Q3 2020 Contura Energy Inc Earnings Call
[music].
Good morning, and welcome to the contour energy third quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I.
I would now like to turn the conference over to Emily O'quinn SVP Corporate Communications. Please go ahead.
Thanks, Charlie and good morning, everyone before.
Before we get started let me remind you that during our prepared remarks, and the Q and a period our comments relating to expected business and financial performance contain forward looking statements and actual results may differ materially from those discussed for more information regarding forward looking statements and some of the factors that can affect them. Please refer to the company's.
Third quarter 2020 earnings release any associated SEC filing Oh. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures participating.
Participating on the call today are concerned as chairman and Chief Executive Officer, David Stetson and Chief Financial Officer, Andy Edson also participating on the call is Jason Whitehead, Our Chief operating officer, who is available to answer your question on operations with that I'll turn the call over to David.
Thanks, and good morning, everyone on the call and thank you for joining us today.
What a new trophy and challenging year 2020 has given us.
Just in the last few months, we have seen met prices dipped to a $105 spring back to 126, and just recently settle around 140.
We've managed through the pain and hardship of the virus assuring our teams have been well protected as possible, while still operating our business doing with economic implications and uncertainties in the domestic and international markets that we serve.
And preserving our capital to strengthen our long term sustainability.
We announced our first quarter operating results earlier. This year. They were simultaneously praised and questioned thats, whether our costs could be sustained at those levels then.
When we report our second quarter results, reflecting lower cost.
But again I heard that we had to prove our ability to sustain or cost performance in order to be considered one of the lowest cost producers in the metallurgical space.
Well as everyone is read this morning, I'm pleased to announce another solid quarter to report on today. The contour team continues to do a great job of being vigilant is.
Flexible so we can adapt as necessary.
And I have said before we choose to closely mange the business based on factors, we can control and this mindset has resulted in another solid quarter for concern.
Before I get into the details of the third quarter in our specific results I want to briefly comment on last week's presidential election.
Like the majority of the business community, we pay attention to politics, we seek to understand how election results may influence or impact our business.
But our goal in a way we manage our business is for our company to be successful, regardless, who sits in the white house or which party controls Congress.
I don't say this to diminish the importance of elections in any way because they are critically important to our democracy. We regularly engage indago log with elected officials at all levels to help inform them as to the importance of our products in manufacturing and the underpinning that they provide to a stronger economy. However.
However election outcomes will never change the core principles that anchor our daily operations.
Safety.
Responsibility.
Environmental stewardship and continuous improvement will continue to drive our actions each and every day and we remain committed to those important aspects of who we are and how we operate.
Turning now to our quarterly results, which include adjusted EBITDA of $20 million for the quarter and the best cost performance on record for Central lab mix since the start of the comedy over four years ago.
And to provide a more robust overview the numbers after I finish my remarks, but I have to congratulate Jason and his team on repeatedly exceeding expectations and I'd. Just 66 40, not a time for the quarter managed to beat our prior record setting net cost performance.
Importantly, all this progress has occurred while keeping safety the forefront at all times.
Simply can't say enough about the job they've done this year.
I'll briefly comment on our 21 guidance OLED and you go into more detail. We are pleased with our committed met only position in the Central lab mix segment with 34% of the anticipated mid point of our shipments locked in for next year. The average price for committed tons for the met only portion of the segment is just over 86.
Dollars a ton.
We expect to continue our strong cost performance was central lab cost per ton anticipate in the range of $68 to $74.
As for 21, Capex, we expect to become Insignificantly lower than our spend in 2020 at a range of $80 million to $100 million.
We project SG nine for next year to be in the $45 million to $50 million range, which is slightly better than our 2020 expectations.
In addition to closely managing our cost we've been operating with a strong focus on cash preservation.
Not only to help us weather the effects of the pandemic, but also help us navigate softness and recent volatility the pricing of our products.
As we predicted on our last call the back half of 2020 has so far proven challenging.
Albeit with sporadic signs of optimism.
We continue to believe are doing what we can to manage through these challenges and the guidance. We issued today reflects our thinking about what 21 will hold.
