Q2 2021 Alpha Metallurgical Resources Inc Earnings Call
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Good day and welcome to the Alpha Metallurgical Resources' second quarter 2021 results conference call all participants will be in a listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Emily O'quinn S. C. P. Corporate communications. Please go ahead.
Thank you, Matt and good morning, everyone.
Before we get sorry, let me remind you that during our prepared remarks Q&A period, our comments regarding anticipated business.
And financial performance contain forward looking statements and actual results may differ materially from those.
For more information regarding forward looking statements at some of the factors that can affect that please refer to the company's second quarter 2021 earnings release and the associated SEC filings. 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 are Alpha chair and Chief Executive Officer, Dennis that day.
President and Chief Financial Officer, Andy S. At.
Also participating on the call are Jason Whitehead, our Chief operating Officer, and Dan Moore Executive Vice President of sales with that I'll turn the call over to David.
Thank you Emily and good morning to everyone on the call today, we were pleased to announce another solid quarter of financial performance the team and I look forward discussing those results along with mid year analysis of 2021, how we see the back half shaping up and what we're doing to set ourselves up for an excellent start to.
'twenty 2.
Before we do that I want to briefly reflect on the significant progress made during the last couple of years and connect those are cost accomplishments to our current circumstances and our vision for the future.
2 years ago Alpha Senior management team came together as a cohesive unit established a broad vision of strategy for the future success of the company.
The expansive volume of good work that has been done in relatively short period of time is remarkable.
We've divested noncore assets and set ourselves on a nearly complete pathway to becoming a pure play metallurgical producer.
Slab camp our last remaining thermal mine is expected to close roughly 1 year from now at which point, we will have no remaining thermal operations.
We have strategically fine tuned our metallurgical portfolio with an eye toward longevity and diversity of products.
Carefully deploying capital to transition away from higher cost mines.
This work coupled with the implementation of Jason's vision for a more streamlined enterprise has also yielded a more advantageous cost structure that allows us to weather downturns in the market and capture upside when the markets rebound.
Above all our team has stayed focused and disciplined in building a strong foundation for our future growth and success now we see this work beginning to pay off.
In terms of the current market the Australian P. L. P index hit a low for the year in January at approximately $102 with gradual increases throughout the second quarter.
This left the Australian linked part portion of our portfolio lagging and negatively impacting our overall average cost realizations in the second quarter.
However that index has increased by roughly 115% in just 6 months to recent levels in the $219 range.
With this rebound in Australia, and indices and a general positive market environment across the globe.
We expect our second half realizations to reflect these much stronger levels.
We're increasing our production guidance for the year as we anticipate mining roughly an extra 1 million tonnes of coal than the midpoint of our prior range.
Looking ahead, we've already settled some 'twenty 2 north American business.
And expect discussions to begin in earnest in the coming weeks.
With demand projections remaining strong for the immediate future, we expect to be able to build our cash balance and aggressively pay down debt.
In keeping with my previously stated interest in Delevering, we accelerated the timeline for completing 1 of our legacy payment obligations with the West Virginia LCC note.
This occurred subsequent to the quarter close and Andy will cover this decision in more detail.
From a high level perspective, I see this as another step in solidifying the organization financially.
And as further evidence of the executive team's focus on strengthening our balance sheet.
Along those lines, our cash management strategy will continue to hinge on the prudent use of funds to help build and maximize value in the organization in his remarks, Jason We'll tell you more about our decision that a force section that road Fork 52, and why we believe this is advantageous use of our capital that will service well in operating.
Good paybacks and well under 6 months.
In summary.
In addition to reporting another strong quarter performance I think the state of the business is solid.
And well prepared to capitalize on the current market strength and high demand for met coal that is projected to extend well into the future.
Now for some additional details on operation I'll turn the call over to Jason Whitehead.
Thanks, David and good morning, everyone.
As you know we've made great strides in the last year to streamline and optimize our operations.
