Q4 2019 Earnings Call
a month 7th production volume set another best of a record-breaking last years previously achieved record.
Provide more color on these record achievements in my commentary that follows.
The company's fourth-quarter played out as we expected in disgust on our third quarter conference call with the exception of higher inventories that we achieved record sales and production levels for the for year of 2019 for sales and production volumes were lower in the fourth quarter compared to any other quarter during the 2019.
as we indicated
Previously, these lower volumes were impacted by Soft market conditions low pricing more holidays during the quarter additional days out of production to perform routine maintenance and the complete took one long will move.
What we elected to perform this additional routine maintenance and flexible production volumes during these challenging market conditions. We were able to management or cash cost of sales to less than $86 per short time the lowest quarterly amounts in the last night quarters.
The first quarter proved to be the most challenging quarter of 2019 for our markets still producers continued to struggle with slim margins while constantly adjusting their production levels to match sales or service as one would expect these challenges extended to met coal producers as well and navigate it to a declining demand while also dealing with lower margins caused by a low pricing environment.
All major indices premium hard coking coal remain range-bound at their lowest levels of the Year mainly due to staff saw steel demand the uncertainty caused by the ongoing trade Wars and the Chinese import restrictions on seaborne Kohl's.
The difficult fourth-quarter Global pig iron production end of the year at one point three billion metric tons equivalent to an increase of 2.3% compared to 2018, National markets Europe and South America experienced year-on-year year-over-year pig iron production declines a 4.2% and 8.7% respectively.
Where was not immune to these challenges as we saw some of our customers request adjustments to vessel shipments in order to minimize their on-site inventory levels?
In addition spot Market opportunities were few and far between and when available we're normally met with a larger contingent of suppliers competing for these opportunities.
As a result of a difficult circumstances a handful of producers responded by shutting down or temporarily idling over 7 million metric tons of annualized production.
Warriors proud to have increased our you're over your sales volume in such an environment.
Production volume in the fourth quarter was 1.8 million short tons compared to 1.9 million short tons produced in the same quarter of 2018 a decrease of 4%
Successfully completed one lower will move in the fourth quarter compared to $1 will move in the fourth quarter of 2018.
I mentioned earlier the lower production volumes were driven primarily by our election to perform additional maintenance at the mines during the fourth quarter as well as the software market conditions that I described earlier.
The company's strong performance in the fourth quarter propelled pull your production volume to a record high of eight point five million short tons, which exceeded our guidance targets.
This record high represents over 700,000 more shortcuts in 2019 or a 10% increase over 2018.
The capital investment into the mind over the last three years has paid off nicely in the operations are an extremely well with minimal disruptions during the year.
Mine 7 weeks a new milestone in its history with a record high production of 6.2 million short tons in 2019, which is the best every year had since the began production in the nineteenth century.
This Record year was on top of last year's record-breaking year.
Or operational successes and record high production volumes are credit to the hard work and dedication of our employees and I thank them for all they've been doing to help us perform a strongly as we did again in 2019.
Our goal for the safety of our people. Is it everyone who works at Warrior comes to work every day and returns home every day without an accident or safety incident.
I'm proud to announce that we set these record high production volumes while also setting record low safety incident rate at the mines in 2019.
We're safety rates have improved each year since 2016. We believe the company's safety isn't rate is among the lowest in the US for underground line and it's 48% better off than the US industry, right? Our top priority remains working safely is that is the first and most important step to working efficiently and ultimately achieving success in the marketplace.
Sales volumes in the fourth quarter or 1.7 million short time compared to two million short tons in the same quarter 2018 a decrease of 16%
the man from our customers continue to be week during the fourth quarter, especially in South America.
For sales by geography in the quarter were 53% in to Europe 19% in South America and 28% into Asia.
The mix shift from South America. Asia was primarily driven by more spot Market opportunities in Asia, unless the man from South America largely due to Extended maintenance and customers as well as software market conditions.
Sales volumes for the full year of 2019 reached a record high of eight million short tons, which exceeded our guidance targets and compared to seven point six million short tons in 2018 Chevy Caprice of over three hundred thousand short tons or 4%
our sales by geography for the year. We're 56% into Europe 22% into South America and 22% into Asia.
Expect the warrior continued to increase its exposure to select agent steel Market with producers who value value or premium calls.
The fourth quarter pole inventories increased 148000 short tons to seven hundred forty nine thousand short tons at the end of the year primarily due to stock market conditions and production volume down in sales volume store in the fourth quarter.
We believe the company is well-positioned heading into 2020 to capture better market pricing than we saw in the fourth quarter of 2019.
Argos price realization from fourth quarter was 97% of the Platts premium mobile Australian index price.
Index prices remain flat during the quarter and average $140 per metric ton while reaching a three-year low in November of $132 per metric ton.