I reiterate our prior statements from the second quarter call with regard to the long term Big picture strategy for continued growth we are accelerating our strategic exit from thermal coal mining and we've made great strides in executing our strategic vision to become a pure play metallurgical coal company, providing critical feedstock for the steel production.
Auction.
As we discussed in prior quarters, our portfolio optimization efforts include bringing on some new met properties that are currently in development or being prepared to run in the future, while deemphasizing or removing from our portfolio. Other mines that are mining out.
On economic are no longer offering synergistic value in terms of coal qualities market demand or cost structure.
Whenever there is a profit is idled ore mined out we look for opportunities to realign our coal processing workflows into fewer plants and to redeploy mine equipment to other locations in the company.
These efforts allow us to tighten our cost structures and make the best use of existing capital in the organization we've.
We regularly evaluate our portfolio and have been planning for the best utilization of our newer high quality mines, we continue to be on track or in some cases, even exceeding our expectations in that regard.
For example, Black Eagle is nearly finished with the corridor to the main reserve Bharti, where we anticipate multi section production next year.
We have accelerated our third section at roast pork 52.
The section three now expected in early December instead of first quarter or 21.
Lastly, the surface infrastructure installation is almost complete for our land branch underground mine.
With intake and returned shafts in place belts installed in the finishing touches being put on the track tunnel.
We remain excited about these properties and we'll keep you updated on our progress.
Like our peers contour as closely watch the market landscape in the ebbs and flows of recent weeks pricing was soft throughout the better part of the quarter and then increase significantly before dropping meaningfully again in the recent weeks with.
Within the quarter, we received communication from customers, either lifting or ceasing their force majeure notices and we now know anything we also negotiate agreements with certain customers to defer anticipated shortfall volumes from 2020 into 2021.
We have largely seen limited impact of these circumstances to our metallurgical coal sales volumes and production for the third quarter.
Before I wrap.
Wrap up my prepared remarks, I want to congratulate our environmental and safety teams on another strong quarter performance.
Our environmental teams continue their near perfect water quality compliance rate and a significant reduction in violations against the rolling three year average.
Our safety teams into the quarter with all metrics favorable the national average.
Additionally, two of our Virginia subsidiaries originally presented with the safety Awards from the State Department of mines minerals in the energy, reaching milestones work hours without lost time accidents.
Those are operations on Mcclure prep plant long branch surface and long range Highwall Congrats.
Congratulations each member these teams and we look forward to your continued success.
I will now turn the call over to Andy for some additional details on our financial.
Thanks, David Good morning, everyone.
Dave you commented on the multitude of uncertainties facing.
The world and our industry.
Our goal is to find ways to alleviate these risks in order to build a stronger sustainable enterprise not to be redundant to what we said in prior quarters, but the way. We believe this is best known is by focusing on the issues. We've mentioned many times before.
Effective cost management matching of production with demand and most importantly, a sharp focus on cash flows and cash preservation.
To that end as we take a closer look at our balance sheet and cash flows for the quarter. We ended the quarter with approximately $162 million in unrestricted cash.
Our ABL and debt capacity right now due to the marketing impact or the market impact on our borrowing base both through accounts receivable and inventory. So we have no additional availability there but quarter over quarter, we did use approximately $77 million in cash and.
To dig into that a little bit give you a better picture of usage in the quarter, we did reduce our debt by more than $30 million to $598 million during the quarter.
This debt reduction included Aibo payment of approximately $12 million $17.5 million and legacy payments related to the LCC node and a small term loan principal payment of $1.4 million.
We also had $30 million in cash interest payments and we paid an additional $30 million and other legacy payments.
Those include such things as pension and some of the other legacy bankruptcy items that we've been clearing out.
On top of those payments, we also provided roughly $90 million in additional cash collateral for surety bonding as we discussed a couple of quarters ago.
It was a little bit of a harbinger of things to come but the surety markets insurance markets. All these peripheral markets that we have to deal with first for services.
Become even more challenging day by day, so the third quarter for US was certainly no exception.
