Q3 2021 CONSOL Energy Inc Earnings Call
Good morning, everyone and welcome to the Consol Energy third quarter 2021 earnings Conference call.
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At this time I'd like to turn the conference call over to Nathan Tucker director of Finance and IR.
Sure.
Please go ahead.
Thank you and good morning, everyone welcome to Consol Energy's third 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 in our SEC filings and are considered forward looking statements within the meaning of section 20 <unk> of the Securities Exchange Act of 1934.
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 in our press release and furnished to the SEC on form 8-K, which is also posted on our website.
Additionally, we filed our 10-Q for the quarter ended September 32021, with the SEC. This morning, you can find additional information regarding the company on our website Www Dot Consol energy Dot com 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 are.
Rice president of marketing and sales.
The prepared remarks, Jimmy will provide a recap of our key achievements during the third quarter of 2021 and specific insights on operations and sales attached will then provide an update on our liability management initiatives, our financial performance during the quarter and our 2021 guidance and.
In his closing comments, Jimmy will lay out our key priorities as we head into 2022.
After the prepared remarks, there will be a Q&A session in which Dan and Bob will also participate finally, we posted a supplemental slide deck on our website. This morning, which can be referred to for additional information with that let me turn it over to our CEO Jimmy Brock.
Thank you Nate and good morning, everyone I wanted to start by highlighting a few developments for consol that we're very excited about.
First we recently announced a very important strategic goal related to reducing our scope, one and two direct operating greenhouse gas emissions across our entire operating footprint.
Specifically, we committed to a 50% reduction in scope, one and two greenhouse gas emissions compared to 2019 baseline levels by the end of 2026 and net zero scope, one and two admissions by 2040.
We are very.
Very pleased to be among the first peer play cole companies to set these targets.
Also want to emphasize that this isn't a new focus for us.
Since becoming an independent company in 2017, we've prioritized and ESG approach centered around enhancing employee safety, reducing environmental impacts and creating sustainable value.
Developing direct operating greenhouse gas emission reduction targets underscores ESG as a core component of our business strategy, while complementing our technology growth and diversification initiatives.
We expect to achieve these targets through multiple pathways, including the expansion of our methane destruction program, which began at the P. A M C in 2017.
We believe our world class assets will continue to play a vital role in securing the worlds.
Actress and infrastructure needs and this effort is aligned with our commitment to sustainably lead the coal industry and carrying out this role.
Second due to the improved and sustained demand for our products. We announced this morning that we are recommencing the development of our fifth longwall located at our Enlow Fork mine.
This well will go to the newest reserve area of Enlow Fort After we recently finished selling off the northern section of the mine as such.
Enlow will be like new mine with an efficient lay out moving forward.
Given the supply demand imbalance, we have witnessed this year as well as our recent multiyear contracting success, we believe the market fundamentals that exist to support this decision.
Finally, our admin mine in preparation plant are progressing as expected demand continues to operate productively on a single production shift with a second support shift that was recently added.
Due to the improved market dynamics the underground operations.
Generating positive operating cash flows on a consistent basis.
We continue to explore options to further ramp up production and promote the <unk> product and the low vol met market.
Prep plant Earth work began in Q3 and is approximately 50% complete.
Teardown of the recently purchased plant is underway.
The primary processing equipment has been removed and is awaiting transport to the admin side.
The main steel structure of the plant and rail load out is now being disassembled.
Earthwork and foundations are targeted for completion by the end of the fourth quarter and the erection of the plant will then commence.
Commissioning of the Edmond plant remains targeted for the second half of 2022, which will coincide with the ramp up to full production at the mine shortly thereafter.
On the safety front.
Our enlow Fort mine Bailey preparation plant Consol Marine terminal and Knickman project, each had zero employee recordable incidents during the third quarter of 2021.
Our year to date total recordable incident rate at the Pennsylvania mining complex remains significantly below the national average for underground bituminous coal mines.
Now, let me move on to our Q3 'twenty one operational performance.
Coal production at the Pennsylvania mining complex came in at $5 3 million tonnes in Q3 of 'twenty, one compared to $4 5 million tonnes in Q3 of 'twenty.
The improvement versus the prior year period was due to the increased demand for our product as coal markets were just beginning to recover from the COVID-19 related demand decline in Q3 of 'twenty.
However, we encountered multiple operational geological and logistic issues as well as planned maintenance shut down that limited our production in the quarter.
As a result, our average cash cost of coal sold per ton was elevated finishing Q3 'twenty one at $30.64 compared to $28.64 in Q3 of 'twenty.
The increase in our per ton cash cost was mostly the result of limited production as well as increased maintenance supply contractor and project expenses associated with the operational and geological issues that we encountered in the quarter.
We continued to deal with certain geological challenges in the early part of the fourth quarter. However, this has been largely mitigated and we're back to running four longwall more consistently.
The Consol Marine terminal had a throughput volume of $2 8 million tonnes during Q3 of 'twenty one.
Compared to 2 million tons in the year ago period.
The increase was again due to improved demand in the seaborne markets compared to the prior year quarter, which was still being impacted by Covid related cole demand decline.
