Q3 2021 Alpha Metallurgical Resources Inc Earnings Call
Hello, and welcome to the Alpha Metallurgical resources third quarter 2021 results Conference call. My name is Alex and I will be coordinating Nicole what today, if you'd like to ask a question at the end of the presentation. You can press star one on your telephone keypad.
If you would like to withdraw your question you can press star two.
I will now hand over to your highest Emily O'quinn SVP of corporate communications to begin <unk>.
Emily.
Thank you Alex and good morning, everyone before we get started let me remind you that during our prepared remarks, and the Q&A period, our comments regarding anticipated business and financial performance contain forward looking statements and actual results may differ materially from those discussed.
For more information regarding forward looking statements and some of the factors that can affect them. Please refer to the company's third quarter 2021 earnings release and the associated SEC filings. Please also see these documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures.
Participating on the call today are alphas chair and Chief Executive Officer, David Stetson, and President and Chief Financial Officer, Andy Edson also participating on the call are Jason Whitehead, our Chief operating officer, and Dan Horn Executive Vice President of sales with that I'll turn the call over to David.
Thanks, Emily good morning to everyone and thank you for joining us.
Excited to discuss additional details about our third quarter performance with you today.
As usual I'll, let the rest of the team provide their detailed thoughts on the results.
But there are a couple of points I want to highlight with additional context there.
First is the 134% increase in sales realizations quarter over quarter on our business tied to Australia and indices.
Beyond being an outstanding accomplishment by Dan and his entire sales team.
This figures also reminder of Apple's commitment to our customers.
Both in good times and those like earlier this year when unique circumstances, we're much more challenging.
That's because we deeply value our customers and make good on our commitments as much as we've talked about the Australian indices on prior call I'm, especially pleased to report this positive shift.
Another important detail to highlight is the fact that we nearly tripled gross revenues quarter over quarter on our met sales. This is a further testament to the robust market dynamics, and our team's diligence and mining and selling our coal for an attractive price.
An area, where I'm, especially proud of our progress is on our debt and legacy reduction.
Our total long term debt and legacy obligations were reduced in the third quarter by over $75 million.
If you've listened to our prior earnings calls.
You know that I've been steadfast in my assertion that deleveraging. The company is critically important to alpha is longevity.
And therefore debt reduction should be our first priority for excess cash.
Thanks in large part to Andy's excellent work in executing these various prepayments in repurchase we ended the quarter with roughly $500 million in long term debt.
We intend to continue this forward momentum in the coming months, because it's not only creates value for our shareholders.
But it also represents more autonomy for our company.
Allowing us to be less dependent upon the increasingly expensive and exclusive capital markets.
As we decrease our debt load I believe apple becomes a stronger and more self sufficient and better.
Capable and weather the cycles, we have ahead in this industry.
This serves us well both in the near term and as we look several years ahead.
Speaking of looking ahead today, we're providing 'twenty two guidance to shed some additional light on our expectations for the next year and our plans to invest analysis future.
You'll see in our guidance a range of $160 million to $190 million or 22 capital expenditures.
Jason will outline our anticipated capex in more detail.
But this figure broadly includes.
At the midpoint of roughly $120 million of maintenance spending.
And $55 million in project specific investments to strategically expand improve or streamline operations at our existing portfolio of facilities.
Similar to the fourth section that road Fork 52 that we announced last quarter. These projects were rigorously selected based on their expected quick return on a modest capital investment coupled with anticipated long term benefit to the company.
I'm excited about each of these projects individually, but taken together I believe these projects will provide additional portfolio depth and flexibility that we can leverage for years to come.
As anyone who has watched the coal industry over the last couple of decades or so can a test. This is a cyclical business that it can experienced dramatic highs.
And Loews.
While we are undoubtedly experiencing a period of market strength right now.
Conditions can change rapidly.
It's when the market is poor we want to be prepared to act quickly to take advantage of improved pricing and we simply want to be clear headed and ready to adjust any potential drop the market from todays very positive conditions.
This is the kind of long term thinking that informs our capital allocation strategies.
And it's why we plan to continue making prudent and responsible use of our free cash flow we generate.
Paying down debt and legacy liabilities and.
And investing the future of our operations.