We continue to see some benefit from our working capital mainly inventory and accounts receivable, which provided a total of $30 million of cash in the third quarter and basically covered our capex for the quarter.
Go.
Going back to the ABL for just a second.
We had borrowed drawn down against a deal earlier this year in March.
At quarter end that facility was down to $18.4 million in outstanding borrowings and how to about $122 million of letters of credit outstanding as of the end of the quarter subs and subsequent to the quarter end, we paid an additional $50 million of the principal and so the current outstanding borrowings on the 88.
As of today.
Approximately $3.4 million. So we've we've about work that back down.
Next I want to give a quick update on a couple of tax related items.
We still anticipate that we'll receive our $66 million AOMT credit monetization refund in the coming weeks. Some it has suffered from a couple of processing delays, but.
Feel pretty good that we may actually receive it will at some point this week, but certainly in the next couple of weeks.
Also in connection with the carriers actively as mentioned previously we still expect to defer approximately $14 million and payroll taxes until 21 and 22.
With the total deferral amount distributed evenly across both years.
Finally, we anticipate an additional $70 million in oil carry back related tax refund in the back half of 21.
Moving to our financial results for the quarter, our EBITDA increased $3 million quarter over quarter from $17 million to $20 million. Despite the continued decline in market prices relative to the second quarter.
The strong EBITDA performance was driven by another quarter of excellent cost containment.
Particularly in the cabinet segment, where we reported the lowest full quarter costs since the inception of contouring $66 40 nonsense.
The third quarter cap met costs were approximately three and a half dollars lower than the second quarter costs, if you could kind of adjust Q.
Q2 for a more normalized.
Run rate if you exclude the impact.
Our April furlough and other onetime top issues.
On a three quarter moving average basis and this is real is really a testament to the.
The sustainability of that.
Some of these cost decreases we've seen.
Three quarter moving average basis.
Our current averages $70.53 down more than $5 over the prior three quarter, moving average and down from a high of nearly $90 a ton.
So again.
David mentioned the performance of the operating team just when we think the Jason the operating team.
Kind of hit their peak as far as cost reduction legal in the drop a quarter like this on this and we have to come up with new words to describe it. So just incredible incredible work there.
Overall cap med generated $80 million of EBITDA during the quarter basically flat with the prior quarter, while net contributed $7 million of EBITDA.
Thermal segment can.
Contributed more than $45 million of EBITDA in the quarter.
Naturally as DNA expense aren't allocated into the segments. So as to get the total though has to be added back in.
On the shipments and revenue from our.
Cat met shipments remained strong in the third quarter with total volumes of 3.3 million tons shipped and that's up about 100000 tons from second quarter.
And then a trend we've we've seen over the past couple of quarters naturally with our revenues continued to be negatively impacted by soft market.
In particularly in export market for that.
Our cabinet realizations down approximately $8 a ton to around 70 $74 a ton in the third quarter.
Kept thermal volumes were essentially flat.
Second quarter total shipments of around 600000 tones and realizations improving to just under $15 a ton from $50 in the prior quarter of first quarter, we did have some.
Cleanup of some low lower quality thermal coal with impacted pricing. We also had some customer mix issues, but.
I think third quarter realizations were more in line with with Q1 as our customer mix go back to a more normal baseline.
Northern App revenue improved as a result of higher volumes with prices effectively flat at $40 a ton our shipments were up.
About 300000 tons 1.6 million tons all in.
As DNA, excluding non cash stock comp onetime items was $13.5 million in third quarter compared with $10 million in the second quarter and our third quarter Capex was down 13.7 million to just under $20 million.
Looking at 21.
As David has some of the hot spots earlier, we do expect to ship a total of between 24 and 22.2 million tons and 21.
12, and a half to 13 million tons of that will be pure met flowing through the cabinet segment will be approximately one to 1.5 million tons of thermal that will also be going through that segment has.
Kind of tangential or incidental production.
For the Cat thermal segment, we're going to 1.3 to 1.7 million tons.
And 5.6 to 6 million tons of northern App.