The company spent $34 on Capital expenditures and Mine Development costs during the fourth quarter of this year compared to $26 last year.
Before your 2019 Capital spending was $107 compared to $102 for the previous year.
307 million dollars. We spent $89 on sustaining capital and another $18 on discretionary Capital primarily on the floor North shaft construction wage. In addition. We spent twenty-three million dollars on four North Mine Development in 2019 compared to nine million dollars in 2018.
These development costs related to a continuous monitor unit and support costs are incurred to develop low wall panels at four North we expect to be low on mining in the four North Area and approximately four or five years.
Over the last three years, where's demonstrated a commitment to reinvesting significant amounts of capital into the business more specifically we've spent over three hundred million dollars to strengthen over operational platform my driving production efficiencies and higher equipment utilization.
in addition
These higher than normal sustaining Capital Investments during high-pressure environments provide the company with better flexibility to reduce our Capital spending and lower price environments.
I will discuss later. We expect to continue that investment approach again in 2020 subject to favorable market conditions.
Warriors record performance continues to demonstrate the unique value of a highly focused business strategy as a premium pure-play my co-producer. Our goal is to operate profitably and maximum cash flow generation in any pricing environment. Not just in the favorable conditions. We've experienced over the past few years.
We've invested in the business where appropriate to support this strategy. We've also continued to reward our stockholders as conditions warrant.
Where performs mostly as expected in the fourth quarter which led to a record year in production and sales volumes for 2019. These operational records also drove strong financial performance account to announce that for the full year 2019. We achieved one point three billion dollars in revenues $479 of adjusted ebitda and free cash flow of $400,000 in addition. We continued our commitment of attorney Capital stockholders, which total $253 of cash dividends and stock repurchases over the course of 2019.
Strong fourth-quarter and full-year 2019 results continue to demonstrate the key strengths of our business model one focused on the highest quality Medical Products sold into the Seaboard Market to suck largest global steel producers.
To realizing industry-leading price realizations for a high-quality products three a low and variable cost structure to generate some of the highest operating margins and free cash flow in the interest rate and for a highly talented Workforce that drive safety sales production volume and efficiencies in the business.
And please do note the warrior continues to maintain a strong sustainability record and is committed to further Improvement.
Earlier this month the company released its inaugural corporate environmental social and governance sustainability report that can be found on our website.
Report was prepared in accordance with the global reporting initiative standards and highlights the company strong environmental record.
committed
This is supplying the global steel industry as a responsible corporate citizen focusing not just on what we do, but how we do it that means proactively lowering energy use reducing greenhouse gas ensuring land reclamation and maintaining a leading safety record.
Lastly before I hand things over to jail as previously stated on her and it's called the company spent a significant amount of time in 2019 completing. It's work on Blue Creek on the Blue Creek project feasibility studies.
Additional core drilling permits fourth floor storage another key project analysis to be in a position to make a go no-go decision regarding the development of the Blue Creek mine and the first quarter of 2020.
We're extremely pleased to announce today that the company's board of directors has approved the company's development of the transformational Blue Creek growth project beginning in 2020. I'll go into greater detail in a few moments. Well now ask the other address our fourth-quarter and full-year results in Greater detail.
Hi.
Well as Walt commented on earlier the company's fourth-quarter played out mostly as expected and discussed on our third quarter conference call. So sales and production volumes are lower in the fourth quarter compared to any other quarter in 2019.
Another key theme from the fourth quarter where the stock market conditions which led to load market pricing and significantly impacted. Our quarterly results, especially compared to the fourth quarter of 2018 when market pricing was very strong.
2019 was a record year and operational performance that generate strong financial results for the company the company met or exceeded most of its guidance targets. However, the the year of 2019 with the story of two halves the first half and the second half.
The plastic Loop all index price began 2019 at $220 per metric ton and averaged $205 per ton in the first half of 2019 on the back on demand for met coal by Global Steel producers.
We recorded 75% of its full-year adjusted ebitda and the first half of 2019 and 73% of its free cash flow as a result of high Met cold prices as steel production and demand soften outside of Asia during the second half of 2019 then steal margins continue to get pressure from high Ironwood input prices despite following met coal prices.
Play some volatility accelerate in the second half of 2019 as a trade and tariff war with China continued and trying to begin to impose increasingly tighter Port restrictions on coal important job during the second half of the year.
The third quarter began with the plaits low-vol index priced at $194 per time and declined $54 or 28% to the fourth quarter index price $140 per time.
For the full year the plats low-ball index price decreased $81 per ton or 37%
For the fourth quarter of 2019 net income on a gaap. Basis was $21 or $0.41 per diluted share compared to net income of $374 or $0.07 per diluted share in the fourth quarter of 2018.
