that you see, I mean, we're all looking for visibility, but as you think about the plans on Itmann, is it 12 months delayed? Is it a market-driven delay? Just how that's going to fit in as we kind of emerge through this.

Jimmy Brock (CEO)

Itmann is a project that we're really excited about.

It's going to be the best quality around when it comes to low-vol metallurgical coal. However, we do have a capital allocation process, and we have followed that. The highest rate of return on our investment right now is probably our debt security. We have deferred or literally stopped most of the spending on the Itmann Project. Now, we are continuing with a very, very low-cost exploratory mining, as I called it before. It's very low-volume tons, one crew, one shift a day that's working there now. We will not be spending a lot of money on Itmann moving forward until we have a better idea of where the market is and timing of what we need to continue that project. Just so you know, it's not really a question around Itmann's economics. It's more of a capital allocation question for us.

I think it's a great project. It's just where your cash gets the most bang for its buck.

Michael Diaz (Analyst)

Yeah, I just wanted to get that confirmation. Gentlemen, thanks so much, and best of luck, Jim.

Jim McCaffrey (Chief Commercial Officer)

Thanks, Mike. Appreciate it.

Operator (participant)

Thank you. This will conclude our question-and-answer session. I would like to turn the conference back over to Nathan Tucker for any closing remarks.

Nathan Martin (Head of Investor Relations)

Thank you, Cole. We appreciate everyone's time this morning, and thank you for your interest in and support of Core Natural Resources. Hopefully, we were able to answer most of your questions today. We look forward to our next quarterly earnings call. Thanks, everyone.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.