Shifting production to lower cost mines as David said this work has already paid off with a much improved cost structure.
Our teams delivered again this quarter with net cost of coal sales coming in at 69.94 time.
Roughly $2 from the prior quarter.
Some of the inflationary and supply demand pressure I mentioned on our last call has continued but were keeping our previously announced 2021 cost guidance as we still believe we'll end the year within the range of 68.70, $174 a tonne in the med segment.
Also today, we announced an increase in our production guidance.
Jumping our overall tonnage up about 1 million tons at the midpoint for the year, reflecting excellent productivity by our miners and our ability to ramp up production quickly when the market demands.
Andy will provide more detail on that later.
With coal supply expected to remain tight for the near term. We believe we are well positioned for any desired production adjustments to match that increased demand whether seaborne or domestic.
Our existing group of operations offers 1 of the most diversified portfolios of any coal company, but we're always looking for ways to incrementally add value.
We continually annualize analyze potential bolt on or development projects like our most recent Lynn branch and road Fork 52 projects.
Where we can spend a modest amount of capital in a way that offer swift return with long term value.
To that end, we're in the process of adding a fourth Super section that road Fork 52.
It will provide the ability to mine additional low vol coal from an operation that has exceeded productivity expectations since its inception.
This action should be up and running by year end and.
And we're looking forward to putting some additional alpha tons into a tight market.
Raising capex guidance for the year by $8 million at the midpoint in conjunction with this addition.
But the project the payback on this investment is expected to come in less than 6 months and at today's spot prices, perhaps even in a quarter's time.
This makes great sense to us, especially given the current market environment and even with the increase we expect capex for the year to come in under $100 million.
We don't have any other mine development announcements to make today, but there are a few other projects. Our teams are currently evaluating and they all have similar capex profiles to what I just described a road for.
Modest spend with a fast return expected on the investment.
I will plan to provide more information on future calls as appropriate but the takeaway here is that alpha is ready enable to increase production.
By augmenting our existing portfolio, we're investing and cost effective development projects.
I'll now turn the call over to Andy for some additional details on our financials for the quarter.
Thanks, Jason.
We reported in our release this morning, our second quarter, adjusted EBITDA was $39.9 million up nearly 40% from our force first quarter figure.
Q2 volumes per sales were roughly flat with the prior quarter, but 1 area. We want to specifically highlight is are.
Net segment realizations on our last call.
There was a lot of discussion about the tensions between China, and Australia, and the various market impacts stemming from that situation, but especially the lag on pricing tied to the Australian indices.
While the Aussie and Atlantic indices are found more of an equilibrium in the past few weeks.
8 weeks actually.
The lag on pricing persisted well into the second quarter and continued to impact our realizations.
Illustrate the magnitude we introduced a new table in our earnings release to provide additional granularity on our realizations from met shipments in the quarter based on the various market pricing mechanism.
Tibet tables point.
We realized $101.80 per ton on our export business for the quarter that was based on the Atlantic index and other pricing mechanisms.
By contrast, our export business linked to the Australian indices yielded realizations of $67.77.
Due to the index weakness that persisted well into the quarter.
Now that the spread between the indices is tightened to a more normalized level and effectively at parity.
We don't really expect to see much of a variance between the regions going forward.
For the met segment as a whole our realizations came in at $83.38 per ton up slightly from first quarter, while realizations dropped slightly within the all other category to $60.45 per ton.
As Jason mentioned earlier, our Q2 net cost of coal sales performance was excellent and despite continued inflationary pressures and improved by nearly $2.
As compared to Q1 down to $69.94.
Costs also improved in the all other category with cost of coal sales down in.
Q2.
From first quarter to $42 and 77.
SG&A, excluding noncash stock comp and nonrecurring items increased from $12.7 million to $13.7 million in the second quarter and we are increasing our 4 year SG&A guidance largely due to increased corporate insurance costs as well as the adjustment of accruals related to our incentive compensation plan that reflects an improved outlook.
