Q1 2021 Alpha Metallurgical Resources Inc Earnings Call
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I'd now like to turn the conference over to Emily O'quinn. Please go ahead.
Thank you, Jason and good morning, everyone before we get started let me remind you that during paired remarks, and the Q&A period, our comments related to expected expected business and financial performance contain forward looking statements and actual results may differ materially from those discussed for more information regarding forward looking.
Payments and some other factors that can affect them. Please refer to the company's first quarter 2021 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures participating on the call today, our Alpha Chair and Chief Executive Officer, David <unk>.
That's right and President and Chief Financial Officer, Andy Ethane also participating on the call are Jason Whitehead, our Chief operating officer, and Dan Horn Executive Vice President of sales with that I'll turn the call over to David.
Thanks, Emily good morning to everyone on the call and thank you for joining us today.
I'm looking forward to discussing our first quarter results today and hearing from Jason Andy and Dan about details of the quarter in each of their respective areas.
I wanted to start by commending the team on another productive quarter that drove continued progress on our long term goals and initiatives.
From a financial and sales perspective, the first quarter was solid with adjusted EBITDA of $29 million and net cost of coal sales coming in roughly at the midpoint of guidance. Our sales volumes were excellent for the quarter and our overall realizations increase in comparison to Q4 2020.
Had it not been for the market effects of the prolonged tensions between Australia and China go sell realizations would likely have been higher.
For example, if you set aside our tons that were sold into the quarter against the unusually low Australian indices, our average realization on the remaining was $91 per ton.
While it is unclear how long Australia coal will be unwelcome in China, we are seeking opportunities to proactively manage around the downward pressure of the Australian indices and position ourselves well for the remainder of the year.
Operating a lot of work occurred behind the scenes in Q1, two transition crews and equipment from operations that we're mining out to our newer mines have been ramping up.
Although we announced it on our last call Alpha received word in the first quarter that our obligations under the EPA consent decree had been fulfilled marking another positive milestone for us.
A few weeks ago, a Republic energy subsidiary received another permit approval to expand mining reserves in Raleigh County, West Virginia.
Jason will go into more details about our plans for this project, which is part of our work Me Creek surface mine and the permit name is Turkey foot.
While we don't have a firm date for this project in the books yet permit approvals are important early steps and we're excited about the many benefits of this project.
For our company and our local communities near the project site.
From a corporate governance perspective, we held our annual meeting of stockholders at the end of April.
I was very pleased to see our stockholders reelected our current directors to serve another year on Alpha Board. Additionally.
Additionally, stockholders approved a proposal to increase the number of shares reserved for the company's long term incentive program, which is an important step in aligning senior management performance with you overall creation of shareholder value.
Additional details on the results of the annual meeting can be found in our 8-K filing.
Before I hand, the call over to Jason I want to briefly touch on our outlook for the second half of 2021 and summarize our near term focus areas.
As you know last year was transformational moving us closer to a pure play metallurgical company and dramatically, reducing the thermal percentage of our portfolio.
Our new low cost net minder.
Bonds are now operational.
And we are nearing completion of the transition of our workforce and equipment from the older mines to the new ones.
With this work behind US, we're expecting 21 capex to be near maintenance levels as we've outlined in our guidance.
This means it's time to settle in.
<unk> established a strong baseline of performance with our new portfolio mix.
Dan and his team are closely watching the market dynamics and maximizing any opportunities to shift tons away from currently depressed Australian indices into markets, where pricing is much more attractive assuming these higher pricing levels prevail for any extended period of time I will be seeking opportunities to strengthen alpha overall liquidity and it.
Possible pay down debt.
As Andy will explain later in the call our financial position remains solid we plan to continue our emphasis on cash preservation and liquidity management.
However, I continued season, a strong pricing against the Atlantic indices, and any improvement in Australia ones should allow us to further strengthen the company's financial position.
We remain focused as we have been on executing the core functions of our business and look forward to strategic opportunities as market dynamics continue to unfold.
With that I will turn the call over to Jason for some additional color on operations.
Thanks, David and good morning, everyone.