The cap thermal reduction relative to 2019 as part of our ongoing and planned strategic focus toward.
Moving towards a pure play company.
Based on the midpoint of our cat met guidance the met only portion of that 34% committed in products that $86.41 with an additional 27% committed but unpriced.
The thermal portion of the cabinet segment of 72% committed and profit at an average price of $52.11 and were essentially fully committed and priced and cat pheromone, northern app that $57.17 and $40.43 respectively.
Looking at costs for next year, we expect.
Met costs to be in the range of 68, $74, while cat thermal should come in between 45 and $49 per ton.
And that is holding relatively static at 33 to $37 a ton.
As DNA, excluding noncash stock comp and onetime items is forecast to be in the range of $45 million to $50 million.
Also as you can see from David's earlier comment, we're expecting our 21 capex to be significantly lower than where we were trending in 2020, we expect it to be nearer of more regular maintenance level of $80 million to $100 million as most of our growth Capex was spent in the past two years and we don't have any large.
Near term projects to address.
Idle operations expenses are expected to be between 27 and $33 million as we continue that.
Performance and shift away from thermal coal production.
Cash interest should come in roughly around between 51 and $55 million at 21, well DNA is expect to be down meaningfully the range of 150 to 175 million.
Mostly due to the previously announced.
Impairments and write downs in the second quarter and finally, the cash tax rate should be near zero.
Before we open up the call for Q in a more briefly mentioned that we still don't have any meaningful updates.
From the department of Labor on our appeal regarding collateral amounts for certain black lung obligations.
So really don't have any updates to share. There. However, once something conclusive is determined we'll obviously share that information with you.
So with that operator, we are ready to open the line for questions at this time.
I will now begin the question and answer session I ask the question Press Star Pharma Warren I know Touchtone phone okay.
If you are using speakerphone, please pick up your handset for profit.
Got a question please press star from you.
Our first question today comes from Lucas pipes with B. Riley security.
Hey, good morning, everyone and congrats on on the outstanding cost performance really great to see I also.
I also want to thank you for the 2021 outlook at this point.
And all the encouraging updates including Derrick.
My first question is on the on the cost side do you.
You mentioned in the release and your prepared remarks, a couple of drivers productivity labor cost sourcing.
Can you provide a little bit of a break down on on.
That's what these various buckets contributed in terms of college dollars per tonne SMB, maybe the third quarter 2019, just that we have that kind of good good good sense for where the bulk of the savings came thank you very much.
Hey, Lukas the TD.
So that's that's a little bit of a telephone because we've had so much transition going on inside the portfolio.
The biggest driver and again, it's the overlap in significant fashion productivity really is the main driver here. It will obviously fall into separate buckets on your PNM.
And that is where the labor in the supplies per ton improvement come from we have seen.
Slot reductions.
Of each of those on an extended cost basis, but the real driver is just the amount of tons flowing through the system and.
Probably still in a little bit of Jason's Thunder here.
If it came up in another question, but when you look at our portfolio.
From from not team rolling into most of 2020, we had roughly 22 months contributing to the portfolio.
That has continued to shift downward as we're consolidating production optimizing outputs, taking higher cost mines out of the system to the point, where when we get to.
Probably the middle of next year will have gone from 22 to 12 months. So that's that's again, that's reflective of the kind of productivity and improvements that we've seen really since Jason came on board just revisiting the entire portfolio. So it's kind of a.
A I'm running around the the question to get to the answer but its really driven by the productivity impacts on those individual buckets.
Other than the themselves.
Got it Thats very helpful.
I'll I'll turn over to my second question is in regards to your 2021.
Met coal volume outlook.
Very robust good to see.
But in.
To add to that to get to the question kind of how do you feel about your sales book in regards to your sales outlook and is there is the sales outlook the shipment outlook for 2021 as a reflection on the fault current forward curve on met coal or which you say look in any reasonable price environment even.
What we've seen more recently, which of course hasn't been so good focus on grade to put it mildly we would be able to.
But these plans to bed thank.
Thank you very much for that.
Yes, I'll just hit.
Hit.