Excluding the non-cash adjustment to our asset retirement obligations due to a change in Reclamation estimates. Non-gaap adjusted. Net income for the fourth quarter of 2019 was $12 or $0.23 per diluted share compared to $2.38 per diluted share in the fourth quarter of 2018.
For the full year 2019 that didn't come on a gaap. Basis was $302 or $5.86 per diluted share compared to net income of $697 or $13.17 per diluted share in 2018.
Excluding the non-cash asset retirement obligation adjustment loss on early extinguishment of debt and other non-recurring income non-gaap adjusted net income for 2019 with 2084 million dollars or $5.52 per diluted share compared to $459 or $8.67 per diluted share in 2018.
Adjusted ebitda was $39 in the fourth quarter as compared to adjusted ebitda of a hundred sixty-two million dollars in the same period of 2018 it decreases 76%
The company's adjusted ebitda margin was 19% in the fourth quarter compared to 45% in the fourth quarter of 2018.
The corlee decrease was primarily driven by decreasing average net selling prices of 33% and a 16% decrease in sales volumes partially offset by lower production costs.
For the full year 2019 were you recorded just said 479 million dollars compared to $601 in 2018 decrease at 20%
yearly decrease was primarily driven by a 12% decrease in average net selling prices partially offset by a four percent increase in sales volumes and lower mining production costs.
Yes.
Even a margin of 38% in 2019 compared to 44% in 2018.
Total revenues were $205 in the fourth quarter of 2019 compared to $360 in the same period last year just decrease was primarily due to a 33% decrease average net selling prices and a 16% decrease in sales volumes.
For the full-year 2019 total revenues were one point three billion dollars on record sales volume of eight million short tons compared to one point four billion dollars in 2015 on sales volume of 7.6 million short tons.
A revenues in 2019 decreased $110 or 8% of a 2018 primarily due to a 12% decrease in average net selling prices off partially offset by a 4% increase in sales volumes.
the average net selling price for a short time decreased 33% in the fourth quarter compared to the same period in 2018 the plats low-ball index price remained flat during the fourth quarter beginning and ending at $140 per metric time while hitting a 3-year low of $132 per metric time in November a gross price realization was 97% in the fourth quarter the marriage and other charges reduced our gross price realization to Annette average selling price of $120 per short time in the fourth quarter of 2019 compared to $100,000 in the same period last year
For the full year 2019 average net selling prices decreased 12% to $155 per short time.
mine in cash cost of sales
was $142 or 72% of mining revenues in the fourth quarter of 2019 compared to $183 or 52% of mining revenues in the fourth quarter of 2018.
Cash cost of sales for a short time after would be poured was approximately $86 in the fourth quarter compared to $93 in the same period of 2018 the primary driver of this decrease were lower transportation and royalty calls which are variable and price-sensitive to met coal prices.
These calls were lower on 16% lower sales volumes and a 33% lower average net selling prices.
As well indicate earlier reflects our production volumes and down in the fourth quarter by managing our cash cost to the lowest quarterly cost per ton amount since the second quarter of 2017 or 9 quarters ago.
That's called the sales for a short time fo be poured was approximately $90 for the entire year of 2019 and approximately $4 per short time lower than 2018.
This was a record low amount for warrior in the last three years.
Be strong results with the in the lower end of our guidance range for the year.
Decrease in the cash cost for short time is primarily due to 12% lower average net selling prices partially offset by a 4% increase in sales volumes and lower mining production costs for the full year of 2019.
I see any expenses were about eight million dollars or 4% of total revenues in the fourth quarter of 2019, and approximately the same dollar amount in the same period last year
Sg&a expenses were set $37 for the full year 2019 and flat compared to 2018.
Appreciation and depletion expenses for the fourth quarter of 2019 were 24 million dollars were 12% of total revenues compared to twenty-five million dollars in 2018.
For the full year 2019 these expenses were $97. And approximately the same amount is 2018.
The full year 2018 expense included $4000000 accelerated depreciation on the equipment Beyond its economic repair.
That interest expense was about seven million dollars in the fourth quarter and include interest on our outstanding debt plus amortization of our debt issuance costs associated with a credit facilities all set by interesting.
For the full year 2019 net interest expense was $29 million dollars or eight million dollars lower than 2018 is slightly better than our guidance for the full year 2019.
Decrease in the fourth quarter and that its net interest expense in full year 2019 amount over the same period in 2018 were primarily due to the early retirement of $132 million dollars of our debt in the first quarter of 2019.
the company recorded non-cash income tax benefit of three million dollars during the fourth quarter of 2019 reflecting the utilization of the companies in a weld and a benefit a seven million dollars wage results of recognizing additional alternative minimum tax credits General business business credits and net operating losses available to the company in connection with the settlement agreement between Walter a m m e r s
For the full year 2019 the company recorded on cash income tax expense of $65 million dollars or an effective income tax rate of 17.8% wage primarily relate to the utilization of Aryan Wells.