Total revenues for the quarter came in at $14 1 million compared to $17 million in the year ago quarter.
Despite the increase in throughput tonnage revenue was impaired in Q3 of 'twenty, one compared to Q2 of 'twenty due to the take or pay contract that was in place in the prior year period.
DMT operating cash costs came in at $5 8 million versus $4 8 million in the year ago quarter, driven by the increased throughput tonnage.
On the marketing front.
We continued to witness demand for our products strengthening throughout the third quarter of 2021 due to the ongoing economic recovery and improved electric power and industrial demand here at home and across the globe.
During the quarter, we sold five 4 million tons of coal at an average revenue per ton of $47.46.
<unk> to $4 5 million tons at an average revenue per ton or $40.55 in the year ago period.
The improvement was due to the increased demand for our products and ongoing supply partners compared to the prior year period when coal markets. We're just beginning to recover from the COVID-19 demand destruction that bottomed out in the middle of 2020.
Pricing was improved as the commodity markets continue to rise in the third quarter of 2021.
Henry hub natural gas spot prices averaged $4 35 per million Btu during Q3 of 'twenty one.
A 118% increase compared to Q3 of 'twenty.
Average PJM West day ahead powder process also continued to improve ending Q3, 'twenty, 181% above the year ago quarter.
Pricing has further improved since the end of the third quarter with Henry hub natural gas prices now and the $5 50 million per Btu range for December deliveries and calendar year 2022 trading above $4 per million Btu.
On the export front, the seaborne thermal coal markets continued their upward trend in the third quarter of 2021 as well.
APL two spot prices ended Q3 dollars 21, and $151 per ton or 193% improved versus Q3 of 'twenty.
LNG prices also continued to rise in the third quarter of 2021, and the Asian marker ended the quarter more than five times higher than Q3 'twenty prices.
Pet Coke prices remain supportive proppant up demand and pricing for northern App coal and high CBD markets.
Additionally, Turkey recently announced that it has eased restrictions to allow up to 3% dry sulfur coal to be importing.
We believe that our PMC product is a natural fit and we have already received inquiries.
We continue to see improvement in our domestic customers contracting appetites and our marketing team was successful in securing additional sales contracts in 2022 and 2023.
Such our contracted position has gone to 22 million tons in 2022, and $5 8 million tonnes in 2023.
Due to our strong contracted position and free cash flow generation, we feel good about our business as we head into 2022.
That I will now turn the call over to attach.
Thank you Jimmy and good morning, everyone.
Before I move onto the financial update let me add some more color on the recent coal market strength with Jimmy had just highlighted.
A lot of what is driving that improvement is the significant supply demand imbalance that we are witnessing we expect that overall market conditions will continue to remain robust due to the accelerating global economic of comedy and immuno pet supply response.
IHS Markit estimates that total U S coal demand in 2021 will increase by 110 million tonnes was 2020 levels, while total U S coal production will improve by only 59 million tonnes.
This is leading to tight supply and declining coal inventories.
The EIA reports that August call inventory levels domestic power plants sort of at $84 3 million tonnes, the lowest level since at least when Ronald Reagan was president.
While the low number is important what is even more important is that the market is fundamentally under supplied and power plants are already in preservation more I heard of the window.
Additionally, the EIA also estimates that these inventory levels will continue to decline and finished 2021 at approximately 73 million tons, a reduction of 45% from year end 2020 levels.
Barring any significant reduction in demand. We expect this imbalance will continue driven by a lack of investment in the coal space in recent years and the dwindling access to capital for Cole companies, which we expect will remain the trend going forward.
And bind us, but the fact that Actavis reserves continue to deplete during each year of operation and you have a situation where it will be challenging for supply to ramp up or even sustained at current levels in the future.
This highlights the significant value of an already installed asset base and the advantage we have to be able to we started the development of our fifth longwall restore capacity in an environment, where such few opportunities exist.
Now let me provide an update on the progress we have made on our key financial priorities.
I also want to touch on some of the water authority, we have recently witnessed in the market in the API two market.
I will then review our third quarter 2021 results and our guidance.
Despite the operational challenges we faced this quarter.
We still made significant progress on our financial priorities first we continue to maximize free cash flow generation and generated nearly $35 million of free cash flow in the third quarter, which brings our year to date total to $162 million for the first nine months of 2021.
Second we continued to make strides on our overall debt reduction goals as we made debt payments and repurchases of approximately 23 million and <unk> 21, including $2 $9 million.
Open market repurchases of our outstanding second lien notes.
Third our cash balance increased by approximately $12 million during <unk> 21, bringing our total unrestricted cash and cash equivalents to $162 million at 932021.
Accounting for our restricted cash of $50 million of total cash and cash equivalents.
<unk> sat at more than $212 million at quarter end.
Port.
We ended up <unk> 21, with a liquidity position of $402 million, which allows us to continue to make prudent capital allocation disciplines, such as moving forward with the Edmond project and accelerating our debt reduction goals.
Finally, we reduced our net leverage ratio to approximately one six times at the end of <unk> 'twenty one.
