Q2 2021 CONSOL Energy Inc Earnings Call
And it.
I would now like to turn the conference over to Nathan Tucker Director of Finance and Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to Consol Energy second quarter 2021 earnings conference call any forward looking statements or comments, we make about future expectations are subject to some risks, which we have outlined in our press release and our SEC filings and are considered forward looking statements within the meaning of section 20 <unk> of the Securities Exchange Act of 1.
19 to 34, we do not undertake any obligations of updating any forward looking statements for future events or otherwise we will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures and our press release and furnished to the SEC on form 8-K, which is also posted on our website. Additionally, we have.
Filed our 10-Q for the quarter ended June 32021, with the SEC. This morning, you can find additional information regarding the company on our website Www Dot Consol energy Dot com on.
On the call with me today are Jimmy Brock, our Chief Executive Officer attached to Carr, our Chief Financial Officer, Dan Connell, Our senior Vice President of strategy and Bob Braithwaite, Our vice President of marketing and sales and his prepared remarks, Jimmy will provide an update on the re commenced development of the Aetna and metallurgical project a recap of our key achievements during the second quarter.
From 2021 and specific insights on operations and sales and <unk> will then provide an update on our liability management initiatives, our financial performance during the quarter and 2021 guidance and his closing comments Jimmy will lay out our key priorities for the remainder of 2021. After the prepared remarks, there will be a Q&A session and which day in and Bob will join us as well.
Well finally, we posted a supplemental slide deck on our website. This morning, which we will refer to on this call with that let me turn it over to our CEO Jimmy Brock.
Thank you Nate and good morning, everyone.
And we capped off the first half of 2021 by delivering another strong quarterly performance in Q2 on the operations front. Despite 2 longwall moves and the quarter, we delivered a solid cash cost performance and.
Additionally, we once again demonstrated our ability to achieve strong cash flow performance by generating north of $50 million and free cash flow and Q2 of 'twenty, 1 and increase and the unrestricted cash on our balance sheet by more than $50 million as well.
We reduced the leverage on our balance sheet and reaffirms our ability to raise a significant amount of long term capital due to the recently completed tactics and financing on the P&C refuse expansion project.
On the marketing front, we continued to execute our strategic shift into the export markets and we also strategically layered and some financial hedges and the API 2 market to secure revenue visibility and capture some of the recent export market strength for 2022.
On the safety front, our Bailey preparation plant Consol Marine terminal and Knickman project, each had zero recordable incidents during the second quarter of 2021.
However, our total recordable incident rate or TR hour at the PMC finished Q2, 'twenty 1 higher than what is typical for us.
Although the severity level on each of these incidents was very low we strive to perform each day at zero incidents and our year to date tiara, our PMC remains significantly below the national average for underground bituminous coal miners.
Now, let me start with our most exciting news this quarter and provide an update on our metallurgical coal project.
We have been very clear that 1 of our major strategic goals is to diversify our revenue streams and reduce the percentage of revenues associated with power generation markets.
This project is a very important step in that direction.
As most of you know.
And early 2019, we announced the commitments of the development of our <unk> project, which is a low vol metallurgical coal mining operation and Wyoming County, West Virginia.
However.
Due to the unprecedented demand and earnings decline associated with the COVID-19, pandemic and 2020 we.
We made the capital allocation decision to pull back spending on this project in order to focus our discretionary capital towards repurchase in our second lien notes and the open market, which were trading well below par value at that time.
Now as our debt has continued to trade up to near par levels.
And as our free cash flow generation has significantly improved.
And Im very pleased to announce our decision to recommence the shipment project.
Despite the significant pullback and project expenditures.
The past 12 to 18 months were instrumental and repositioning the project.
We used this time to complete initial development miner to shore up our confidence and the reserve and we optimize plans for the preparation plant to create and additional upside potential.
We are evaluating several options for the preparation plant first.
We had a brand new facility from scratch.
Second purchase and existing plant at a nearby location and truck to call for process or third.
Identify and existing preparation plant for sale that could be relocated to our <unk> side.
Based on our analysis the third option made the most economic sense.
And we are moving forward with relocating a higher capacity and steadily on our preparation plant to the hit and our project site, which is expected to start up and 2022.
By relocating the plant, we eliminate potentially long lead times on equipment and.
And avoid inflationary pressures from steel and other construction materials.
We expect to produce 900000 plus tons of high quality low vol. Coking coal annually from our Aetna and number 5 mine once we're at full run rate production.
We expect this to be a low cost operation with a long reserve life of 20, plus years and production at maintenance capital levels.