In the fourth quarter of 2018 the company record a non-cash income tax benefit of two hundred twenty six million dollars primarily reflecting the release of the valuation allowance on deferred tax assets associated with the company's net operating losses.
We paid no cash taxes in 2019 or 2018 as indicating their guidance and continued expect the utilization of an oil would reduce our federal and state income tax liability to zero Until the End are fully utilized or expire.
I need the cash flow during the fourth quarter. The company used $9 of free cash flow, which was a result of cash flows provided by operating activities at twenty-five million dollars less cash for Capital expenditures and Mine Development a 34 million dollars.
Free cash flow would have been twenty-five million dollars higher and positive for the fourth quarter had one customers accounts receivable balance been paid.
On the due date by your end.
This quarterly result compared to a hundred five million dollars of free cash flow in the fourth quarter of 2018.
This will result was primarily due to lower net income in the fourth quarter plus an increase in working capital of $27 from the third quarter of 2019.
It's working capital increase was primarily due to lower pricing and the higher end indoors.
Cash flows from operating activities for the full year 2019 were five hundred thirty-three million dollars and we're $27 or 5% lower than 2018.
These lower results were driven by lower. Net income in 2019 compared to 2018 and partially offset by a decrease in working capital of $30.
the company
For a free cash flow of $402 in 2019 a decrease of $56 or 12% over 2018.
Free cash flow conversion with 84% this year compared to 76% last year.
That's used in investing activities for the purchase of capital expenditures and Mine Development calls.
What's 34 million dollars during the fourth quarter and totaled $131 for the year?
Cash flows used in financing activities or seven million dollars in the fourth quarter of 2019 and consisted of the payment of the quarterly dividend of $3 plus $4 of capital lease payments.
For the for year of 2019 cash flows used in financing activities were four hundred twelve million dollars and consisted primarily of repayments a debt of $132 capital lease payments on a 17 million dollars distributions of dividends a 240 million dollars in stock repurchases a $13.
The company exhausted his first stock repurchase plan in the early 2019 and announce a new seventy million dollar stock repurchase plan beginning in 2019.
Under the new plan. The company has repurchased repurchased five hundred thousand shares of common stock totaling $11.
Luke has distributed to stockholders in 2019 through dividends and stock repurchases total $253.
It's a company's IPO in April of 2017. The company is distributed approximately 1.3 billion dollars to stockholders consisting of dividends and stock repurchases.
The company's balance sheet continues to be strong with a leverage ratio of 0.38 times adjusted ebitda plus ample liquidity a total available liquidity g at the end of the year Well, 310 million dollars consisting of cash and cash equivalents of $194 and $160 available under a BL facility out of outstanding letters of credit of approximately nine million dollars.
In summary, we finished fourth quarters expected and that contribute to our record production in sales volumes for the full year and another strong year of financial performance.
Now turning to our Outlook and guidance for 2020.
As a result of our strong production in 2019, we expect to complete for long will moves in 2020 compared to the five moons. We had in 2019.
A guidance for the full year 2020 is subject to many risks that may impact performance such as market conditions in the steel and met coal Industries and overall global economic conditions. I'm always more fully described under our forward-looking statements in our SEC filings and is as follows,
Wholesales that 7.3 to 7.8 million short tons oil production of 7.0 to 7.5 million short tons
Cash cost of sales Kobe Port of eighty-eight to ninety three dollars for a short time.
Capital expenditures of $125 245 million dollars Mine Development cost of ten to fourteen million dollars
sg&a expenses are thirty-two to thirty-six million dollars.
interest expense net 25 to $27
non-cash deferred tax expense of eighteen to twenty percent and a cash tax rate of 0%
We're approaching 2020 with continued optimism although with a cautious and conservative approach until further market and economic information is available.
I rested must reflect some conservatism because of the inherent risk of underground mining.
Several factors may affect our Outlets including the flats premium low-ball pricing index the number of planned long long ball moves and the timing of those moves between quarters.
Before returning back over the wall. I want to come in on our other announcement today regarding the development of our Blue Creek project. We're very excited about this transformational growth project.
after completing
Project work and analyses in 2019 The Net Present Value and assume metco price of $150 per metric ton, which is approximately today's market price wage only increased over our initial estimates primarily due to higher expected production volumes and lower estimated production costs.
We project that the net present value of this transformational growth project is over 1 billion dollars and you can do the math for yourself and what that could mean turn on a per-share basis.
We expect an after-tax internal rate of return of nearly 30% and a short pay Battle of two years from the initial longwall production.
We're strong free cash flow generation current liquidity as well as the ability to finance a hundred and ten to $120 of capital expenditures through equipment leases allows were to be opportunistic as it re-evaluates funding options for Blue Creek these drinks combined with a strong balance sheet provides a company significant flexibility and how we choose to finance Blue Creek development.
on the alternate back
to Walters final comments
Thanks Dale before we move on to Q&A. I'd like to make a few more comments about the year. We just completed and our Blue Creek announcement today.