A brief preface on that Ford, let Dan dig into the details of the he wants to share, but I think when you look at our production it is.
Just kind of looking.
Mostly flat on the met side.
20 to 21 may be a slight tick up but again, we don't have any better information than anyone else out there to go off of the futures are where they are everyone is optimistic about getting.
Getting there, but we just don't know necessarily a timing or what the curve looks like to get there. So I think by and large we're pretty comfortable Dan and his team have done a fantastic job getting a domestic book lock locked into place in this kind of a challenging market. So I think I think we feel pretty solid about volumes in total.
Actually we can't control price.
But dan anything you'd like to add to that.
Thanks, Andy Lucas Yes.
We're comfortable going forward, we're shipping at about a rate of 3 million tons a quarter this year and through some very difficult times and.
Challenging markets in challenging times with our customers and.
It's fair to say, we were little more optimistic about 2021 as far as the volumes, but we're we're moving the call right now we'll move on it.
In Q4, we are going to move it into Q1 in Q2 and as far as the domestic work, we like our position. There. We took the business that we felt like we wanted and some business we didnt.
Great. So I think we like what we liked the balance that we have.
That's that's very good to hear thank you everyone for the color and continued best of luck.
Thanks, Lucas Thanks Lucas.
Well the garlic you have a question please press star unwind term.
Our next question comes from Mark Levin with the benchmark company.
Yes.
Great and then echoing Lucas his comments congratulations to the team on a great cash cost performance I remember it wasn't that long ago, where net cash costs were in the nineties and.
Really really quite an improvement.
Let me, let me ask a couple of questions on cash so Andy in in the fourth quarter I guess, you referenced some confidence you'll get the $66 million on T. refund. So yes, I would assume it's reasonable to assume that your your cash would build a Q3 over Q4 or are there. Some other factors that we should be mindful of.
Yes ill.
Hey, Mark by the way I don't I hate to got to precisely again, just because we don't we don't know where market process going to fall out it's been.
So so inconsistent the past couple of months in particular, but I will say the third quarter every year is our heaviest cash burn quarter just because.
July's when all of our legacy payments hip.
And so I certainly would expect.
The fourth quarter, all things being equal to be considerably better from a cash usage or cash generation perspective in Q3.
Again, I don't want to get into any specifics of projecting much looks like but I think just by virtue of not having those payments weighing a bonus for Q4, we we should be $30 million to $40 million better all other things being equal.
Plus the $66 million PMT refund plus the $66 million correct right. Okay got it and then.
You referenced the $17 million.
Cash collateral call or collateral call from third party surety providers.
Maybe you can give gives us just a greater understanding of of how to think about what the exposure is how to how to model what those cashcall collateral requirements could look like.
Going forward I know this morning, Bob.
We disclosed that they had reached a standstill agreement with their surety providers are situations, obviously markedly different but I'm just kind of curious how to think about what the exposure looks like and then you know what it what to think about it going forward.
Yes. The main the main exposure still is coming from thermal thermal permits.
The surety companies by and large are terribly excited about holding thermal permits and they are under the same pressures as all the other third party providers not only is there risk from a market perspective, and just ongoing economics, but it also has a considerable amount of DSG risk involved from the surety perspective themselves. So its kind.
Hard for the.
These security guys to go upstairs and asked for.
Permission needed, even take new bonds or have to justify not requiring higher collateral levels. So I think by and large we were in a pretty pretty good position on our bonds right. Now we do continue to have conversations with our surety is but.
We have a very long standing relationship with maturities most of the book has been with US for many many years going back to legacy Amphadase.
And.
So we'd theyve been partners with us for a long time and.
I've been very patient in challenging markets, but I do think.
With what we did to shore up collateral in Q3, I think we are in pretty good pretty good position, but to the degree that we continue moving away from thermal markets that will only a near to our benefit.
Is there a way Andy to quantify what takes or how to maybe think about it.
No I mean, you have to look at any given companies total bonding exposure and then.
Okay.
And what does that what does the channel bonding exposure now.
For us we're.
I'm not sure I know that one off the top of my head, it's roughly going to.