While the overall project capital cost has increased slightly due to the re optimized plans for the prep plant.
We believe this can be more than offset by the expanded capacity afforded by the prep plant and improved cost structure due to the inclusion of a highly efficient rail load out.
And the prep plant, we're relocating will have a processing capacity that is nearly double that of the plant originally and visit Britain.
Turning up the opportunity for us to process up to 750000 to 1 million product tons of third party coal and addition to the coal from our <unk> and Ma.
We expect this will create additional growth opportunity and higher revenue potential compared to the original project plan.
With that now let me provide an overview of the coal markets.
We continue to execute on our multiyear transition of diversifying our sales mix and increased net exposure to non power generation markets.
Following a record export sales volume in Q1 of 'twenty, 1 we successfully placed and near record $3.2 million tons into the export market and Q2 of 'twenty, 1 representing nearly 55% of our total shipments in the quarter.
Additionally, 47% of our tons sold were used in the industrial and metallurgical non power generation applications as we continue to diversify away from traditional power generations.
As you can see on slide 5 we have continued to steadily diversify our global customer base and end use markets since our spin and 2017 and and the second quarter of 2021, our overall export volume as a percentage of total sales volume went up roughly 22 percentage points versus full year.
And of 2017.
This improvement was driven by a sharp increase and the portion of our tons going into the industrial markets, which has risen by 33 percentage points versus 2017.
We continue to focus on our strategy of further reducing our exposure to a declining U S coal market for power generation with a heightened focus on increasing and our industrial business.
We believe that with our quality of coal and cost structure at PMC, coupled with their ownership of Consol Marine terminal, we are very well positioned to take advantage of developing and sustaining opportunities and the export market.
Demand for our product continues to strengthen and the second quarter of 2021 on the back of economic recovery and improved electric power and export demand.
Henry hub natural gas spot prices average $2 and 95 per million Btu during the quarter.
A 73% increase compared to Q2 of 'twenty.
Additionally, average PJM West day ahead power prices continued to improve.
And in Q2 of $21, 61% above the year ago quarter.
Spot pricing trends were especially encouraging given that we were and the shoulder season.
Pricing has continued to improve since the end of the second quarter.
Henry hub natural gas prices are now and the $4 per million Btu range for August deliveries with calendar year, 2022, now well above $3 per million Btu.
Prior to 2021 you'd have to go back to 2018 to find a month and which Henry hub averaged $4 or more and prior to that all the way back to 2014.
We remain optimistic that overall market conditions will continue to improve due to accelerating global economic recovery and a relatively muted supply response.
On the export front, we are seeing sustained improvements and the seaborne thermal coal market since the end of the third quarter of 2020.
Pet Coke prices continue to remain supportive as a result of reduced oil production proppant demand and pricing from northern App coal and high CV markets.
API 2 spot process also continued to rise and the second quarter of 2021, largely driven by hot and dry weather strong LNG pricing and a limited supply response and ended the quarter improved by 82% compared to Q2 of 'twenty.
As such we layered and commodity derivative contracts and the API 2 market for calendar year, 2022, which tests will provide more color on shortly.
Additionally, we completed 4 term deals and the export market during the quarter with durations from 1 to 2 years and land and we recently contracted and cargo.
And see coal to China for the first time since 2018.
From a marketing perspective.
It's encouraging to see that demand for our coal has continued to improve since the low point in Q2 of 'twenty.
We continue to maintain the vast majority of our core customer base and continued to see improvement and our customers contracting and appetites are.
Our sales teams remains opportunistic and its marketing strategy and increased our contracted position and 9.4 million tons since our last earnings release, bringing.
Bringing our contracted position to $24.6 million tons in 2021, and $10.9 million tons and 2022.
Now, let me review, our Q2 'twenty, 1 on operational performance and detail.
Coal production at the Pennsylvania mining complex came in at $5.9 million tonnes, and Q2, 'twenty, 1 compared to $2.4 million tonnes and Q2 of 'twenty.
The vast improvement despite the aforementioned multiple longwall moves in Q2 of 'twenty..1 was due to a continued increase and demand for our product since the COVID-19 related trough and demand that bottomed out during the year ago quarter.
As a result productivity at the PMC measured as tons per employee hour and proved by an impressive 46, 7% and Q2 of 'twenty, 1 compared to Q2 of 'twenty.
On the cost from our average cash cost of coal sold per ton was $28 and <unk> and Q2 of 'twenty, 1 compared to $25 and non <unk> and Q2 of 'twenty.