With that I will turn the call over to Jason to discuss our operational results and details of the planned enhancements to our mining portfolio.
Thanks, Dave and good morning, everyone. Our operations team turned in another solid quarter performance.
Overcoming several unique challenges in the period, including continued inflationary pressure that has resulted in increased cost for certain materials.
This together with increased labor cost and higher royalties and taxes due to higher sales prices resulted in elevated cost of coal sales for the quarter.
With these factors expected to continue at least for the near term, we're increasing our 2021 med segment cost of coal sales guidance to a range of 73 to $77 per ton.
The 2022 guidance range of 88 to 92 issued today also reflects our go forward expectations for calls.
Despite these factors outside of our control.
Proud of the operation teams across the organization for remaining focused and committed to cost containment and managing the costs that we can directly influence.
Last quarter I spoke about our decision to add a four section at a road Fork 52 mine to.
To increase our output of low vol met coal with a modest capital cost with an expected payback in a matter of six months or less.
Development progress on this additional section ahead of schedule during the quarter, which allowed us to begin begin producing.
<unk> in mid October.
As David mentioned earlier in connection with our issuance of 2022 Capex guidance. We're announcing several planned projects designed to provide optionality and increased efficiency for alpha.
Both in the near term and for many years to come.
In addition to having attractive expectations for return on invested capital each of these projects should provide immediate value upon our completion, while also yielding longer term benefits to the organization.
This project list includes development of two new mines in West, Virginia, Cedar Grove number three mine and the Glen our mine.
As well as adding a four section at our new Lynn Branch mine.
Cedar Grove number three which is not expected to begin production until 2023 will serve as a replacement mine for the hub all coal. We're currently mining from Cedar Grove number two.
We expect this 2023 transitioned to continue the low cost and efficient performance of our band Mill complex.
Glen Alum is a new mine planned as replacement tonnage for our depleting Horse Creek Eagle mine.
Glen Alum is a higher rank and has an excellent mid vol coking coal.
We're currently expected to complete development of Glen alum within the coming year and first production anticipated from the mine in the latter part of 2022.
This call will report into the bar for preparation plant.
And finally, bringing lot of worst section that Lynn branch is a similar calculation to our successful expansion of road Fork 52 with the four section.
This can be done economically and it affords us the ability to bring an additional 400000 tons online per year very quickly.
Today's market environment holds.
Once commission this projects payback in less than two quarters.
I expect the core section to start in the first quarter of 2022.
In addition to these mine projects. Our 2022 Capex is also focused on upgrading and modernizing our couple of our prep plant facilities.
While very productive these plants rely on aging equipment that in many cases, what doesn't solve many years ago to handle different coal qualities than what we're currently handling.
By investing in some modest yet important upgrades at our Marburg and kept our plants will be able to realize higher recovery levels and greater organic efficiencies, which we expect to quickly yield positive return for the invested capital.
At Kepler for example, which was built in 1968, we will update the bond coal circuitry to better accommodate the high quality coals, we're sending through the facility.
Why it is also include enhancements to the existing transportation infrastructure and the construction of a truck loading facility homesite. These upgrades along nicely with the investment we've already made and rose $4 52.
Providing more complementary set up to handle the 25 years of anticipated reserve life and that low cost operation.
Turning them off work, which was built in the mid nineties, we plan to similarly invest in upgrades to better accommodate the higher quality coals that were moving through that facility.
Plans include increasing pepper preparation capacity to the phone coal plant circuitry upgrades are also planned on the clean coal side of the more pork plant.
These upgrades will afford us better quality segregation to optimize shipments and make it possible to handle and distribute mid vol coal at tomorrow workload out.
Together, along with some strategic equipment purchases planned for next year. We believe these special projects and upgrades will lengthen the runway for safe efficient production and preparation of alpha coals well into the future.
We look forward to sharing our progress as appropriate on future earning calls.
I will now turn the call over to Andy for some additional details on our financials for the quarter.
Thanks, Jason as we reported in our release this morning, our third quarter adjusted EBITDA was $148 $2 million nearly quadrupling, our second quarter adjusted EBITDA.
One $9 million.
<unk> sold a total of $4 7 million tons for the third quarter with our met segment volume of $4 4 million tons, representing an increase of nearly 20% quarter over quarter.