Before I go into the details of our first quarter performance I want to provide some additional information.
The parking flow permit it said some side are working great operation as David mentioned, we're pleased to receive approval for the Republic Energy article three and N. P. D. S per man for Turkey put what will ultimately expand our existing mining reserve base and provide future sustainability Award from Creek complex.
These approvals are the first two of four necessary permitting steps before mining activities could commence.
<unk> Creek is alpha's largest surface mine with expected output of about two and a half million tons in 2021 it.
It has a long history of incorporating benefits to the community and to the mining process and our team. There has won numerous awards for the reclamation efforts.
Workman Creek was founded in 2013 on the column sport remediation permit.
Prior to our involvement the columns for plan had been mined by another operator, but not reclaimed.
It was eventually designated by the EPA as an abandoned mine land, leaving the state of West, Virginia, and ultimately taxpayers responsible for the cleanup.
However, as part of our mining activities were apartment Greek we agreed to remediate the area as department named suggest.
Which includes the eventual elimination of other legacy slurry impoundment called the columns for compounded.
Workman Creek has also operated our active long ridge permit, which I mentioned because of its many similarities to our Turkey flip from it.
Similar to long ridge, the barkeep led from it is drawn to eliminate roughly 86000 feet or 16 miles 395 acres of pre-law highwall.
For those who may not be familiar with this what this means the term pre law. It refers to surface mining that occurred prior to the 1977 surplus mining control and reclamation that which is often referred to as macro.
Its passage provided new stricter rules by which surface mining is governed.
And the law is still in place today and includes a number of amendments that have been added over time.
I'd like to briefly explain a few of the expected environmental anesthetic benefits. This project will yield for the local Raleigh County communities.
Part of the land permitted in our Turkey, but project was previously mined by another operator.
Prior to 1977 in prior to smart growth.
And as a result, the land is not as visually appealing as opposed to smack room on land that has been held to a much higher standard.
Again like long Ridge, our proposed mining process, where Turkey book will reclaim revegetate implant native trees on approximately 395 acres of land, providing significant aesthetic environmental benefits to land in question.
While this was not a requirement involved in obtaining the permit we saw another opportunity to improve pre law land in connection with what we already do and we're excited about this opportunity to do this good work.
Additionally, the Turkey book project is expected to provide aquatic uplift to a streaming receiving streams beyond the permitted area.
Through the reclamation of pretty low ha ha wall that I, just described approximately 8000 tons.
Of annualized sediment load will be removed from several local Greenwich areas.
In addition in addition to the economic impacts of continued mining in the region. This project will specifically provide environmental benefits to the surrounding areas.
As responsible operators, who take great pride in our work we seek to go above and beyond compliance with regulatory requirements and has great opportunities to give back to local communities around our operations, we expect Turkey book to be another example.
Long list of award winning reclamation work at Alpha.
In addition to the mining capabilities that will provide the company and the employment opportunities that will extend for over 100 monitors in west Virginia. The positive tax impact of the project is anticipated to be over $5 million per year.
Even though this isn't directly related to our results for the quarter. It's an important part of what we do and in my opinion it doesn't get enough recognition.
For some commentary on the operation results for the quarter.
Relative to guidance, we were roughly in line with our cost of coal sales expectations.
This is despite some negative factors, we faced in the quarter, which included higher materials pricing for things like diesel fuel and roof support.
As well higher than expected COVID-19 related absenteeism.
We expect some of these factors to persist into the second quarter, but largely resolved as we move into the second half of the year.
Although not unexpected another factor that influenced our cost for the quarter was the transition into our new low call. It met low cost met mines I mentioned on our last call. We expected to move from 15 to 12 months by the end of March and we successfully took those remaining three mines offline as planned within the quarter.
Work continues to fully transition employees and equipment into the new met mines, but we do expect this to be complete by the end of the second quarter.
Speaking to our new met mines I've provided update updates on prior calls as sections have come online and operations have ramped up.
As of last week, we completed the transformation around the band Mill complex with the addition of the third and final continuous monitor section.
Atlanta branch.
With that I'll now turn the call over to Andy for some additional details on our calls from financials.