Although this seems impaired keep in mind that the $25.19 per ton did not reflect a $32 million and mind on and cash costs incurred during the year ago quarter.
We adjust when adjusted for that Q2, 'twenty, 1 cash cost significantly outperformed the prior year period.
Even without accounting for that idle cost our year to date average cash cost of coal sold per ton was improved by nearly 15% versus the first half of 2020.
Our operations team continues to focus on maintaining tight control over our cash expenditures as we move forward.
The Consol Marine terminal achieved a throughput volume of $3.8 million tonnes. During Q2 of 'twenty, 1 compared to $1.6 million tonnes and the year ago period.
And the significant increase was again due to improved demand and the seaborne markets compared to the trough with the COVID-19 related decline and coal demand and Q2 'twenty.
Terminal throughput volumes reflects a pace of over 15 million tonnes per annum and marks the second consecutive quarter with an annualized run rate north of 15 million tonnes.
<unk> revenues for the quarter came in at $17.4 million compared to $15.9 million and the year ago quarter.
Despite the major increase in throughput tonnage the impact on revenue was somewhat lessened due to the take or pay contract that was in place and the prior year period.
Cash operating cost came in at $5.3 million versus $3.8 million and the year ago quarter.
With that I will now turn the call over to the test to provide the financial update.
Thank you Jimmy and good morning, everyone.
I will start with an update on the progress we have made on our key financial priorities I will then review our second quarter 2021 results and our full year 2021 guidance.
As we have discussed in the past our financial priorities remain.
Maximizing free cash flow generation, maintaining strong liquidity and reducing outstanding debt.
And while these remain on Northstar will now also selectively allocating capital towards strategic initiatives, such as our Hickman project.
After accomplishing a significant milestone of achieving a net leverage ratio below 2 times and the end of <unk> 'twenty..1 we further reduced our leverage to 1.7 times at the end of <unk> 'twenty 1.
This was despite of the recently completed tax exempt bond offering, which we previously highlighted would increase our leverage and the near term due to the treatment of restricted cash under our credit agreement.
However, if we include the restricted cash on leverage ratio as of June 30 would have dropped to 154 times.
While we have more work to do on our balance sheet front, we have several initiatives underway or recently completed debt. We believe will create long term value for our shareholders.
First we continue to make strides on our overall debt reduction goals as we may have total debt payments and repurchases of $18 million and $2.21.
This included open market repurchases of outstanding second lien notes, where we spent $4.8 million to about $5 million at a slight discount to book.
We view these buybacks as a good use of capital even at the market price of our second lien notes have rallied back to create at near par levels.
Second we made a discretionary decision to execute and $18.4 million early buyout option on an existing operating lease for a set of longwall shields. This decision not only saves us nearly $900000 per month and operating lease expense for the next 12 months, but also eliminates the buyout requirement and $2.22.
At fair market value.
Given where steel prices are currently this fair market value would most likely have been elevated and could have been close to on more than the $18 million fixed early buyout amount we executed.
The early buyout also reduces the operating lease liability on our books, which rating agencies include and debt leverage calculations.
Third as highlighted last quarter, we continue to find ways to tap alternative sources of capital by successfully securing $75 million of tax exempt solid waste disposal revenue bonds at the beginning of the second quarter.
Silver reimbursement from qualified expenses and the amount of $21.5 million and $2.21, which date back to the initial inducement date and mid 2020.
Additionally, we are $53.5 million and restricted cash associated with debt financing that will be used to fund future spending on the refuse disposal areas at the PMC and.
And will reduce our leverage ratio over time.
From a strategic standpoint, this transaction gives us additional financial flexibility and helps to Derisk a portion of our future refinancing efforts by pushing $75 million of maturity in 2028.
The transaction is also a testament to our ability to access long term capital.
Gets even more exciting when you consider that the commodity environment and our balance sheet is only strengthened since the closing of this transaction. We also expect us as a future financing avenue that could be available to us.
And to capitalize on the strength and the export market, we initiated a targeted revenue hedging strategy during the second quarter of 2021.
So far we have laid out and 2 million metric tons of commodity derivative contracts and the API 2 market for calendar year 2022 at a weighted average price of $79.34 per ton.
These financial hedges and show a strong net back core price has put us from approximately 2 million tons of physical contracts. We signed during 2 years 'twenty 1 for 'twenty credits, 2 which are also tied to API 2 prices.
The good news for US is that API, 2 prices and other export market pricing indicators continued to strengthen and we still have an additional 30 plus million tons of coal sales on contracted for 2022.
We anticipated a significant portion of these sales will go into the export markets.