For the back half of the year.
As such with these recent adjustments, we now expect SG&A for 'twenty, 1 to be in the range of $48 million to $52 million up from the prior $44 million to $49 million range.
Our capex from second quarter came in at $17.6 million in Q2.
And as Jason mentioned, we are increasing our capex guidance for the full year from our previous range of $75 million to $95 million to a more narrow window of $88 million to $98 million and of course. This increase as a result of the additional section at a road Fork 52.
No Jason discussed, which we obviously believe it is a beneficial use of capital and well worth the modest increase in projected spend for the year and the timing honestly couldn't be better for that that span.
Turning to the balance sheet and cash flows we ended the quarter with roughly 20% more in total liquidity as compared to the end of the first quarter.
We ended the quarter with $72 million in unrestricted cash and $60 million and availability on our ABL for total liquidity of $132 million cash.
Cash used in operating activities for the quarter was $6 million.
At the end of the quarter, our ABL had a $129 million of letters of credit outstanding and no borrowings.
As we've already explained in connection with earlier comments, our updated guidance reflects our expectations for how alpha will round out the year with.
We've increased total shipments guidance for 'twenty, 1 from the prior range midpoint of $15.5 million tonnes up to our new range midpoint of $16.6 million tons. This is now comprised of an expected midpoint of $13.5 million tons of pyramid and the mid point of $1.6 million tonnes of incidental thermal production within the met segment our.
Prior guidance for the all other category remains unchanged.
Against the midpoint of guidance around 21% of our met segment, where just over $2.8 million tons is currently unpriced and can be expected to benefit from improved market environment, we're seeing.
Of that 21% unpriced and the met segment around 18% is committed.
The thermal byproduct portion of the met segment is effectively fully committed and priced at an average price of $52.68, and we remain fully committed in price for 'twenty 1 in our all other category at an average price of $59.66.
As Jason mentioned, our 2021 net cost guidance.
It remains unchanged as does the all other category with range midpoint costs.
70, $171.47 per ton respectively.
As I mentioned on prior calls we still expect to receive the NOL carry back tax refund of around $70 million, sometimes in the back half of this year. Additionally, subsequent to the end of the second quarter Alpha made a $21 million payment to eliminate the west Virginia portion of the Lexington Coal company note 1 year ahead of schedule.
We also negotiated the return of $14 million and related surety collateral, meaning the early payment also allowed us to extinguish this liability at a lower net cash outflow than we previously expected and had disclosed.
Finally, a comment on cash allocation strategy as we move forward into strong markets with an anticipation of additional free cash flow.
Been pretty clear over the past several quarters about our intention to build cash balances and aggressively pay down debt, but I want to reiterate those 2 items is our highest financial priorities.
Our focus is on strengthening the balance sheet deleveraging the enterprise both of which we believe will maximize shareholder value over both the short and the long terms.
So with that I'll turn the call over to Dan Horn for market analysis and sales outlook.
Thanks, Andy and good morning.
In my remarks, I will share a few additional observations about the year. So far what we have to look forward to in the back half and the way we are starting to think about 2022.
The second quarter was another solid period for our sales team.
You've already heard some commentary on the significant shift in the Australian indices. In recent weeks. There are a couple of additional areas that I want to highlight in this regard.
Although our contracts tied to Aussie indices work as lucrative in the first half of the year as they would've been on another pricing mechanism I am proud to say that we continue to fulfill our contract obligations to our customers.
We have long standing and in some cases decades long relationships with customers around the globe and in markets, where metallurgical coal demand is expected to continue climbing from many years to come.
We are also seeing some opportunities created by the Chinese ban on Australian coal.
While China has not historically been a destination for office products.
We found great acceptance of our high quality coals at multiple Chinese steel mills.
Therefore, we have built on these initial shipments into the country early this year and several of our recent vessels were actually larger than shipments sold earlier in the spring.