Our most significant area of increase resulted in our realizations, which drove gross margins of $36.90, which tripled nearly nearly tripled quarter over quarter.
Our export business linked to the Australian indices yielded realizations.
Under a $159 for the quarter, while we realized a $125 44 per ton on our export business that was based on the Atlantic indices and other pricing mechanisms for.
For the met segment as a whole our realizations came in at $113 51 per tonne, which is an increase of 36% from the second quarter, while relations realizations increased slightly within the all other category to $62 43 per ton.
As you would expect in a pricing environment like this one our Q3 met segment cost of coal sales increased to $76 62 per ton in our all other categories of cost of coal sales rose to $47 47 in Q3.
With increased labor costs, we discussed on our last quarterly call combined with increased materials costs due to inflationary pressures and higher sales prices that require larger royalties and severance taxes, we expect higher cost to be part of the equation for as long as the current market holds that's.
A good problem to have at this point in the market.
SG&A, excluding noncash stock comp and nonrecurring items increased from $13 3 million to $14 1 million.
Yes.
Our Q3, Capex was $22 $3 million up from our second quarter level of $17 6 million.
Along with our increased guidance range guidance range for the year.
Looking at the balance sheet and our cash flows at the close of third quarter with nearly 40% more in total liquidity as compared to the end of the second quarter. We ended Q3 with approximately $78 million in unrestricted cash and keep in mind. This is net of the $75 million utilized to reduce our long term debt and legacy obligations.
And also we had $105 million of unused availability on our ABL for total liquidity of $183 million.
Cash provided by operating activities for the quarter was $96 million.
I'd like to remind everyone. During these times.
A lot of our export sales have payment terms 2079 days. So the cash receipts in the third quarter are not completely reflective of the increased revenue that we're reporting.
It's also worth noting that our accounts receivable balance increased quarter over quarter by approximately $130 million. So that's where a lot of that value is currently being captured.
Convert to cash in the near future.
At the end of this quarter, the ABL facility had $120 million of Lcs outstanding and no borrowings.
The maturity date on the ABL coming up early in next year, we've been actively pursuing a refinance or an amend and extend.
We're nearing the final stages of that process and I expect it will finally finalize the refund in the coming weeks, we expect the size of the new facility to be reduced with total capacity estimate it'd probably be right around $150 million.
The new facility will more than cover our existing LC requirements and also provide.
Some undrawn borrowing capacity.
Looking at our committed in price business for the current year against the midpoint of guidance. Our met segment is almost fully committed in price or 96% at least for the year at an average price of $105 45.
Thermal byproducts.
<unk> of the met segment is 98% committed and priced at an average of $55 76.
Over 90% committed in price for 'twenty, one in our all other category at an average price of $58 33 sales and it's also worth noting that looking at our guidance for net sales.
MIT product in the met segment sales.
There could be some upside just again when you get closer to the end of the year there could be some timing on shipping schedules, where we could have some cargos scheduled for Q1 demand slipped into Q4 so.
Be on the lookout.
As you saw in our release. This morning, we issued guidance with our 2022 expectations. We expect to ship a total of 15, 4% to 17 million tons in 2022, consisting of 14 to 15 million tons of pyramid and 800000 of the $1 2 million tons of incidental thermal within the <unk> segment.
For the all other category, we're guiding to 600000 to 800000 tons.
Based on the midpoint of met segment guidance. The met only portion is 28% percent committed and priced at an average of $195 or 43.
With an additional 23% committed without firm pricing.
The thermal portion of the mass segment is 88% committed and priced at an average of $51 56.
And in the all other category were committed 89% committed and priced at $56 49.
On the cost side, we expect our 'twenty two met segment cost per ton to be in the range of <unk> 88 to $92 per tonne, while all other should come in between 58 to $62 per ton.
Nearly half of the expected increase to met cost of coal sales has hired due to higher royalties and severance taxes.
While labor and supplies inflation does account for approximately 25% each of the increase.
SG&A, excluding noncash stock comp of one time items is forecast to be in the range of $50 million to $54 million for 'twenty two.