Fifth on the legacy liabilities front under our current actuarial assumptions, we have a fully funded status on our defined benefit pension plan at this point, we do not have any funding requirements for the foreseeable future and have significantly lowered our exposure to equity market volatility.
As we move forward, we will continue to focus on strengthening our balance sheet, while implementing our targeted growth and diversification strategy. This includes our commitment to completing the <unk> project. We expect this project required on an additional $65 million to $70 million of Capex to complete given the increased processing capacity and new train load out and the preparation.
And <unk>.
This is in addition to the $24 million already spent on the project to date since its inception in early 2019.
Recommencing. This project is not an either or decision relative to our debt reduction priority.
We still expect to continue to reduce our outstanding debt on our balance sheet and unrestricted cash.
This project like all financial decisions went through a rigorous capital allocation process.
Excluding any third party revenue, we expect it to generate a rate offered on north of 25% over the life of the project, assuming an Australian premium low vol. Coking coal price of 160 to $170, a tonne, which is consistent with the actual grill and 10 year average price and the current forward strip for 2023 to 2025.
We believe the returns on the admin project will exceed our weighted average cost of capital even at long term average Australian premium low oil prices of $130 a ton.
We are very excited about this project and its earnings and free cash flow potential.
With that let me and I'll recap the second quarter results before moving on to our 2021 guidance.
<unk> reported a very strong financial performance for 221 with net income of $4.2 million or <unk> per diluted share, which included $24 million of unrealized mark to market losses related to commodity derivatives and adjusted EBITDA of $84.4 million.
This compares to a loss of $18 million or 69 per diluted share and adjusted EBITDA of $34.2 million and the year ago quarter.
And $2.21, we generated $94.6 million of cash flow from operations, which included $25.6 million positive working capital changes driven by a significant reduction and a <unk>.
Comps and notes receivable balance.
Additionally, we spent $43.7 million and capital expenditures, which included the previously discussed $18.4 million per the discretionary operating lease buyout.
And we received $3.4 million and proceeds from asset sales.
This resulted in free cash flow generation of $54.4 million and <unk> 21.
This highlights the ability of our business to generate free cash flow and challenging markets and captured a meaningful upside and stronger markets.
As a result of our free cash flow generation, we have increased our unrestricted cash position by nearly $56 million and the quarter and now have an unrestricted cash position of $146 million.
Which is the highest level since 2019.
Including the restricted cash position of $53.5 million on a cash and cash equivalents balance is over $200 million.
Now let me provide you with our updated outlook for 2021.
Due to our strong first half 'twenty, 1 operational performance and outlook for the remainder of the year. We are increasing our expected sales volume for 2021 to $23.5 to 25 million tons up from our previous guidance of 22 to 24 million tons. Additionally, due to the FERC of our operations team.
To drive cost down despite inflationary pressures so far this year we are at.
Adjusting on expected average cash cost of growth sold per ton to a range of 27 to $28 per ton down.
Down from our previous guidance of 27 to $29 per ton.
On the pricing front. We currently have a 2021 contracted position of $24.6 million tonnes, and an expected average price of $44 and <unk> per ton.
Movement from back to our prior guidance reflects the strength and the current pricing environment on the additional contracted volumes, we have layered in as well as an improvement and the zone PJM West power forward.
Finally, we are increasing our capital guidance due to the decision to recommence statement project and the completed lease buyout to a range of $160 million to $180 million.
As always we will continue to reassess our guidance ranges each quarter and adjust them as necessary.
With that let me turn it back to Jimmy to make some final comments.
Thank you <unk> before.
Before we move on to the Q&A session. Let me take this opportunity to provide a recap of our accomplishments and the second quarter and reiterate our priorities as we move forward.
We continue to prioritize strengthening and enhancing our balance sheet by improving our liquidity and financial flexibility.
Despite shrinking access to capital for coal companies, we have had good success and identifying and tapping alternative sources of capital.
Second despite significant inflationary pressures, we continue to keep costs at our operations under control through efficiencies reduced discretionary spending and creativity and our supply chain management program.
And the team continues to look for ways to effectively drive costs down without sacrificing the effectiveness of our operations.
By right sizing our operations, we've taken some slack and the system, allowing our 4 operating model allows us at the PMC the ability to essentially run full out.
This drives efficiency and results and a sustained reduction and our average cash cost of coal sold per ton compared to our historical averages.
<unk>, Arkansas and Marine terminal is 1 of the most strategically valuable assets and our portfolio the.