We're very pleased with the company's record operational performance and strong financial results in 2019. And we appreciate the support and engagement that we have received from our stockholders are of course our employees.
What the steel production finished 2019 in an upward Trend but almost entirely on the strength of Chinese production while South America Europe continue producing steel at reduced levels.
No, understanding the global uncertainty but it's by the coronavirus outbreak Warrior has observed signs of improvement across all of our Geographic markets as the year starts.
Indications are that must feel producers have stopped producing operating rates while several of our customers have raised their production or in the process of planning for incremental increases in the current and back in quarters as a result. We're expecting our sales orders to return to expected levels sometime in the first half of 2020 and we're also expecting spot opportunities to increase over the same.
this is
Like these improvements we prefer to remain cautious and confirm that recent development and still pricing and steel demand can be sustained especially due to the effects of short-term uncertainty lingering in our Market.
We recognize that certain macroeconomic factors such as a potential slowdown in Regional GDP growth rates and the trade and tariff war with China the Corona virus outbreak as well as the office till the minute you were a have the potential to create a soft pricing environment for hard coking coal.
Corona virus outbreak to be the largest threat to seaborne met coal prices until we can get more clarity on containment of the virus in China and their businesses get back to operating as usual.
However, barring any unforeseen material events We Believe current fundamentals should remain relatively healthy for our markets.
We expect sales and production volumes and the first quarter of 2020 to be more like the fourth quarter of 2019 in which inventory levels could rise even further if macroeconomic factors continuing pressure steel demand.
He's expected market conditions were establishing our 2020 guidance targets of cautious optimism is I've sent on previous calls we run the business as if the next pricing downturn in a logical issue or just around the corner with conservative targets and flexible operations that allows to adjust to the market environment has it changed throughout the year.
We expect to update our 2020 guidance during the year is necessary to adapt to changing market conditions and changes in the business.
Last thing I want to provide some additional color on our announcement to develop the Blue Creek project.
The new single or mine at Blue Creek is expected to produce an average of 4.3 million short tons per year of Premium high-volume met coal and for the first ten years of production month.
Once we've developed Blue Creek, we expect that this new line could result in a 54% growth in our annual production capacity that we'll total nearly twelve and half million short tons per year off.
Believe that premium haiwale calls will become increasingly scarce driven by declining Supply and a lack of significant new project development which should support strong pricing fundamentals in the future.
No, more attractive feature this new mind. The respect production costs should be in the first quartile of the US and Global Seaboard cost curves.
We believe the combination of these factors will generate some of the highest metco margins in the US.
The company will begin developing the mind this year and expects to spend approximately twenty-five million dollars in 2020.
What's that? We'd like to open the call for questions operator.
Thank you at this time. I would like to remind everyone to ask a question. You may press star then the number one on your telephone keypad. If you choose to withdraw your question, press * then two will pause just for a moment to compile the Q&A roster.
And the first question will come from Daniel Scott with Clarkson's please go ahead thanks, congratulations guys good quarter and a tough environment and exciting dishes on the mine notice in correct me if I'm wrong that the the estimated cost of Blue Creek 550 to 600. I think that's the same number that you had last time that you did the budget for it a few years ago. Is there anything else you know, and he puts her takes that have changed the profile or to just nothing really move though. They you know, what, this is Walt and thank you. Yeah things changed around a little bit but all in all it was kind of a wash so we came back to about the same number just a different way of getting there.
Okay, and what's real I guess jumps out is is clearly that that cost structure being significantly lower. Can you talk about what it is about that mine in particular other than it's just brand new that really pushes the costs down that much money for part of it is the fact that it's brand-new. The other part is as we did more exploration drilling the coal seam thickness through the at least the first ten years is a little thicker than we had modeled Thursday and that's why we're seeing the increased volume which will drive the cost.
Okay, that makes sense. And then just one more. I know have any on the road that you talked about being able to sequence of the construction. That's mine. You mean it is a fairly large number even over five years. I could just kind of comment on that. You know, we're at what points if the markets States off you could you could pause?
You know right now what we're starting is the the slope for the mind and it really takes I think it's about three years before you get to the bottom of the slope. And at that point that is where you begin the continuous monitor development and that's really a an obvious break point is you know, once you start that slope development you want to going to want to complete it off. So the purchase of that equipment and the development of the underground mine would be a clear break point. Also you have the development of a preparation plant and a few things like that that are have very well-defined timing to get those constructed and you're going to base that timing upon which what you see is the market and whether or not you have moved forward on some of the other things so it's those types of things that I think make clear break points in the development.