Including business recently agreed upon but not yet shipped alpha has sold approximately 1 million tons of coal into China. This year with a significant possibility of more to come.
It's impossible to predict how long this window of opportunity will last but we continue to evaluate this new market for us and sell additional tons if it makes sense.
While the F O B and CFR indices are currently at high levels. It's also important to note that these so called headline prices are often substantially different from the net backs at the mine report, especially considering that the freight cost to get our product across the world are not insignificant.
Even still this has been very good business for us and I applaud my team for their flexibility and willingness to think creatively to help alpha mitigate some of the negative impacts of the Chinese Australian trade tensions with new advantageous business.
As you've heard already we plan to produce more coal this year than we previously guided and we're pleased to have some additional tonnage to offer to our customers, especially given the strong demand environment from metallurgical coal.
And the tightness of current supply.
Okay.
Economic indicators continue to signal positive conditions for the near term with the most recently reported U S steel mill capacity utilization at 85%.
Globally, the World Steel Association crude steel production statistics show year over year growth of 11, 6% in June.
India showed growth of 21, 4%, while China increased 1.5% over the period long ago, what periods a year ago.
Regionally, North American and European crude steel production increased 45, 2% and 34, 7% respectively.
Against the year ago period, all of these are signs of strength and alpha as key markets.
Turning specifically to next year as David mentioned, we settled a couple of pieces of North American business for 2022 and continue discussions with others.
While we obviously will not be providing further details while negotiations are ongoing we can say that this business will concluded at market prices well above our 2021 settlement.
We are also strategically evaluating product mix and continuing the most advantageous destinations for these products in 2022.
While we have historically place roughly a third of our business into the domestic market in any given year, we might decide to adjust that percentage depending on how the export demand shapes up.
Regardless, we look forward to having plenty of our high quality coal to sell and based on what we're seeing on our current conversations we believe that 2022 should be a good year for off.
This concludes our prepared remarks for the quarter operator, we are now ready to take questions.
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At this time, we will pause momentarily to assemble IRA.
Our first question will come from Nathan Martin with the Benchmark Company. Please go ahead.
Hey, guys good morning, and thanks for taking my questions.
Good morning Nate.
Really appreciate the extra color this quarter on the net side with the breakdown of ship that different price realizations. So they've all kind of start there.
How should we think about that split moving it back half of the year.
It's fair to assume domestic kind of stays pretty pretty ratable and then on the export side. Obviously as you guys pointed out in the Australia and lifetimes kind of hurts you in the second quarter with the depressed pricing, but since then the index has more than doubled.
You talked in the past about moving some business away from that index as contracts roll off.
You guys have about 21 per cent of your net production on price as you just pointed out so there Daniel you covered a little bit of additional prepared remarks, just now, but maybe you could give us a little more color on which markets you're targeting or have shown interest.
Do you think there thank you.
Sure well I guess broadly.
Broadly speaking, we're targeting all of them, we expect to continue to ship into India and other markets.
High levels, but as I mentioned China's.
Interesting target right now with the indices kind of rebalancing themselves.
We'll just have to look among the best opportunities there, we're still selling additional spot tons into Europe, South America, as well and some additional domestic met so.
It truly is an all of the above situation right now.
But we will look for where the realizations of the best.
Got it the next day, so yeah, I mean I guess.
Uh huh.
The other day allure of the Chinese just benchmark pricing is not quite the same yeah, they're now closer to parity I guess to the index, but.
I guess kind of looking at the full year.
Net shipment guidance increased there can you guys can maybe talk about where those tons are coming from or maybe even the cadence do you expect in the third and fourth quarters, Obviously you announced.
Playing to add that force section of road Fork 52.
It sounds like that should be online by the end of the year, what kind of incremental tonnage are you expecting there I don't I don't think we highlighted that at all.
That helped lower overall net segment costs as well and is it correct maybe.
Maybe assume that that production kind of attitude from next year as well.