And the terminal will be essential for executing our longer term strategic shift and to the export market, which we expect will de risk our domestic exposure and allow us to capitalize on growing international demand for our <unk> product.
Year to date, we've shipped more than 50% of our total sales volume into the export market, which highlights the value of owning our own terminal and is a huge differentiator for us compared to our peers.
And finally, we're extremely excited to be and are positioned to restart the <unk> project.
We view this project as the next phase of our strategy, which focuses on targeted growth and diversification as an additional avenue to increase value for our shareholders.
This project is strategically important as it will diversify our portfolio by adding a new metallurgical coal product stream to the mixed and it aligns well with our current operations by being low cost high margin and high quality.
Before handing the call over I want to reiterate that we're extremely proud of our accomplishments to date and believe we have a lot of opportunity in front of us to build upon our strategic priorities.
Our capital allocation process World class asset and employees have helped us to come out of 2020 prime to excel in 2021 and beyond Theres always more work to do but we continue to focus on our goal of strengthening our balance sheet and creating long term value for our shareholders with that.
I'll hand, the call back over to night from further instructions.
Thank you Jimmy we will now move to the Q&A session of our call at this time I'd like to ask our operator to please provide the instruction to our callers.
We will now begin the question and answer session to ask a question Press Star then 1 on a touched on film.
If you are using a speakerphone, please pick up your handset before pressing and keys.
To withdraw your question Press Star then 2 at.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Nathan Martin with the Benchmark Company. Please go ahead.
Hey, good morning, guys and congratulations on the first half performance.
Good morning.
Maybe I'll start on the cost side, 1 guidance, obviously lowered your guidance by <unk> 55 per ton on at the midpoint.
And even if I run costs and the second half flat with second quarter results of $28, which at the high end of your revised full year guidance.
And up right at the low end of that and your guidance range is there something that pushes costs higher here and the second half or maybe is there a chance you could.
Possibly outperform there.
Net if you remember on our last earnings call I said that we expect to come in at the lower half of our cost guidance and.
And as we look forward, there's still some uncertainties and the market out there I mean, we have a contracted position for 2021 and Thats up significantly then we move on and the last earnings call, but still we have 2 longwall moves and the second half of the year, 1 and each quarter, whereas in that first quarter, we didn't have any.
And inflationary pressures from some of the commodities that we produce with <unk>.
We see those could come to us so as <unk> mentioned in his comments, we will reevaluate and look at it but our goal is.
Keep a tight leash on costs, where we can and then let the operations team do what they do best and day figure out ways to lower cost as we continued to produce but the reason that we lowered it and $1 is because of our performance to date and then as we look forward with 1 longwall move and each quarter, we think we will.
And opportunity to still come in towards the low end of that guidance and thats, what our goal will be.
Yes, and net I think inflation is a big part of of.
A little bit of cautiousness here as you know.
All raw raw material prices have been higher since the beginning of the year, So I think that.
And that is something that we continuously monitor I think our supply chain team has done a good job of managing that so far.
Theres always some buffer related to inflation as we go through the year.
Things continue to be very strong and the commodity landscape.
Got it I appreciate those thoughts guys and then maybe shifting over to the pricing side.
Looks like here, you're essentially fully contracted for this year and an additional 400000 tons or so at the high end and provide guidance should we assume those targets would likely go to the export market and then if you will.
Look forward to 2020.2.
I think you've layered on an additional 5 million tons or so there can you talk about the mix of those tonnes and dose and idea what prices.
Thanks.
Yes, sure and Hey, this is Bob.
And just kind of highlight 2021.
As we mentioned earlier, we have now $24.6 million tons sold the.
And the additional volume we have to get to the upper end and the guidance I would suggest that that's likely going to go into the export market.
There is still about a $5 to $10 arbitrage versus what the domestic prices are today, even at $4 gas I would suggest that the.
The prices, you're seeing and the publications coal desk I'll reference you know and they call. It the mid $50 range, we're still seeing and arbitrage in the export market. So it's likely that those volumes will go there as.
As far as 2022 is concerned.
We did contract and additional $5.3 million tons since our last earnings call about 80% of those volumes were contracted into the into the international market. So sitting here today of the $10.9 million tons, a little over 4 million tonnes of those are contracted to go exports and based on where we sit today I would suggest that.
Our export volumes will be pretty much <unk>.
Similar to if not a little bit higher in 2022, and what we expect to export and 2021 and again net goes based on Jimmy's comments of our strategic shift and and also again based on the price arbitrage that exists today.
And I appreciate that color, Bob and just and then.
Early thoughts on potential production levels and <unk>.