So it's fair to say that, you know, probably a year for is that the shield?
And that's the the the max spending year of the first three are are much more modest.
Oh, that's that's probably not inaccurate. Yeah, then there's in the slide presentation that we did put on our website. We kind of laid out the spending by year, you know, really your third and fourth years kind of, you know round twenty 25% and the years so it's it's a small cuz of spendings pretty much the last three years.
That's awesome. Right? Thanks guys. Thank you. The next question will be from David with BMO, please go ahead great. Thanks for taking my question. I think you may have just touched on the question that I had but, you know based on some rough math. It looks like you could probably find you know, most of the Blue Creek on an annual basis, um, but the internal cash flows, assuming, you know, kind of a 150 that environment or or better so so, you know two questions actually, you know that team or does that seem accurate to you not relatively that seem accurate to you number one and number two if so, why and what kind of external funding options are you are you considering
Thanks, David you.
I think we have a lot of flexibility here. And one of the things that we did point out in our disclosures is you know, there's a large amount of equipment that you got a purchase for this mind as well that we get look at leasing office. So, you know, when you think about cash flows, you know since the IPO Justin 2 and 1/2 years, we generate over a billion dollars of free cash flow. So if you could look forward in a pricing environment of called 150, you know, we're going to generate an excess of one point two billion dollars and operating cash flows and let's just say can fax, you know, you spend a hundred million a year for five years, which I think is high on the high side. You still have, you know, more than a hundred million dollars of cushion, even if you spend the max amount of cash backs here so feel very confident that this could be done free cash flow if you want, but I think we do have other options that are disposable and you know, we plan to take advantage of birth.
Any Market opportunities?
I didn't made may come come to us. So, you know, we're going to be flexible on how we look at financing the whole project.
Okay, and then just related question obviously historically there's been very chunky special dividends that were paid out. Can you comment on them, you know expectations are not expectations essentially but thoughts moving forward on the potential for additional special dividends during this period of high capex.
Well, you know like in the past we really haven't changed our Capital allocation policy announcement of this project, you know, we seem to the extent we determined the board determines that there is excess cash flows. We will return that to shareholders and various forms and we've done that and showing that throughout our history so far off. Now most of those big special dividends have occurred in very very high price environments. So, you know you if you're going to be in a 150 environment that's substantially different than $200 so know we tend and we're still committed to returning Capital to shareholders, but we're going to have to balance the two just depending upon the environment during this five-year Construction.
A couple. Thanks.
The next question is from Kurt Woodworth with credit Swiss, please go ahead.
Yes, thanks. Yeah. Hey. Hey Walton Dale. I just wanted to say you know, congratulations on a really remarkable sort of operational turnaround you guys have achieved at this asset. I think you know a lot of us remember back in the Jim Walter days some of the their variability in the mine and it's pretty amazing. What you guys have accomplished. First question is just with regard to change your calculations for nav for for Blue Creek. Are you assuming that the hive all a production is priced it parity with Loval and then you know on the cob a performance being so much lower. Is that a fully loaded number at the port cuz you know, I was in of the view that maybe Logistics could be a little bit higher. It's my first question.
yeah, I guess the
The answer your last question first. I mean that all in cash cost is, you know fo be Port you know, it's going to be very low cost on the main production side. And then the transportation should be similar to what we get the rates we have today.
I'm sorry. Your first part of that question was the the pricing assumptions in terms of the relative discount?
Well the way we laid it out Kurt here in in all of our metrics is just saying look if if prices are 154 a highball, right you're going to have some ability and you know, it's a little bit hard to predict what those differences are going to be even though we've seen historical Trends recently being here the low-ball index price. So we didn't want to assume that we just need more around. Okay, if you're looking at an assumed highball a price is 150 then this is this this is the amount of the returns and the payback.
great, and then you know, I guess
When you look at this project and the you know the nav that you're running at you know, what I think is a very conservative 150 number is equivalent to the entire market cap of the company. I don't think I've ever seen like a single project where you could correlate that to the value of the entire market cap would you know and took an environment if the equity markets seems to almost penalize you for this. Would you evaluate strategic options or you know, look at monetising part of this project crystallized that value
Well, it's hard to imagine someone's going to argue with a 30% irr. If you have something better, please please call me back. I just you know, you're talking about even done margins graders and 50% of payback of two years. If you've got a better project something quicker, please give me a call that just it's just an incredible project. Um one high-quality product that you know, as well desired by our customers already low-cost very very low cost if you can see the materials, you know, we think on a combined basis with the existing business that will take us well into the first quartile the cost curve and what better returns can get and that in the in today's environment.
No, I agree. I guess the question is if the equity Market tends to disagree one way to solve for that would be to sell an interest in the project. And you know, we've kind of seen it in Copper where wage strategic buyers tend to award maybe better value. So I guess I guess the question is are are you contemplating at all? Do you risking the project or trying to monetize the project?