A reminder, this ratio does not account for the restricted cash from our tax exempt bonds due to the treatment of restricted cash under our credit agreement.
However, if we include the $50 million of restricted cash our leverage ratio as of September 30th would be below one five times consolidated net debt dropped to $469 million.
Before moving to the financial results for the quarter, Let me highlight some of the volatility we've seen in the API two market as it relates to our financial hedges for 2022.
As a reminder, we had 2 million metric tons in the API two market for calendar year 2022 at a weighted average price of $79 34 per ton.
On a year to date basis, we have recorded nearly $168 million in unrealized pre tax losses on commodity derivative instruments.
$147 million of rich, but recorded in the third quarter of 2021.
Calendar year 2022, API two forward have been highly volatile throughout 2021.
Ending September 2021, $857 per metric ton versus $76 per metric ton at the beginning of May 2021, an increase of 107%.
However.
As of end of October.
Calendar 'twenty two API two prices have reduced by 28% compared to September 30, yet and we estimate that approximately $112 million of these unrealized losses have been divorced.
With that let me now recap the third quarter results before moving on to our 2021 guidance.
<unk> ended the third quarter of 2021, with a net loss of $113 8 million or $3.30 per diluted share.
Which included the previously mentioned $147 3 million of unrealized pretax mark to market losses related to commodity derivatives and adjusted EBITDA of $66 6 million.
This compares to a loss of $7 2 million or 28 cents per diluted share and adjusted EBITDA of $68 3 million in the year ago quarter.
And <unk> 21, we generated $85 million of cash flow from operations, which included $27 million.
A positive working capital changes driven by a reduction in our accounts and notes receivables balance and an increase in our accounts payable balance.
This compares to cash flow from operations of $15 7 million and <unk> 20, which included $31 7 million of negative working capital changes.
The improvement in operating cash flow compared to the prior year period highlights the improvement in the core markets and demand for our product.
Additionally, we spent $45 9 million and capital expenditures in 'twenty to 'twenty one.
Compared to $19 5 million and 20.
This resulted in free cash flow generation of $34 8 million and <unk> 21, compared to $4 3 million in the prior year period.
Now let me provide you with our updated outlook for 2021.
The operational and logistical challenges we encountered during the third quarter decreasing the top end of our expected sales volume range for 2021.
To $23 five to $24 5 million tons. Additionally, due to our recently announced recommenced fifth longwall development.
As well as the operational challenges and modest inflationary pressures, we have encountered we are increasing our expected average cash cost of coal sold per ton range by 50 cents.
On the low and high end to an updated range of $27 50 to $28 54 down.
On the pricing front, we are fully contracted for 2021.
Unexpected average revenue of $46 26 per ton, assuming PJM west power forwards for the fourth quarter of $54 84 per megawatt hour.
Finally, we are reducing our capital guidance range by $10 million at the midpoint to a range of $150 million to $170 million.
Additionally, as discussed earlier, our equipment project is progressing as expected and on budget and we are reaffirming our guidance of a second half 2022 startup as well as all operating assumptions as we follow up our expectations for 2022, we will provide our 2022 guidance ranges on our next earnings call.
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 reiterate our priorities as we move forward.
First we continue to emphasize the importance of our balance sheet and prioritize improving our liquidity and financial flexibility.
We've had a lot of success in this regard since becoming an independent public company due to our consistent free cash flow generation and all parts of the commodity cycle.
We are optimistic moving forward that we will continue to de lever the balance sheet and reduce our absolute debt levels, especially given the significantly improved coal markets that we are now seeing.
Second.
Given the confidence that our customers have shown in us by providing duration to our contracted position and reverse the recent trend of shorter term domestic contracts.
We are committed to getting our fifth longwall up and running once development is completed which we believe will be in the fourth quarter of 2022.
We think this is a positive sign for us moving forward and provides justification for beginning the work to adding more PMC tons to the market.
As we stand today, we have a solid order book for 2022, and we will remain opportunistic on additional sales we booked.
Third while we view recent domestic term business as a positive development for US we continue to focus on our longer term strategic shift into the export market, which we expect will derisk, our domestic exposure and allow us to capitalize on growing international demand for our high CV product.
Year to date.
We have shipped approximately 50% of our total sales volume into the export market.
And owning our own terminal is a huge differentiator for us compared to our peers.
The value of our PMC Cole has always been tied to a top quality.
Which allows us to play in many markets across the globe.
We will continue to prioritize balancing markets at home and abroad with the longer term focus on shifting to global demand growth.
Fourth.
We are pleased to be well underway with our efforts to relocate a preparation plant to be at my side.
This project is the next phase of our growth and diversification strategy.
We're very anxious to get this project completed and start placing our high quality low vol metallurgical <unk> product into the market.
Finally.
Let me reemphasize, our excitement about our recently announced greenhouse gas emission reduction targets.
Our commitment to ESG with a focus centered around enhancing employee safety, reducing environmental impacts and creating sustainable value aligns well with our top core values of safety compliance and continuous improvement.
We expect to be a part of the energy mix for the long haul and our dedication to reducing our emissions will allow us to do that responsibly and sustainably.