Turning to dividend the positive quarter due to the market.
Yes, I think as we've always said, we will run to the market. Thus far we've been able to run our force long hauls fallout, we would want to continue that into 2022 and independent of bone.
Future forecast, we see there we could run some additional shifts or something but I would expect our tonnage for 2022 to be very similar to what we have in 2020, 1 with possibly some upside.
Got it thanks, Good luck, Jeremy and then real quick wanted to shift to it.
I appreciate all the color you guys have given on the project and any updates there.
How would how would we think about production and ramp I'm, assuming we'll have to wait for the.
Completion, before we see and meaningful production, which I think you guys had said maybe.
And have 22.
Can you kind of talk about that and then maybe.
And your decision to relocate the existing prep plant and additional capacity maybe.
Maybe just any thoughts on the appetite and you sort of fill that excess capacity. Thanks.
Sure Nate this is Dan regarding the first part of your question on the production ramp.
We have been fortunate in being able to continue our development mining here.
At a reduced rate for the past.
Number of months and we will continue that as we build out the plant.
So that puts us and really good position when the plant becomes available.
And kind of the Q3.2022.
Time frame.
To very rapidly ramp up and bring both of the additional sections on that we will need to.
To scale up to full production. So I think our plan would be that during the second half of next year.
We can move from kind of the controlled development mining that we've been doing to.
And to something very close to if not achieving.
And full production during during 2022.
The decision to relocate the plant is 1 that as Jimmy mentioned, we ran a lot of analysis on we had time to give that a thorough look.
And given kind of a pause on the project are in the last couple of months. So we feel like we vetted that plan.
Very well.
There are a number of reserves kind of in the vicinity of where this prep plant is being built that.
And that are.
And have yet to be developed.
And.
We actually have some development mining going on nearby Hickman and some of the upper teams as we speak.
And that will likely be looking for for a home. So we.
We feel optimistic about.
The opportunity to to pull third party tons into the plant based on economics should help to improve the product lines that we can produce coming out of it and then.
And to be clear the economic numbers that we've been reporting do not assume any upside from those third party tons. So.
We have we based our decisions on just kind of it and <unk> base case, and we view the third party Congress is upside to that plan.
And then just.
Add to that 1 of the things when we were looking at the preparation plant, which is a big decision as far as us ramping up to full production that 900000 tonnes plus debt we had mentioned.
We would not want to do that until we're process and our own coal and we can get that through.
When we looked at the preparation plant on the key factors there on our initial plan, we were going to build a much smaller plant that would be somewhere around 350 tons an hour and then we will go on and if we got all the third party business everything we would add that second piece on what we're buying this plant and relocate and then we have that from day 1.
And then some of the increase and capital was because of the try and load out that we're going to have the skill and give us the ability to not only and move our KOL very efficiently on our rail on but also and a third party coal that we have coming into there. So I remain very very excited about the Aetna and project I'm happy that we've put our staff and are positioned to whereas we can recommence it.
And I think it's going to be agnostic return and be a nice project for our shareholders.
Got it I appreciate that and those additional thoughts of access and then just finally.
Obviously, you went through from some quick IRR numbers correct.
And I might've missed some of those but.
And there have you guys been kind of payback period calculations for the project and what that might look like at various net price decks.
Sure.
I think it depends on what price did you use I mean, some of these cases, the payback period could be.
And as little as 2 to 3 years I'll, let Dan address some more specific payback period, if you will.
Sure No I mean I.
As we mentioned.
During during the remarks.
We've kind of run the project economics, using a price strip that's consistent with.
Both the 10 year average historic met.
Net prices and.
And the current forward strip and that.
What's your kind of and the payback.
Payback range that <unk> mentioned I think.
In terms of ROI, Nonetheless, we said north of 25%.
Obviously, if you run the numbers at the current market and assume that it holds out here.
For a couple of years.
Payback period it becomes.
Quite quite short and these are these are paybacks the ROI numbers just to clarify are.
Based on total project capital cost since inception, if you look at the numbers on a go forward basis.
They become more attractive and what was and I think thats an important point that I wanted to highlight that all of these economics that we ran on.
And total project cost basis, it's not just a go forward capex that we used for analysis, even though.
Today, if you are making that decision you should look at go forward because thats more applicable we wanted to make sure that the project economics hold.
Got it.
We say it all that information you guys.
Thanks again for the time of day and best of luck and the second half.
Thanks, Nick.
Okay.
Again, if you would like to ask a question press Star then 1 to join the queue.