Well again, that would say that you're projecting that we do not have a proven track record on execution risk. I think over the last three years since 2016 as you let let off here we've proven we demonstrated that we can grow this business we manage risk and we believe we can do this Thursday at the cash flow generation over the last few years the strength of our balance sheet. We feel highly confident that we can do this on our own without a partner. It's and I think the rep Walter there as well as you know, just looking at as I mentioned earlier the cash flows we're going to cash flows that we can generate to do this on our own. So I am confident in this project.
Makes sense. Thanks very much.
the next question comes from Lucas pipes with B Riley FBR
Hey, good afternoon, everybody, and I want to Echo some of the earlier. Congratulations on truly outstanding operational performance and see if emerged from your restriction off. I want to piggyback on on some of Curt's questions specifically, if if you think about kind of the cost of the capital cost for Blue Creek relative to do the market cap versus the alternative of buying back your shares. How did you evaluate that opportunity cost would would would appreciate your thoughts on that? Thank you.
Well, I just buying back shares in general. Well, that will say that that doesn't seem to work too. Well recently in the factor as just looking across the sector the public publicly traded coal companies. A lot of money has been spent on BuyBacks and I don't think the results show that that's worked very well. So and I think it's difficult in this sector to say that that's an absolute these days. So as we've done in the past we tried to use the tool in our tool belt with special dividends quarterly dividends BuyBacks, and we're going to evaluate those with you know, with the funding this project but as you can be in the metrics the the gross the size of this opportunity is enormous. So to say a buyback is better. It's going to have to have a name.
Credible return to it.
Okay. Well, thank you for that. And then just the two more clarification questions the first the 65 to 75 dollar cost guidance. Is that Thursday on at the port?
Yes at the Ford f o b Port very helpful. Thank you and then back to the Quality side. So we think of my number seven is kind of Premium Loval wage policy equivalent my number for more akin to admit ball and then Shoal Creek in the same vicinity more. It's kind of a fireball a would you be able to kind of put off Blue Creek on that Spectrum where it would fit in from a from a quality standpoint very similar to Shoal Creek. It's a very similar quality product. That's all free CARFAX has
it's a for a highball a it's a low sulfur icsr highball a
Very helpful. Well, it was on my questions for now. I appreciate it and best of luck.
Our next question is from Alex hacking with City, please go ahead. Hi. Good evening. I also have a few questions, I guess first off. Do you need any additional Port capacity? I have mobile cuz you you talk about the expansion there and the slides or is the port is the current capacity sufficient to handle the additional volume. Thanks.
The port is doing some upgrades over the next several years. One of them is deepening and widening the the channel which will allow bigger vessels to come in to operate in the area. And we believe the port capacity will not be an issue. Once the project is bought online.
Okay, I guess I guess my question is do you need that project that Port project to go ahead or the poor could handle the tons today? As long as it is they might need to tweak a few things but not a lot. I think they're designed their designed capacity is within the range of what we intend to produce but I think I may have to tweak a few things. Nothing major. Thanks. So I'm looking at your slide thirteen here from the Blue Creek Foundation you talk about you know, the large majority of high volley. Demand is in your target market.
Yeah, if if I add all that.
It looks like a bit less than thirty million tonnes of haiwale demand around the world and then above that, you know, you got a bunch of projects that up to 10,000 tons, right including Blue Creek like I might it seems like a lot of supply for that market size or my like misinterpreting this line, I guess.
Well, we just highlight the biggest markets. We didn't identify the entire Marketplace demands for the highway. So you're you're confident that you can you going to secure update? Oh, yeah. Yeah, we are confident that you know, the the large majority of this will go into our existing markets, but we do think that's you know with Adam and that's going to grow out of India and and as we all know and talked in the past, you know, India's have been talking about the growth for quite some time, but we do but we've seen that recently and that opportunity for us is the market is something we think will happen over the next several years.
Okay. Thanks. And then
It's done to the 2020 guidance. Maybe I I missed this in the comments at the beginning cuz I was just a minute or two late. Obviously your sales guidance for 2020 is lower than 2019, How much of that is is market-driven and could be adjusted higher if you know if if we see a pick up and call demand and and how much of that is is production and operation. Is there anything else?
Well, as I stated we looked at the first quarter and projected the first quarter to be similar to Q4 of last year in which we we did not have our foot fully on the accelerator pushing them on a hard as we could and if we would see the market justify pushing these mines at full speed we we would do that. So I think there is upside from their home based on what the market conditions are. You know, it's an example last year through the first nine months of the year. We ran just about every Saturday. So we push these mines pretty off guard and in the fourth quarter, we slowed down a bit and then the first quarter with inventory levels, we're maintaining that pace.
Okay. Thank you very much.