Hey, Nate this is Jason I think.
Good portion of our increase in guidance is just come from productivity from the current operations being.
Slightly above what was expected.
With respect to road Fork 52 in the fourth section it will be up and running by the end of the year and it will be more or less at a full run rate by first of the year.
Nominally speaking I think it would add about 400000 tons of 400000 incremental tonnes.
Across the portfolio.
And Thats low vol, correct, Jason sorry, just average kind of help your mix a little bit.
It is low ball and I think you asked a question about how it would contribute to cost and road Fork. It is basically at the midpoint of our guidance. So it's.
Incrementally it should be helpful but.
I don't think you're materially see it in overall numbers.
Got it that's that's helpful.
And then again another great cost quarter exactly.
The other thermal categories with back to back a $43 plus or minus quarters, which was below your full year guidance, so kudos to Jason.
Yeah, obviously, you guys are maintaining our full year guidance on both met and thermal costs is there you know as we look to the second half is there anything you guys see that could.
Cause these numbers to a different material either 1 way or the other in <unk> right now.
And then maybe high royalties if prices stay where they are at a day, but you know any longwall moves you mentioned inflation, a little bit labor costs et cetera, any color there.
Yes.
We're all room and pillar operation So no longwall moves.
For us, but I think more of lastly, the supply demand pressure that were seeing has mostly been offset with improved productivity.
So therefore, I think I think we're able to maintain our our guidance that we gave at the start of the year.
That's fair, Jason I apologize for the long haul question.
So I guess, just maybe maybe final question for Andy.
Congrats on paying off they also share liability early.
As we think about some of the other legacy liabilities you guys have.
Else out there, maybe that you're working on or could attack to reduce future cash outflows.
<unk> outflows there.
And any thoughts I appreciate it.
Yes, Thanks Nate.
We're constantly evaluating the balance sheet just to try to pick off some items, where it makes sense now we're kind of getting to the point, where all of the bankruptcy related items and the other peripheral below the line items are wrapping up at the end of next year and so we're we're close enough now where theres.
Probably not too much more to be done in that regard and that's why we're focusing so heavily on.
Potentially preparing for some pretty aggressive debt reduction.
It seems to be the best.
The best Bank for our book as far as.
Really achieving and capturing some shareholder value. So I think that's probably that's probably the last big lick of non debt related liabilities that we'll be able to attack for now but again if an.
<unk> Pops up we're constantly looking at the balance sheet for other other pockets that we may be able to take out.
Great Thanks for that.
And.
I'll leave it there guys again as always appreciate your thoughts and best of luck in the second half. Thanks.
Thanks, Nate I appreciate your day.
Again, if you have a question. Please press Star then 1.
Next question will come from Lucas pipes with B Riley Securities. Please go ahead.
Hey, good morning, everyone.
I'll I'll take another crack at Nate's first question I also really appreciate at the met segment sales table and.
You have these 3 categories export other pricing domestic export Australian index.
And.
I assume domestic well, that's not going to change much kind of Q3 versus Q2 or Q <unk> Q4 versus Q2, just given the nature of it but can you can you provide some thoughts as how export other pricing mechanisms export Australian index, what those numbers might look like.
Q3, Q4, but really appreciate your thoughts thank you Paul.
Well look as you know you can do the math and do the percentage increase in the indices there.
<unk>.
Quite a bit.
Quarter over quarter, there, but just to give you I guess a sense.
The.
The Aussie indices pricing number that you saw there.
And this in the current month, if you'd put the math to it you'd probably come up with a number that looks like.
$70 a ton higher than that right now the indices are way up so.
It's a big increase.
Terrific. So it's a kind of kind of $1.40 per short ton at the mine Gate Q Q3 is a reasonable number for <unk>.
For I'm looking at the indices today.
It's a guess.
And there is a freight component involved in there that does this.
Moving quite a bit these days as well, but yeah. That's a good guess.