Thanks, Jason.
It was another strong quarter for alpha in terms of cost performance with EBITDA generation improving materially from fourth quarter last year.
It said strong sales volume and improved pricing as well as some evolving customer terms will talk about our resulted in a significant increase in receivables during the quarter.
Leading to a net decrease in cash balances and we'll dig into that a little bit a.
A little bit later.
For Q1, our adjusted EBITDA was $28 $9 million up substantially from $7 4 million in the fourth quarter of 'twenty.
Due to stronger volumes and increased met coal realizations are.
Our net segment shipment volume increased 14% to $3 7 million tonnes with average realization improving 9% over the fourth quarter, resulting in net segment revenue increase of 24% to $300 million.
We also saw strong improvement in our quarter over quarter met segment margins, which increased 72% to $10 28 per ton.
Our first quarter 2021 cost of coal sales ticked up slightly in comparison to our two outstanding and record setting quarters at the in the back half of 'twenty.
For first quarter met costs came in roughly in line with God's as Jason mentioned.
Compared to Q4, our cost of coal sales were up about $2 $52.47 per ton.
Driven by increased sales related costs royalties and severance taxes due to higher net price realizations as.
As well as the supplies issues that Jason mentioned diesel fuel roof support pretty much any kind of infrastructure or mining costs related to we're tied to steel pricing has been on the rise along with.
So many other commodities over the past few months.
Yeah.
And the all other segment, we saw another quarter of excellent cost performance with cost of coal sales declining nearly a dollar down to $43.05 per ton.
SG&A, excluding noncash stock comp and non recurring items improved to $12 $7 million in the first quarter.
From $14 4 million in the fourth quarter of 'twenty.
And as we are now effectively complete with new mine development work, our capex declined substantially to near maintenance levels of $24 million down from $35 million in the fourth quarter of 'twenty.
As for the balance sheet and cash flows we ended the first quarter with approximately $92 million in unrestricted cash and 60 million in availability on our ABL for a total liquidity of $108 million.
Cash used for operating activities for the quarter was $19 million impacted by the aforementioned increase in accounts receivable of $62 million and partially offset by a $37 million increase in accounts payable and inventory.
Inventory levels remained basically unchanged from year end.
Recently, we have seen our working capital specifically our began to normalize which we expect to result in higher cash questions collections over the coming periods.
However, as I mentioned earlier.
When we look at customer terms, we have seen about a 25 per cent increase in day sales outstanding AR. Some of that's due to customer mix. Some of it's just due to general extension of payment terms via negotiations but.
That also is impacting our <unk> levels.
The ABL facility had $131 million of letters of credit outstanding at the end of the quarter and no remaining borrowings.
Yes.
Before I go through our guidance I wanted to highlight too.
Cash related items that will positively impact us in 2021 first one is a new items.
Based on the provisions on the recent American Rescue Plan Act, we've updated our estimates for minimum required pension contributions for the next five years.
And the impact of that basically for 2021 is a $14 million reduction two contributions this year down from 25 million to $11 million and an overall reduction of $84 million in contributions through the year 2025.
The second item of course is the NOL carry back a tax refund that we've discussed for quite a while now things are still on track and moving according to plan and we expect to receive this approximately $70 million refund in the back half of this year.
Given the uncertainty in the global marketplace due to the continued effects of COVID-19 in certain locations and the strangeness of the Australian indices is related to the.
North American East Coast indices, I wanted to touch on our guidance again, mostly just to confirm that it does remain unchanged I don't want to pay.
Partially the details too much but I believe it is important to continue to talk about our expectations for the year. So the top level, we still expect to ship 14.8 to $16 2 million tonnes, and 21, consisting of $12 five to 13 million tons of pure met and one to one and a half million tons of incidental thermal within the met segment.
For the all other segment regarding 213 to $1 7 million tons of thermal coal.
Based on the midpoint of met guidance the med only portion of the 64% committed.
And priced at $85.65 with an additional 28% committed.
With pricing tied to various indices.
The thermal byproduct portion of the met segment is 93% committed and priced at an average price of $51.16 and we're fully committed in price for 'twenty, one and our all other segment at an average price of $57 67.