I want to end the call by thanking our employees for working safely and completely and dealing with some of the challenges we faced during the quarter and getting us ready to head into the new year Prime to excel in 2022 and beyond.
Our employees are the key to our success and once again, they have proven their value and challenging situations.
There's 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 will hand, the call back over to Nate for 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.
Okay.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one on your Touchtone telephone.
If you are using a speaker phone, we do ask that you. Please pickup your handset before pressing the keys.
So what's your all your questions you May Press Star then two.
Once again that is star and then one to join the question queue.
Pause momentarily to assemble the roster.
Our first question today comes from Lucas pipes from B Riley Securities. Please go ahead with your question.
Hey, good morning, everyone.
I have a I have a few questions.
First one is on the fifth longwall and I Wonder if you could.
Elaborate a bit on the capital costs that are required for that project and then the payback period and ultimately the returns.
That project very much appreciate your perspective on that thank you.
Okay.
Good morning, well as far as the capital goes as as you know we already own the equipment. So it was just sitting there idle there may be some project rebuild cost in that but we don't expect that to be anything other than normal because we have the equipment. There the costs that we'll have enough faith longwall is developed in those two.
Panels to get it started.
Two sections to do that we're driving them both now.
That capital costs will be the same as our others Lucas it'll be we say somewhere around $5 a ton for maintenance capital. This will be the same.
Got it.
Got it so there's no.
So to the upfront investment to get this long wall.
Start producing this is in the tens of millions of dollars is that the right way to think about I know you would probably expensive, but I'm just trying to think about like what is.
What sort of returns you're looking for to bring additional production back online and I understand this is a very low hanging fruit.
Yes, they do.
The way to look at it Lucas is it won't even be tens of millions here being a single digits. It's just rebuilding some of that equipment that we have now so we will send just like a normal rebuild will send it out to get it rebuilt and then we'll bring it back and achieves a usually each longwall moves is somewhere in the single digits of millions to do that and of course.
The payback as soon as we start that wall up which we're anticipating Q4 of 2022, then we'll start earn that money back.
Got it okay and Luke.
As youre, probably aware that a lot of the development costs might also be expense through operating costs. So it might not all show up in capital.
Yeah, Yeah, no no that's.
That makes sense from an accounting perspective, obviously me.
Do you want to see high returns to bring back additional thermal coal production. That's why I was asking these questions. So I appreciate that perspective. Thank you.
And kind of piggybacking on that.
Commented on that.
Tight from utilities to book longer term business, and obviously, bringing back the longwall plays into that as well so.
What sort of pricing for 2022 2023 have you been.
Able to lock in under fixed price contracts would very much appreciate your perspective.
Well Lucas.
In terms of pricing, let me kind of be clear that we continue to layer in volume for 2022, you know over the past I'll call. It nine to 12 months and you may recall that on our first quarter 'twenty two.
Earnings, we announced we had $5 5 million ton sold for 22 at the end of Q2, we were at 10 nine and now we're at 22 at the end of Q3, so again, taking into consideration and based on recent API too and power forwards are for 'twenty two.
Some of our contracts are linked to API too and power prices, our average price across that $20 2 million tonnes are expected to be in the low fifties.
And for the balance of our portfolio for 'twenty, two we will remain opportunistic and contract volumes that yield the best price for us whether that be domestic or export and then looking at looking ahead at 2023.
We have increased our sold position as of.
This morning, we announced we had $5 8 million tons sold for 23 I can also tell you that we are in negotiations for additional volumes in 2023 again, so that provides us with this confidence to move forward in the development of that fifth longwall.
Okay can you can you comment a bit on pricing for 2023.
Being that we're in the middle of these negotiations Lucas.
We're not we're not prepared to comment today, but I can basically tell you. If you look at the the published prices.
We're close to that that type of level for 2023 today.
Okay. Okay.
A follow up question on on your prior comments for 2022 pricing the low fifty's it sounds like that's a mix between.
Domestic and export is it possible to break that down between.
Between those categories.
Yeah right now on the export front, we have approximately 6 million tons sold for 2022, so the balance would be domestic or roughly 14 million tonnes.
And for.
For the $14 million domestic.
Whats the recent pricing that you've been able to obtain there.
Again, it's been pretty close to what the market has has been for the most recent tons that we contracted but as I mentioned to you. They were contracted throughout the third quarter. So when you go back and you look at what the published pricing was and I believe you'll you'll find that the average pricing across nap Cole for Q3 were was right around $60.
Give or take.
We've been able to secure volumes at or slightly above those published prices during that quarter.
Got it. Thank you very much and then my.
My last question.
The logistics issues during the quarter can you elaborate what what cost them where in the chain are you seeing the biggest bottlenecks and how quickly do you expect the logistic issues to be resolved from here. Thank you very much.
Yet as we mentioned the Royals did have some issues throughout the quarter, but I can tell you that they continue to improve I mean, we're having conversations at all levels across the railroads.
And we are expecting a strong finish to the year followed by a strong start to 2022.
I think the challenge continues to be.
Employees.
They continue to try to ramp up I don't think anybody really saw this demand increasing as quickly as it did.