The next question comes from Lucas pipes with B Riley Securities. Please go ahead.
Thanks, very much and good morning, everyone.
Thank you good morning.
And may have missed it earlier, but.
You mentioned the spread between the international and domestic market and I Wonder can you.
To elaborate on what that spread is today.
What is seeing for export tons, what is pricing for domestic tons and then.
Do you have a view on what might.
Rigor these prices.
And obviously would be great to see the domestic pricing move up so I appreciate your thoughts on that thank you.
Yes, Lucas this is Bob.
Right now I'd say, the arbitrage versus kind of the published marks the Polish marks or call it mid $50 levels for prompt.
Right around $50 levels for Cal strip 22.
And the volumes we've locked in to date on the international side, the arbitrage is roughly around 5 or $10.
And that does not include any again terminal revenues that we receive as well so that's kind of level we're at today.
Going forward I still view that this market has legs for at least another 12 months to 18 months I mean, the supply response, just is not there not only and coal, but gas base as well and and inventories are significantly below their average is in fact I read an article just last week the gas reserves and Europe are the lowest they've been and.
Over a decade and.
And then when you look at pet Coke prices continue to trend upward and now 90% up year on year. So again I think this market has legs on it continued the back and we continued post pandemic recovery and just the relatively muted supply response.
Yes, and I would add look there.
Going forward when we're looking at gas process, where they are today and.
Can't reiterate enough the.
Supply response, just hasnt been there so I think I agree with Bob and I think the market does have legs into the coming years, particularly on the international market and that will help drive some of the domestic pricing as well. So we feel like it does have legs with demand increasing for electricity and gas prices, where they are and our municipal.
<unk> response.
Thank you. Thank you very much Bob and Jimmy for for that perspective.
In terms of your capital allocation and Youre clearly shifting.
And youre shifting towards growth with it and then.
To see that and I'm wondering from here on out.
What.
And what are your priorities is it more so on the capital.
Is it more on that on the debt side by buying back.
Maybe maybe more.
Third we saw at your transaction on the capital lease side, what are some of the opportunities and the test maybe if you could speak to any any limits or restrictions you may have.
Would very much appreciate your perspective, thank you.
So let me start by saying that we are in a very strong position today and are constantly reviewing our capital allocation priorities to ensure they are consistent with changing market conditions and provide us the best risk adjusted return.
And in line with our strategic priorities and the attractive rates of returns that we just talked about from product and project.
Relaunched debt.
Makes a lot of sense.
And for incremental dollars that we're spending.
Also as I mentioned in my prepared remarks, we still have some wood to chop as far as deleveraging is concerned now debt.
On the repurchases are not as attractive as they used to be before but given.
Given that we want to Delever and the fact that we still have an 11% paper out debt.
That allows us to be opportunistic and that area I think youll continue to see us.
Pay down our debt or repurchase on the open market.
Because as I said earlier, it's not an either or decision for us as far as deleveraging is concerned and it.
And then is concerned.
The steps that we're taking with deleveraging and growing our medical business are all geared towards 1 goal and that is really to create significant value for our shareholders.
Whether it comes from growth or from having larger equity value and the enterprise. The good news is that the market is offering us the opportunity today to launch and execute on multiple of these initiatives.
And returning capital to our shareholders is 1 of them right. We're constantly reviewing it and hope to provide you an update and coming quarters as we execute on on our near term goals as well.
With respect to the operating leases I don't see any big opportunities right now on that front and we saw 1 and the second quarter and executed on it which I feel.
And 1 off the best projects so to speak when you think about from a rate of return perspective.
We ran the Bcf salt.
It was it was.
And very easy decision to make.
So I think those are the opportunities we'll continue to look at and.
And continue to deliver on some of our strategic priorities and the good news is for US, it's not an either or as <unk> mentioned earlier in his comments.
Thus generating free cash flow at the rate we are per quarter will have an opportunity to do all of these things but.
I want to reiterate we're really excited about the Aetna and project. It gives us that diversity and our products dreamed of having low vol metallurgical coal and the mix and I think we're going to continue to do the things that we've done and a password.
Enhanced our balance sheet provides great liquidity and add a new.
New product mix to our strength.
Thank you. Thank you very much yeah, when I saw those cash.
Capital lease numbers I thought I should get into the business of lending to you guys.
Really.
Yeah.
Really appreciate all the color.
Best of luck. Thank you.
Thanks Lucas.
The next question comes from Michael Dudas with vertical Research partners. Please go ahead.
Good morning, everyone.
Good morning, Good morning, Michael.
First question.