On the cost side, our 21 net cost per ton is anticipating anticipated to be in the range of 68 to $74 with all other segment.
Expected to be between 45 and $49 per ton.
SG&A, excluding noncash stock comp and one time items.
It's forecast to be in the range of $44 million to $49 million.
'twenty, one capex as we said will be near maintenance level.
A range of $80 million to $100 million.
Total operations expenses are we expect to be between $20 million to $30 million with cash interest at 51% to $55 million.
DD&A, we expect to be between 125 on $145 million and our cash tax guidance rate guidance is zero to five per cent.
So for some commentary on the coal markets I'll turn it over to Dan Horn.
Thanks, Andy and good morning, everyone.
As David mentioned earlier, our first quarter shipments were very strong and we were able to improve our overall realizations against fourth quarter 2020, Despite the negative effects of the Australian indices and the step down in domestic contract prices from 2020 to 2021.
I will let go the positive comments from the rest of the group and commend the sales team on a job well done for the quarter.
As I'm sure you're aware coal companies are experiencing distinctly different market dynamics right now depending on their primary market destinations the types of coal, they're selling and how those times your price.
For example over the last couple of weeks pricing a ton of low vol against the U S East Coast indices vs. The Australia and the disease would show as much as a $60 swing between the two and.
And even greater disparity can be seen between Australia, and F O B and China Sea borne disease, which recently reached the largest spread on record and a difference of over $115.
Obviously, the uniqueness of the circumstances surrounding China, and Australia has had a ripple effect throughout the entire industry.
To provide some additional context on the impact of alpha.
Our approach in mitigating these challenges and.
In our broader expectations for the remainder of the year.
Of course, I won't get into any customer contract specifics, but I can provide a little bit of color around our thinking.
All the shipments that are based on the Australian indices continue to receive much lower realizations in the rest of our book.
Our first quarter realizations were north of $90 for all tons sold were not priced on the Australian indices.
Therefore, as David mentioned earlier, we're looking at ways to optimize our export mix to capitalize on Atlantic pricing, which is currently much more attractive.
As always we remain committed to fulfilling our contract obligations some of which were negotiated when Australian indices were roughly in line with Atlantic Basin pricing.
But we've also taken the advantage.
I'm sorry, we've also taken advantage of the opportunity to make a few sales into China this year, but.
But we've also been mindful of the significant challenges certain countries around the world are experiencing with dangerously high COVID-19 case numbers.
In these situations as possible that economic activity in some of these locations may also be impacted.
On the positive side global and U S steel crude steel production continues to trend upward with World Steel Association statistics in March showing growth of 15, 2% in year over year global crude steel production.
Unsurprisingly, China and Europe led the way over that period was $19, one and 17, 5% growth respectively.
And then they're short range outlook World Steel project, five 8% growth for 2021, and two 7% growth from 2022.
Europe, which is one of office primary export destinations is expect to see more than 10% growth this year and nearly 5% next year.
In the U S steel mill capacity utilization is approaching 80% year, which is another good sign.
In the North American domestic met market demand remains solid and supply remains tight with growing confidence that the stimulus bill will be passed which should further enhance the outlook for stealing from medical.
We are cautiously optimistic about the opportunities for additional tonnage as well.
There's certainly no lack of market dynamics, followed with the China, Australia tensions commanding the most attention right now however from our perspective these kinds of idiosyncrasies in the market highlight the importance of diversity in our customer basis from coal qualities and our sales capabilities all of which off was proud to have.
As the largest and most diversified met coal supplier in the United States, we enjoy some additional optionality and the ability to adjust when necessary, which is exactly what we will continue to do.
Okay.
I think that that wraps up our prepared remarks for the quarter. Operator, I think we're ready to open up the line for questions. Okay. We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from Nathan Martin from the Benchmark Company. Please go ahead.
Hey, good morning, guys congrats on the quarter.
Thanks next night.
Dan you just gave us some from great comments, but I wanted to first day get into the export side, just a little bit more I think obviously, India. One of your one of your major export customers dealing with a pretty bad weighted COVID-19 right now.