But they are in the process of hiring one hundreds and hundreds of conductors and engineers to.
To ensure that they're ready for for this uptick in demand that we're seeing now and we expect it to go through 2022.
Okay, Okay, well I appreciate that and hopefully things things improve on that front as well. So thank you and best of luck.
Thanks for that guys like this.
Our next question comes from Nathan Martin from Benchmark. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking my questions.
Good morning, good morning.
So Lucas kind of touched on the pricing side for 'twenty, two maybe I'll shift over to the cost side, obviously, we're seeing some inflationary pressures.
On logistics issues and they do labor issues as well maybe could you guys kind of help quantify any headwinds you see in there.
It also appears to have it'll be probably a sales sensitive increases will next year. So maybe just get your overall thoughts on how costs might trend in 'twenty two.
Well I think when we look at costs. There are some small inflationary pressures that we're seeing now and it's with many of the products that we use to mine. The cole with also labor is getting labor is very tight across all the markets you've heard many people talk about that but for us we have been able.
To hire the people we've been able to bring some people on down at it man and we will continue to do that now it's not easy to go out into the labor pool today. The market is very very tight.
And I think what our hopes is as we move forward.
Some of these geological issues that we had behind this year in this third quarter will go away and we'll get back to some sort of operating normal, whereas where we've always said, we'd like to keep the inflationary project somewhere below that 5% number when we're looking at inflation and we believe we will be able to do that.
Great. Thanks for his comments Jeremy.
Maybe again, just kind of going back to the fifth longwall ramping up here.
And it looks like Youre doing a production.
Again until fourth quarter next year maybe.
Maybe could you guys give us your early thoughts on what production out of the Kingstone, Pennsylvania mining complex might look like in 'twenty. Two at this point and then maybe touch on it and then you guys gave a little update on progress there what kind of shipments could receive from that lineup in 'twenty two.
Well looking at 'twenty two for the fifth longwall in the Pennsylvania mining complex it'll be late in the quarter and it all depends on how development goes this wall is going into our newest section of reserve. We just feel that northern portion of the mine off and these panels are going to be 3000 feet longer in length than the others.
And that's why it's taken a little extra time to do that.
So it'll be it'll have minimal impact in 2022 as far as the fifth longwall go. So hopefully we can get it up and running for a month or so and do well there, but I think when you look into 2023 and beyond we can be back to that first longwall, whereas you know we ran in the past we use.
The midpoint of 26 million tonnes. So we can be in that neighborhood. There moving forward all depends on the market on how hard we run that fifth wall and if the market's there we'll run it to the same levels around before if its not obviously, we will put one of those wells back.
Edmond Edmund is going very well.
We're really happy that we found a prep plant that we can do.
<unk> mobilized take down there and have run and they continue to run very productively on the one shift that we've been running we did add a second crew to pick up some additional tons there, but we're happy with towards the <unk> project is now and I'll, let Dan add to that a little bit about the ramp up of production and what your expectations are.
Sure Nate.
Our expectation given the the development mining that we've been able to do here since starting a project is that we will be positioned to ramp up.
Very quickly it hasn't been one when our prep plant project is complete we are still targeting.
Second half of next year, we've set our annual run rate is going to be on the order of call. It 900000 tonnes.
So we would expect to get.
Close to that level of run rate in the latter part of next year.
Between now and then Jimmy mentioned, we are currently operating one one section. This is ultimately a three section mine.
So figure.
Somewhere around a third capacity probably for a for the first half of next year.
Okay.
Got it that's helpful guys I appreciate that and then finally, just I guess touching on Capex guidance lowered by $10 million at the midpoint for this year and any early thoughts on how that might shape up for for next year.
Yes.
Nate I think.
Too early.
To give you a 2022 capex guidance range, but generally speaking as Jimmy has mentioned in the past.
If you think about from a maintenance capex perspective.
Four to five Bucks, a ton range, but some inflationary pressures and then.
Edmund residual spending, which I believe could be.
And the order of <unk>.
30% $35 million.
For next year and then some other stuff.
That typically is that from a capex perspective, but generally in that range no major changes.
Jimmy mentioned that the first longwall could be low single digits that could be potentially capitalized. So maybe you add that in.
Yeah.
Got it thanks for Tesh.
That's it for me I appreciate all your thoughts guys. Thanks for taking the time and best of luck in the fourth quarter.
Thank you.
Our next question comes from Michael Dudas from vertical Research partners. Please go ahead with your question.
Hi, Yes. Good morning, everyone. First question is are you.
Talk a little bit about the interesting news out of Turkey, maybe element of.
And your marketing plans.
Are those going to be a significant shift of who's buying your cole who is looking to buy the closer of A&D is going to be continue to be an important customer base is there any shift there is an impact on on pricing and then second I guess, a follow up to that would be.
Looking at today's market and.
As people start to figure out what you can price tons without giving away too Tony state secrets, but.
Relative to what net backs might be today and the appetite of the consumer given where prices are extraordinarily high and it's craziness going on in Europe on a natural gas or are customers. Just are they panicked or are they trying to trying to play cute or how are they portraying and how is that going to be able to help you secure some of those pricing that we might do.