Got it and the export other pricing would those be kind of a high vol a into Europe with.
With those assets move quarter over quarter or versus spot whatever.
Got it.
Kind of across the board on that Lucas.
We're moving all gold grades <unk>, all mid vol low ball.
<unk>.
And all of the markets, whether it's China.
You mentioned Europe Europe, we are definitely shifting additional tons there too so again I'm not trying to evade but it's just all of the above.
And and.
You touched on the convergence.
The Aussie index to some of the other so if if if I were to conclude from the earlier question on the Aussie pricing that.
This export other pricing mechanisms is also around $1.40, which you say Lukas here.
The math again or would you say that's about the right ballpark.
I think you Gotta go well, probably close probably a little higher on the other I mean, you Archie indices are still there as Andy pointed out there's a lagging factor there we're not completely climbed out of that lagging period, yet on those so.
I don't have a number to give you, but I think the other non aussie and linked pricing is going to be a bit stronger.
Bit stronger terrific very helpful really appreciate that.
Since we are in such a role on the pricing side I figure I'll keep going.
Domestic contract season, it seems like it's right around the corner now.
What what what's your read of the market there.
Would appreciate any color you can share thank you.
Well because as you pointed out we've done a couple of settlements here I'm not going to go into any detail at all on those were as you said.
Major negotiating period is coming up here in the coming weeks, but.
I guess, if you want a little extra color I would add what I will say from more conversations is it with the steel industry running very well and the coke plants from blast furnace is trying to run as hard as they can.
They are and we'll be looking for the higher quality coking coals. This year. So I think a lot of the attention will be on the what I call. The higher ranked calls meeting low vol medium ball.
So on the lower sulfur coals.
Going forward. So that's been our experience here in our early discussions.
And then on.
On the pricing side.
There's been a fairly narrow range over the last few years in terms of domestic pricing would you say this is a year where.
Pricing could breakout to the upside given what's going on in the international markets. Thank you for your thoughts on that.
Okay.
There's as I pointed out so far what we've seen is pricing.
Pricing for 'twenty 2.
Much much higher than 21, I'm, not going to get any more granular than that but.
And within a band you know I don't know that there is.
Domestics grades are all over the you know they're not all over the map there with last year, they were probably within a 10 or $15 band I suppose.
That's possible.
Don't know any reason why it wouldn't be similar going forward in 2022 as far as the range.
Got it and with that band you mean, a spread between high vol, a and high vol. B for example.
Well, yeah again, it's a little early to comment put a lot of thought into that.
Hi.
In our portfolio, we have some very good very high quality low sulfur high vol. BS that I'm not I'm, not even willing to say that thats the spread on a versus b to be honest with you truly depends on the product right.
Got it got it Super helpful really appreciate your.
Thoughts on this.
Last question from me.
Congratulations on the cost performance, especially during this inflationary environment.
And to.
To the team.
You commented on the inflationary pressures.
Anything that gives you a particular cause for concern as it steel roof bolts is it fuel is it labor.
<unk>.
Which 1 gives you.
That the most headache. Thank you very much for your perspective.
Hi, This is Jason I would I would say yes.
All of the above everything that you mentioned, there and they seem to be coming up.
Really proportionately with 1 another.
But again as I said before I think the productivity from from the guys from field in.
They are really running well enough to where it's pretty well offsetting that and we're able to maintain the guidance that we previously gave.
Terrific well. Thank you very much really appreciate it and best.
Best of luck.
Thanks, Lucas Thanks for the thanks.
This concludes our question and answer session I would like to turn the conference back over to David Stetson CEO for any closing remarks.
Thank you in closing I want to thank everyone for joining the call. This morning, and we reiterate our excitement about the coming year. Our team will continue to build on from foundational changes. We've made in recent quarters and we think we're very well positioned for the future success. We look forward to checking back with you at the end of next quarter and everyone have a <unk>.
Wonderful and Great day. Thank you all so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.