Can you guys give us an update from what you're hearing from your customers in that market and any potential disruption. There I think I just read that one of their major steel mills have announced production cuts to their current auctions in shortage related to the pandemic. So just any thoughts there.
And then we haven't heard of anything specific yet I did see something this morning about a force majeure or one of the ports. We're watching it closely we're staying in touch with our customers over there.
Nothing to report at the moment, though.
Got it thanks, Dan and then came from.
We shipped over to China.
There's another big $10 jump in the share far China practice morning.
You guys mentioned, you've moved from coal into that market you know a higher net backs and the Atlantic Basin are all C. Can you give us an idea of how much coal maybe you could ship to China. This year, assuming the ban on Australia coal imports continue.
And then the extent that the men and does the weekend from India could be placing those tons that CFR in China market.
Yeah, I think what I would say as we can and we intend to ship tons into those markets.
I would say, it's not only India, it's anywhere anywhere we see prices.
Next to the Aussie indices.
Other customers in the Atlantic Basin that we also sell index.
To the Aussie index, so as those tons roll off contracts and tenders and such those tons.
Mind will be earmarked for China.
We ship three vessels to China.
So far this year, so I I don't have a number to give you a specific number but I think I can imagine ship that many more.
In the future here in the near future.
Okay. So the point being is day and you guys do have some components available at your contract roll off that you could take advantage of that.
Yes, as I said, we maintain a lot of optionality in our book at all times.
And we can react pretty quickly to move different calls we've.
<unk> got some new mines coming on and producing well we've got some additional low vol from our cup where operation.
It's pretty sought after these days so we have.
We have some optionality, we can play with.
That's great that's great and then if I kind of look at the transportation side. I think guys can you can you comment maybe on how rail services spend I know that you know it's it's.
It's been listening to the rails and the service is not quite as good as people have hoped and maybe rates are a real skill pricing based on the ultimate export destination to help shape, our U S coal competitive thanks.
Yeah.
It's been challenging at times, the rail service I would say the domestic or some of our domestic customers are seeing some delays.
They're obviously running their coke plants hard and theyre not seeing.
Perhaps all of the service they'd like to see and at times, we've had some challenges getting a cold export but.
By and large we're hitting our shipments but it.
I'd have to say, let's see rail service improve a bit.
Nate This is David Stetson, we've met with with both nor for can see us ex over the last month.
We're feeling cautiously optimistic debt some of the service disruptions that you've seen in the past are going to be corrected I know <unk> has made a huge effort to bring on more crews and more staffing than.
Allowing.
The increase in their side for us from a service perspective so.
Certainly has been somewhat challenging in the past, we're cautiously optimistic that both <unk> and <unk> or are moving in the right direction.
That's great great to hear you David and then just finally, maybe moving over ex the cost side of things another fantastic quarter for you guys on that Frank Congratulations I was little surprised how low the other thermal result came in at 43 Bucks given the full year guidance. So is there anything one time in that quarter that kind of drove those costs lower or is that.
I find that maybe.
What are your cost per kind of trend down towards that number.
Hey, Nate its Andy I don't think there was anything one time and again since we're kind of maintaining guidance on that it just it just depends on.
As with all things underground where.
Geology, and I mean, we just had a good quarter, we'd love to see that replicate itself throughout the rest of the year, but at this point, we will just hold guidance, where it is but the operations team across the board have just continued to deliver.
Excellent for.
Performance over and over again.
Got it thanks Andy.
Perfect. Thank you guys for your time and all of that information and take care.
Thanks Nate.
Again, if you have a question. Please press Star then one.
Our next question comes from Lucas pipes from B Riley Securities. Please go ahead.
Hey, good morning, everyone good job on the quarter.
Thank you Lucas.
I wanted to first.
On the pricing side as well.
I think about.
Your guidance for the year of 64%.
At 80 565 per ton in Q1, you sold.
Call it $82 per ton. So can you help us kind of in between.
Our committed tons plus with the spot market is doing.
Where should we.
I kind of think about Q2, Q3, but really kind of a bridge to Q2 would be super helpful. Here. Thank you.