As we move into 'twenty two.
Mike I'm going to answer your questions in reverse order starting off by just do these API two price or I should say just indices in general you know.
A lot of this volatility is based on speculation from what's coming out of Russia, and China, Russia, obviously, saying theyre going to increase gas supply, which by the way we have yet to see and then China, putting a cap on on their of their coal pricing, obviously, China does affect the world market. However.
Just looking at the fundamentals the globe certainly remains energy short.
And I think as we continue through time, we will continue to see these international prices pop back up we might not see $300 API two prices, but I wouldn't be surprised if you see another I'll just call it 20 or $30 improvement for.
For where they are today and although these these markets are continuing to bounce all over the place and there is volatility in the export prices. What I can tell you is first we are now seeing our physical coal sell to a premium to the paper.
And secondly, we have been successful in just in just the past two weeks.
To book additional thermal cargoes in Q1 of which yield very close to $100 back to the mine.
So again physical continues to sell at a premium to paper.
As far as Turkey is concerned you know we are excited about the new opportunity.
We are receiving inquiries on a daily basis I will tell you that.
If we could ship a cargo tomorrow they'd be interested however, as we mentioned we are fully contracted for 2021.
There will be opportunity for us in 2022.
Again, it's exciting it actually places a little bit more pressure on the Indians you know typically the India Indians will kind of look at the API two markets and pet Coke markets now. They also got to understand that we have another outlet for our coal so puts another sense of competitive pettishness into the marketplace and again.
I wouldn't say a major shift from what we're doing today, India will still be a large consumer of our KOL going forward and that's our expectation, but the good news for US is now we have another market opening up to to our northern App coal.
Thank you for that.
Maybe touch.
Thinking about locking in in hedging and such or any thoughts on going forward. If there is appetite ability. How you think through this given you know trying to take advantage of some of these spikes relative to the.
The craziness of the market, yet trying to be a little bit more measured on.
The company might be able to secure and certainly drive some pretty you would think free.
Cash flows to continue to recapitalize.
Okay.
Mike Thats a good question and we often have the discussion about forward hedges and stuff like that I think one of the challenges.
Sure.
Just the overall volatility and at times that is a disconnect between the paper and.
Physical market. So for instance, when the prices ran up.
To see physical trade at a little bit of a discount to paper and more recently as Bobby pointed out.
You are seeing paper trading at a premium to <unk>.
Sorry, physical trading at a premium to paper and unless you have a very good one.
One to one correspondence that it becomes a risky proposition and that is okay. If you have a lot of open position that you can offset some of the future sales against that.
But.
For example for 2022.
Not looking to add.
Additional paper.
Sales for the three or 4 million tons that we have opened because.
You will have that issue, where you don't have a lot of open position to offset against right.
'twenty three is something that we will look into 2023 rallied a little bit and then pulled back we'll look into it but again.
I'd much rather prefer Bobby to sell some API dual and contracts.
And then offset against that and then just going.
Nick it against.
Future sales not that we'll never do it but it makes it a little bit of a difficult proposition for us.
Okay.
Yeah.
And just finally logistics on the high seas availabilities.
Issues regard to containers and cruise and.
And those issues, obviously, it's been price of the marketplace, but is there.
Any delays or backups or anything that could cause some some shift to Q1 from Q4 vessels that you might be thinking of.
Although you anticipate to book this year moving into mix, just a sense of that and maybe what pricing might be and of course I'm sure. That's maybe not as volatile as the paper markets certainly.
Sure very volatile as the shippers or the transportation from just want to make there as well.
Yeah, I don't think I don't anticipate any any issues with getting our export volumes loaded this year in fact, almost all of our our vessels that we have for the balance of this year have been nominated.
And and have ETA'S as far as you know vessel rates freights are still inflated from where they were earlier this year. However.
Most people I talk to believe that freight rates will come or I should say vessel rates will come back down approximately 10% to 20% and a lot of this has to do with some of the Australia and ships that had been under load.
For over a year now pre I'll call it the.
Pre China, Australia, attentions and once they off load.
That will add some additional ships in the market and with this I'll call it slight softening in the markets.
It should it should help as well.
Thanks, guys.
Thank you. Our next question comes from Andrew cost growth from Bloomberg Intelligence. Please go ahead.
Yeah.
For 'twenty two so just wanted to double check.
Are the 22 million tons at our contractor that was committed and priced or are any of those tons.
Still yet to be priced.
Andrew Im sorry could you start the first part of that question over you were muted or something we only heard the.
Part about the tons for 2022, okay.
Okay, sorry, Yeah, I was just curious if the.
Tons are earmarked for next year, those contracted which is that 22 million ton figure is all of that committed and priced or are there.
Some slug in that mix that are still yet to be priced.
So the $20 2 million tons, we have about call. It $3 5 million tons that are subject to power prices, which would be our netback contracts and then we have between $1 million a million five tons.
That are <unk>.
Two API two prices balance our fixed price contracts.
Okay, and then I guess there the remaining.
Call. It five better left assuming we do 25 million tons next year are those all export oriented tons.