[noise] reflect our undiscounted.
Telecom reclamation costs, but.
We'll take that number and just a second but.
The weighted average mix is what's going to get any kind of a thermal permit is issued.
Sure. It is probably going to be looking from north of 50% collateral on that kind of a bond. If it's Matt you know you're going to be considerably lower than that.
So just again to the degree that we can get away from thermal permits because were currently across our book were a little bit over 30% in total collateral. So on a weighted average basis, the mad as hell pulling that that number down. So again I think we're in pretty good shape and.
And have too much incremental exposure from that perspective, but.
So as we move forward as.
The political climate moves.
Moves forward.
Especially regarding thermal all bets are off.
No that makes that makes sense that dovetails into something I'm sure you're not going to want to discuss too much to ask anyway, you referenced ongoing progress with the map DAP asset sale, maybe your degree of confidence.
One to 10 scale that you think you can get something done and then what the timing might be and if you did do something would require cash going out the door or would this be no. Okay.
At worst a cash neutral transaction.
So actually to close out the loop Mark this kind of parse partially answers a little bit of your question here.
We do we have roughly $350 million of bonds outstanding that's more than just reclamation bonds. It includes felker's comp things like that but.
Some of that 350 around $150 million that is Cumberland, so that kind of feeds into your question.
Yes that is action.
On a scale of one to 10, I would probably put our likelihood of getting a deal done at somewhere between.
Good morning, Tim.
Okay. So.
That.
Helpful and a potential market will be more than one but less than 10.
That is the color that that does not stand in color.
Hello.
Real precise on my end.
But how about just a follow up which is what you know.
If you sold it in there.
Buyer actually had to post all sorts of cash collateral I mean could you do a transaction or would you go.
Is that the bottom line that you would do a transaction it was cash neutral or might it cash mighty transaction volume actually having that.
Put some cash on it.
Yes, well Mark I think when you look in a deal like this because of the strategic benefit to the entire enterprise you can mix and match lots of financial and non financial benefits on something like this so is.
Possible to expect the transaction I mean can you envision a transaction where you could get some cash maybe it can you envision when we get some cash maybe so really again I hate to give you a non answer answer but theres. So many pieces that.
But can you can move around to benefit the overall enterprise is kind of hard to put a a.
Dollar tank to without knowing all the other pieces in the mix okay.
Okay, perfect all right. Thanks.
Yes, I understand there are a lot of moving pieces. Our last question is just a really is I guess more on on on the market and that market in general So since China announced there sort of an official import ban.
Have you guys seen any or would you I mean, I don't think you sell anything into China, but would you consider selling anything into China. What are kind of the puts and takes if trade flows start to change and they start to you know.
Keep Australian coal is out of their market for an extended.
A lot of time and then the second piece is India, which is such an important market to you know to seaborne coking coal demand, maybe you can discuss a little bit what you're seeing out of that market recently and kind of what the book looks like there over the next three to six months or how you see that market.
Go ahead Dan.
Hey, Mark I'll.
Start with the China the trade worries you in China, We we don't sell any coal to China were aware Weve had a few inquiries by and large mark as you know they jump to the water. The gold goes into China from Australia is low vol coal.
And that's generally what they are looking for we don't export a whole water low vol. We're very balanced.
In our portfolio with it so we're not pursuing actively at all to any sales into China. We are aware of some inquiries and maybe some of our competitors have shipped to a vessel or so over there.
With regard to India, yet very important customer been pretty steady all year.
[music].
Like most customers they add some slowdowns in some difficulties with the pandemic, but by.
By and large our shipments have remained steady there and I expect them to be steady into 2021.
No. That's that's that's great great.
Great to hear.
Super well, thanks, very much for all of the time this morning, and congrats again on all the cost performance.
Thanks Mark.
This concludes our question and answer session and I would like to turn the call back over to David Stetson for any closing remark.
Well. Thank you very much thanks for everyone joining us this morning.
Have a great at the end of year over year and we appreciate it so much. Thank you.
The conference well concluded. Thank you for attending today's presentation, you may now best color.