In terms of you look at from a handy.
Yeah.
As usual you asked the question that.
I really don't even want to attempt to answer because we're dealing with it's such a multivariate analysis going on right now as Dan mentioned.
We've got a lot of things.
A lot of things going on as far as how we're thinking about participating in the markets over the next couple of quarters because of the disconnect between the indices.
<unk>.
Trying to bridge that out.
That's that's kind of tough to do well.
Q2, probably isn't that much different as far as customer mix or regional mix as compared to Q1. So you can kind of take those those.
And apply them to how the markets have moved.
You know unfortunately.
All the index going one direction and the the east coast going a better direction.
Maybe that gets the average back back to a similar outcome, but again I don't want to guide to Q2 two early when were.
I'm not even.
Really halfway through it so.
So al.
I'll stop rambling in and stop my non answer there I just I just don't want to give you something that even we don't have a ton of visibility into just yet.
Okay, Okay, no I appreciate that.
Just one follow up on this for the call it 36%.
Price on the met coal.
Right.
What percentage are we.
Model.
U S East coast assessments versus the lower Australian assessments.
I would.
Well, let me, let me put it like this I mean historically.
We've seen call it.
Between 20, and 30% of our of our export met tons have been priced off of the Aussie PLD index.
I don't know that we can apply it just like you know a peanut butter spread across every breakdown, whether its committed or committed.
Committed in price are committed and unpriced down I'm afraid I don't have that number in front of me at the moment, but I would guess that that percentage would probably does apply so in that you know call. It 25 ish percent.
Of those of that AR, that's tied to index is in the future is probably going to be pov into.
Index.
Okay.
And then for the remaining 75% we should predominantly used.
High Vol, a high vol B index.
Yeah, I mean, all other things being equal.
But again things are things are moving and.
That's the trouble with the stuff being price then are being committed and unpriced those cargos and fall.
If we do run into as you know they mentioned force majeure issue.
Place here.
Here and there and you know shifting the tonnage around as he discussed but as things stand right now again, all things being equal I think that's probably how it will play out.
Got it. Thank you. Thank you very much.
Helpful and then a follow up on the cost side good job.
In Q1 and in the release you mentioned inflationary pressures.
I think diesel.
Called out.
Now when I think back.
This guidance was initially issued in November so terrific job to maintain it.
True through May and obviously the world has change.
Change in a very positive way, but it's much much much much higher commodity price all around so.
Kind of when you think about.
Your cost position today.
With the pressure from the raw material side, maybe even labor.
I appreciate your thoughts, what where you see the pressure points and to what extent.
You would say there is upside risk to full year cost expectations. Thank you.
I think we're just I mean, we've seen the first salvo of increases in raw materials costs.
Theres no doubt theres more to come on line.
Inflationary pressures is what it is.
And we will deal with it I do think the guys have done a really nice job and we were we did budget. Some some raw materials increases into into what we presented as guides to begin with so some of that is just playing out as expected it's probably hitting.
Hitting critical mass earlier than we expected, but thus far I mean, we.
For every penny it's up the gas found a penny on the other side to offset it.
Do think labor is a potential point of exposure and that's just in the industry are actually that's across the country. All sectors are seeing labor pressures, but as far as specifics Jason if you have any anything you'd like to add on that no I think I think that's right Andy.
Mostly diesel fuel is probably the most impact that we've seen.
Which is probably.
On the order of a dollar and a half a tonne or something like that.
Smaller smaller things like steel surcharges for certain certain items, but those.
Oh really minimal in comparison.
Alright, that's very helpful continued best of luck I really appreciate all the other details.
Yeah.
Thanks, Lucas I appreciate it.
Before I turn it over to David to wrap up I didn't want to make one correction of errata in my comments, our I Miss spoke on our Capex guidance. The range is actually 75 to 95, rather than 80 to 100 so mid.
Mid points, a little bit lower than initially stated so that David well. Thanks, Andy I appreciate everybody jumping on to the call today. We appreciate everyone's support of Alpha and we want we wish everybody a wonderful day and a wonderful week. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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