As we mentioned, we're going to remain opportunistic in contract volumes that yield the best price and that could be domestic or it could be export.
Cost arbitrage yep.
Okay. Thank you and then along the lines of Pet Coke can you just may.
Maybe just give us the market a general indication of where current pet coke prices are because.
Not everyone has access to some of these pricing sources. So I think sometimes even just telling people where things are at so they get a good idea and then similarly, where domestic map prices as well right now.
So in pet Coke prices, we look at mainly what it what it is for delivered into India.
Obviously, that's what we compete against.
Last I saw I believe we're somewhere in the high one hundreds.
On a delivered basis.
Close to $200. So we just do the calculation backup back off.
And then also look at the.
The caloric value discount that we have were 6900 K calendar, India pet Coke is at 7500, so it's basically doing a calculation to come up with what we believe our delivered cost and then our <unk> prices for our napp cole to compete against pet coke into those specific markets and again.
And specifically it's India.
As far as net prices are concerned I mean, where gas prices are today call. It the $5 50 range I think what youre seeing in the public markets are accurate.
And then again, we look at what the future natural gas prices and power prices are to come up with what we believe is a competitive price for our northern App coal.
Going into the domestic power Gen market and again I think if you look at.
Kind of where the published prices are today, whether youre looking at SNL, if youre looking at born if Youre looking at IHS I think there they are fairly accurate on where they're at but again, we'll continue to watch the gas curve continue to watch a power curve and price our call accordingly.
Okay, great. Thanks for taking my questions and good luck the rest of the year.
Thank you.
And our next question comes from Brett Wong Karp from Checkmate <unk> Capital Management. Please go ahead with your question.
Yes, hi, good morning.
Two questions one on <unk>.
The volume shortfall in the quarter due to.
C geology and the mine.
Sequentially. Our sales were only your production is only down like half a million tons and its a seasonally weak quarter because of the scheduled maintenance how much of that like quarter over quarter reduction was due to problems and how much was just the normal maintenance season.
Okay.
I think if you look at just the recent quarter, we had probably the geological issues that we had on the one wall and the one fall probably equate somewhere between I'm going to tell you at $250 and 400000 tonnes.
Okay. So thats.
Sure. It was not your usual to have any trouble, but it was a pretty small issue it sounds like in the big scheme.
And then.
I mean, the prices Youre just to shift gears the prices youre talking about.
I mean at least if I'm looking at my spreadsheet right. These are pretty high prices compared to like.
Over the last five years.
Yes, yes.
Thank you.
I mean, there's been a lot of operating leverage in the model.
I mean, maybe you can update us on what your priority is for the use of all of this this free cash flow I mean, whats your target level.
Ridge and what are you going to do when you reach that.
Yes. This is Natasha so first of all.
Overall capital allocation standpoint.
You are right the pricing that we're seeing.
Some of the higher prices that we have seen in last four or five years. So thank you for acknowledging that.
And we do anticipate that.
We are going to have a good year next year and they're going to use that free cash flow based on our stated priorities of reducing our outstanding debt right now is sitting north of one.
One five times Levered.
On a bank calculation method, one six times.
I would like to get that sub one as a first step.
And then.
We always look at what other initiatives that we are going for instance, it's meant project will have some residual spending next year, which will use some capital and then you know.
Looking at what the opportunity set looks like from.
Everything from a shareholder return perspective internal projects.
Those kind of things I think all those things will.
It will be considered.
Okay. Thank you very much.
Thank you.
And our next question is a follow up from Lucas pipes from B Riley Securities. Please go ahead with your follow up.
Hey, Thanks, very much for taking my follow up question.
I wanted to get a better understanding of this fifth longwall. So it sounds like this is going to.
Take the majority of 2022 to get up and running.
Sometimes contract for 2023, but yeah, its about 20% in that in that ballpark or so.
So what gives you that confidence to start restart.
When you start this longwall has something structurally changed in the market.
We're going to need to supply.
Really appreciate it.
We will look at we still think that as Bobby mentioned earlier, you know the world is energy short and we just do not see we think the tightness in the market is going to remain there.
Any of the capital has been spent in the last two to three years is certainly not been spent to have the coal mines and are positioned to run more tonnage or to add new tonnage. So we have the opportunity of this fifth longwall like I said some of the some of the capital has already sunk in that some of that equipment was rebuilt as we had planned on running that until.
The COVID-19 situation happened to us. So we think that the market is going to continue to stay strong we are pivoting toward the grow the market grow.
<unk> markets and the international business, and we believe that we'll be able to get our costs well under control again in competing in both the domestic and international markets and as it grows we'll have an opportunity for the tons.
And Lucas I'll also point out one thing is that if you think about what we said about the fifth longwall.
<unk>, it's Scott we're at de Minimis capital so to speak but it has a long gestation period. So for example, we started work today, we don't see it until our next 12 months. So this helps us get ready.
So hopefully 2023 is going to be a continuation of 2022, and we are able to capitalize on it but if it does not we did not spend a lot of capital, but we awarded the long gestation period and assorted.