Moving on to elaborate a little bit more on your domestic customer base again, certainly inventories down demand up.
And how home urgent do you feel they are right now, especially as where we've had better economic activity going forward and where gas prices are and any update on your customer base relative to potential.
Coal power plant closures and your exposure there and how that May impact maybe some of your competitive suppliers as those thing.
<unk> worked through the system.
And Mike right now we are in discussions with several domestic customers not only for the balance of 'twenty, 1, but the 2022 as well and without a doubt.
Utilities are realizing that spot coal is not readily available as it once was.
So with that being said I do believe that there will be opportunities to lock in some longer term volumes to ensure they had supply going forward.
So with that being said stay tuned there, but as you mentioned inventories are.
I'd say near critical levels for many of the domestic utilities that we do serve when I say critical levels I'm, saying sub 10 days of inventory on the ground and with gas price at $4 I don't see that debt. This will change and the very near future. So again should bode very well for us and our contracting.
<unk> for 2022.
As far as closures are concerned.
As of right now within the next 10 years, we have very minimal.
Very minimal of our customer base look that has announced that they will retire I would say, it's and in the neighborhood of 5 million per $1 million total tons that we view at risk.
Obviously as Jimmy talked about before is Reggie we do have to be concerned about Reggie.
Which we're keeping a close eye on that could have some additional impact on us and Pennsylvania.
But again.
We are continuing to look and focus on shifting some of those volumes already and the export market.
And so thats kind of where we stand today.
I appreciate that and secondly, moving internationally say too.
Your important market in India, and you mentioned about pet Coke and coal.
Maybe just a thought on just the dynamics going on and the Asian coal market, especially.
And with some of the shifts and coal and out of China, and the and a lack of supply response.
And again not to predict future markets, we've got pretty strong curves out there.
Relative to say 2000, and Jimmy mentioned and over 2014, and 2018 coal price spikes and internationally.
How.
And how different is it dynamic and what youre seeing here, especially as usually you guys have evolved into a much more important and solid provider KOL and throws and throws.
Export markets.
And 1 thing and benefits us as we mentioned and our remarks.
Our coal being a high Btu high calorific value coal does transport.
Very nicely into these markets, especially especially into the Asian markets.
And where there is additional transportation.
Yes.
As far as.
This time around versus what happened and call. It 2014.
As we mentioned and supply responses and isn't there I mean, if you look at the production not only in the U S. But look at the production and Colombia, I mean, it's significantly down and Theyre just not those.
<unk> based on just aren't coming back a strong plus knowing that there is additional build outs internationally I mean, India, obviously as a targeted market for us theyre going through and they have been going through and continue to go through industrial Revolution.
And then again with the whole, Australia, and China attentions.
Continuing and it is opening up doors for us to get Bailey coal into China as well as Jimmy mentioned, we did contract our first cargo there. This year, which is our first was 2018. So again I think a lot of this is based on.
Again, a post pandemic recovery and and muted supply response that we just don't do not feel is coming back.
And on.
And your derivative book that you are creating here is that something that is I assume it's opportunistic, but we see that as you manage the pricing markets little bit more exposure to that and as you move forward and thats something thats going to be part of how you on the marketing and hedging side.
Going forward, especially with your more exposure and tools from export markets.
So Mike you're absolutely right I think.
What we did and the second quarter was more opportunistic but it also demonstrates a tool that we have.
Future and I think 1 of the things that we've noticed is there was interest and doing API tooling contracts by some of our suppliers by some of our customers. So we wanted to manage that risk.
And in hindsight, you look at it almost looks like we could have a weighted 3 more months and we would have and a lot better off but I think the goal there was to mitigate the risk and I think we used it appropriately at that time.
But it also gave us another tool to do some of the things are bad if we wanted to if we are seeing that we are not making progress on.
And on improving our contracted position, but the API 2 market is there and we can lock and tonnes net and had some of that book right now and Thats not the case, but that doesn't mean, it's not going to be in future.
Our marketing team is very successful and learning and some on <unk>.
Learning and some contracts here and export markets, even on a dollar basis and not just spot basis, which is really good we like that approach much better than using the derivatives, but it is a tool that we have we can use.
Got it.
Great I appreciate your thoughts gentlemen, thank you thanks, Brian Thanks, Mike.
This concludes our question and answer session I will now turn the conference back over to Nathan Tucker for any closing remarks.
Thank you Tom we appreciate everyone's time this morning, and thank you for your interest and support of <unk>. Hopefully we were able to answer most of your questions today and we look forward to our next quarterly earnings call. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].
Yeah.