Thank you. The next question is from Chris Terry with Deutsche Bank, please go ahead.
Hi Walton, and thanks for taking my questions. The first question just just around around Blue Creek and just relating it to the update. You put out the other day on the net operating loss carryforwards. Do you assume what what sort of tax rates do you assume within the project economics to get to to that page and and the second part of that is you're saying no cash tax obviously in 2020. How long do you think that situation last four on on your mouth? Thanks. Thanks Chris. As far as we in these particular metrics, we have not assumed any use of the in the project economic. What we have assumed is a 14% tax rate. We believe that will be approximately the rate in that project because of the Dead.
and is that we will be able to get
That's related to that project so that I think are here was over 17% So it'll drop down more than that 14 to Fifteen range. Once this month is up running full production. So if you look at the expected life of our analysts, you know in these last two or three years price has been really high. So I took the life of the we certainly come down. But if you assume a 150 price over the next several years, we probably got six to eight years of you know in a low still available to all set, you know the cash taxes so that kind of coincides with you know, the timing of the project.
Okay. Thanks. Thanks. So it is possible depending on the pricing whether that that may overlap into into Blue Creek and therefore improve the economics beyond pissed 30% which is obviously at 1:50 met call. But if you believe that that that pricing you could get upside to that. That's correct.
Okay. Thank you, and I just wanted if you could come in just a little bit more on on that announcement from the other day. I think fed 14 the loss carry-forward announcement. Thanks.
Yeah, what we did is adopted an oil rights plan. Just another layer protection for our nol based on this cumulative ownership change, you know, the rules around the tax rolls around section 382 very complex. And as you may remember we had this chart or had this Charter restriction in play that it was three years from the IPO and extends it it expires in April. So last year we put it up for a boat to extend it through April of 2023. And there was a few shareholders that voted against that proposal and under Delaware law. They cannot be held back to that Charter restriction. So in order to kind of, you know plug that hole you had to put in place this in a oil rights plan off.
prevent that so
Really just another layer of protection it has you know Sunset Provisions. It's really not it's not a poison pill. It's just a protective zinnel else just another layer protection off. Okay. Thank you. And and the last name for me in just coming back to the project and how the markets interpreting just interested in in your feedback is is most of the skepticism around the Met coal Market itself and therefore Market not wanting you to add additional tons and two rather to keep the market tight or is the skepticism around the project itself. Thanks.
Well, I will start in a lit. Well, add some comments here. I think there's always a lot of risk around large projects like this that take time right you have execution risk wage you have price risk, you have a lot of different risk and you know 550 to 600 million is a lot of money so and over five years you all, you know projects have call screen things go wrong. I would just say look look back at our history since the 1st of 2017. I think what you will see is we really have a good strong proven track record. We went from just under three million tons produced and now eight and half tons produced this past year. We've ruined that capacity each and every year we need to do things to keep our costs low and increase that production as we noted in our comments. This year was our lowest annual wage.
cost per ton amount
Three years the fourth quarter itself demonstrates how we can control our cost by flexing production. That was our lowest quarterly cash cost of nine Quarters off all that to me should demonstrate that really we can handle this. We know what we're doing. As I said earlier about the cash flows. We feel very comfortable that we can do this without anyone know and um, we think this is just an incredible opportunity for this company and that we can manage those risks efficiently and deliver.
Yeah, I'll just take over Dell said I think it's purely execution risk and getting through the project and coming out the other end of it ready to operate wage. Thanks so much, cuz that's it for me.
Thank you again as a reminder. If you have a question, please press * then 1.
next
She comes from Matthew Fields with Bank of America Merrill Lynch, please go ahead he guys want to focus on the the cat box and the funding of it for for Blue Creek appreciate that you sort of put out that kind of guidance about equipment financing for a little over a hundred million, but with your bonds, you know trading well above and sort of Colville at the end of this year. What's the calculus on, you know doing a kind of turning out debt and increasing the size of that issue to sort of help, you know, pretty fun job and and kind of make your maturity now outside of the project completion.
Yeah, thanks Matt. Yeah, certainly. We're looking at those options, you know, you know, we're just going to have to see what's available. And what's what we have access to em, as I said earlier, you know be opportunistic in the capital markets, you know that change every every day. So certainly looking at extending those maturities possibly increasing the size or even just taking it out the other you know, those are all options that will continue to look at cuz we do want to optimize our capital capital structures and will be continuous monitoring that but you know, we feel very good about this year. It's twenty-five million dollars a spin which we can handle very easily with our free cash flow.
Okay, that's it for me. Thanks again and good luck. Thank you.
Ladies and gentlemen at this time. There are no further questions. I would not like to turn the call back over to mr. Shell or for any closing comments that concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest and Warrior met coal.
Thank you, sir. That concludes today's conference. Thank you all for participating you may now disconnect.