Mining is always difficult. So for instance, like in the prior quarter it'd be nice to have that first longwall running when we were facing geological issue. So it could potentially help offset some of that risk as well so on a risk adjusted basis. It would be nice to have that wall geared up and ready to start whether we run it or not depends on what our contracted position.
It's going to be in 2023.
And Lucas if you if you recall in the past that's exactly what's happened to US I mean, we've had issues on these other long walls and then we ran the other four really hard and we hardly noticed it but when you take we were down to four long walls. When two of those four down then you feel the pain of the buyer.
And one last thing on the marketing front Lucas we are in negotiations for additional volumes in 'twenty three and I can tell you that we passed on some volumes already for 'twenty. Three we just didn't feel as though it was it was the right price.
For what the market was back in Q3, so and I can tell you we're having similar conversations with those same customers and it's likely we're going to yield higher realizations than if we would have booked those tons in Q3. So I would anticipate by the time, we have our next earnings call that we will have some additional contracted volume for 'twenty three and again most of that just about all of that for 'twenty three.
That we have booked is domestic there's very very very little export in that end.
Typically we sell close to 50% of our coal exports. So we feel pretty pretty confident that the market will be there in 'twenty three.
Okay. That's that's helpful.
One other follow up questions.
On this topic.
Is there a tradeoff between this.
Okay.
Period end and capital.
In other words, given where the market is today why not spend more money to try to get this up and running quicker.
Yeah, there's really not a tradeoff Lucas plus we can't get it upfront quicker, we could spend more money, but it won't do it then we have the crews hired we're running both of those crews to develop but its just a matter of how many feet per machine chip can you drive to get it there and we're going to run ever available shift we can.
And we will update you on our next earnings call, where we are with that but currently it's down to is this paper machine shift to drive up and make the connections to was we can have it ready to move along on too.
Okay, well I appreciate that additional color and then again best of luck.
Thank you.
Our next question comes from Arthur Lai.
<unk> from <unk> capital. Please go ahead with your question. Thank you.
Hey, guys I have a question.
On the contracted position right. So 22 is around the corner in less than 60 days and you just address something a 'twenty three which is interesting that most of it is domestic.
I'm looking at like you guys. All the news flow and you have better useful than I do but the inventories like in India.
England has to turn on a new coal plant are so low at what point to the international guys and I understand they don't do is long term contracts with the U S guys too.
But inventories inventories and if you run out of electricity, it's a bigger problem than what the prices and you mentioned physical was greater than paper.
Do you see that dynamic changing in and I would I would've thought the 'twenty three again, it's early but not really but I would have thought you'd have more international business and 23 or are those guys like calling you up and saying, Okay. I want like a few hundred thousand Thompson I need it like in 'twenty three and also sign a contract. If you could just talk on that thank you.
Yes, Arthur like like you said inventory levels are at the lowest the lowest I've seen them in 17 years across the globe.
<unk>.
Everybody is concerned about tomorrow.
And the focus right now for many international customers is basically tomorrow, not 2023 I do anticipate.
Call. It in the next three months or so we'll probably start start those discussions for I'll call. It the balance of 'twenty, two and and for 2023, but right now everybody just focus for tomorrow to try to get as much cause they possibly can.
As soon as possible to ensure again that keep the lights on I will also tell you that in terms of India. As you mentioned you brought that up most of our coal goes into the engine into the industrial sector not to power Gen sector, it's mainly due to the quality of our cole obviously, India Burns a lot of domestic.
Product, Indonesia, Cole South African coal et cetera.
But we would yield a premium tall that based on our count caloric value. So I think a long winded answer is everybody's concerned about tomorrow 2023 is a little bit too far out for these international guys, but I think we will get in those conversations here call. It in the next 345 months.
And kill the domestic one last question just the domestic guys bring up their inventories I was talking to another coal company on their earnings call last week, and it's sort of the way we phrased it was.
Our guys here.
They can't get there nothing Ken maybe they.
Prohibited or theres something like to keep their inventories higher then that's higher than they should but much higher than they are now.
And the comment was like the utility would like to have higher inventories, but they can't is there anything going on there or anything like that that prohibits them from having higher day supply of inventory.
No I think the comment that was made was.
Likely due to transportation issues.
Obviously, I don't again, I think I mentioned this earlier no. One saw this great uptick I mean, I think many predicted $4 gas I'm not so sure many predicted five and probably not six and when that hit obviously cole there was a lot of gas the cole switching.
And the transportation network, just couldn't respond quick enough to be able to get all this cole to the to the utility. So my assumption here is the comment on inventory levels can't get built up.
In a very short time is mainly due to logistics, but.
Again over time, I think youll continue to see that improve but so long as these gas prices remain in this call. It $5 range. I mean every every ton that gets delivered to a power plant is going to get burned so it'll it'll need to be replaced and that's again. Another reason why we're very bullish on 2022 and for that matter.
<unk> thousand 23.
Alright, Thank you very much.
Yes, Sir.
Okay.
And ladies and gentlemen, with that we'll be ending today's question and answer session.
I'd like to turn the floor back over to Nathan Tucker for any closing remarks.
Thank you. We appreciate everyone's time this morning, and thank you for your interest in 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.
Yeah.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.