As Jason mentioned earlier, we're issuing an important increase of our Capex guidance for next year at a range of $160 million $90 million at the midpoint. This breaks down to roughly $120 million of maintenance Capex of approximately 55 million for raw group of special projects designed to modernize and augment our operation.
<unk> capabilities and that also includes that.
With new mines at Cedar growth number three.
And the <unk> sections that were brands.
Idle operations expenses are expected to be between 30% and $40 million for the year.
And cash interest expense for 2022 is projected to be in the range of $40 million to $45 million. While DD&A is expected to be in a range of $90 million to $110 million. Finally, the cash tax rate is expected to be between five and 15%.
I do want to draw your attention to a new slide in our investor presentation that outlines some additional detail on our Nols available available for utilization as well as certain limitations on their their usage.
Some of those limitations being tied to <unk>.
<unk> two ownership change.
Issues.
With the markets, where they are thing is really important to give as much granularity as possible to the market around our potential cash tax exposure and the pieces that make up.
Our expected tax rate.
But as you can see from our guidance in David's discussion of debt reduction at the start of the call.
We have been pretty resolute and steadfast in our previously outlined cash allocation strategy and.
In the third quarter, we reduced our long term debt and legacy obligations by over $75 million.
This included $6 $6 million in scheduled long term principal payments for the quarter as well as a voluntary prepayment of $31 million in principal on the term loan.
Additionally, we repurchased at a discount roughly $18 7 million in outstanding principal borrowings.
As previously announced we made a $200 million payment in July to extinguish one year ahead of schedule. The reclamation funding obligations with the West Virginia Department of Environmental protection.
We also negotiated retired a $40 million of related surety collateral, which meant the early payment also allowed us to extinguish this liability at a lower net cash outflow than we previously expected.
Along similar lines subsequent to the end of the third quarter Alpha made an early payment of $4 million to west Virginia to EEP to eliminate the legacy obligations related to water treatment.
In addition to this payment to West, Virginia, all liens against certain real estate and other assets securing those obligations were released.
Alpha made another payment of $3 $3 million to eliminate the remaining Kentucky for review reclamation bonding or water treatment legacy obligations and we've also repurchased a small amount of our contingent revenue rise reducing that legacy obligations as well.
So in total over the past four months, we've extinguished approximately $85 million of debt and legacy obligations for around $70 million.
Cash payments, so that's about a 17% discount over face amounts.
We're pretty excited about that.
Alongside our efforts to reduce our debt or legacy liabilities, we've actively worked to improve our bonding exposure across the organization.
Year to date, we've achieved a net bond reduction of over $175 million, which represents a 50% reduction year over year. These figures do include the Cumberland divestiture, but even if those associated bonds are excluded from the total alpha still had a net reduction in outstanding bonds of more than $40 million for the year to date period.
We do plan to continue deleveraging the enterprise through actions like this because it reduces our reliance on external third parties and it allows us to exert more control over our future capital investment the investment as Jason outlined earlier and is also a key driver both in the longevity and efficiency of our infrastructure.
Which we believe will translate into an even stronger company that is built for long term success.
With that I'll turn the call over to Dan Horn for market analysis, and an update on the 2022 domestic sales negotiations.
Thanks, Andy and good morning.
To start off with a look at the most recent market dynamics globally. The latest World Steel Association crude steel production statistics show, an eight 9% decline in the year over year total production for September.
<unk> September production was 21, 2% lower than in September of 2020.
However, in Brazil production increased 15, 3% and India showed an increase of seven 2% for the year over year period.
Regionally North American and European crude steel production increased 19, 2% and 15, 6% respectively against the year ago period.
The year to date U S steel mill capacity utilization rate here was 81, 3% through mid October with the metric recently, reaching a multiyear high in the <unk>.
85% this.
This is encouraging and something we keep an eye on as we survey the market landscape.
We're all aware that colon disease have increased significantly over the course of the third quarter. For example on July one the U S East Coast Highball, a index was at $1 93 per metric ton rose to $377 per metric ton on September 30th the.
The U S East Coast low Vol index, followed a similar path moving from $217 a metric ton at the start of the quarter to four $412 per metric ton at quarter close.
The early year volatility in the seaborne metallurgical coal market began to subside in the second quarter with a more traditional equilibrium between Australia and the Atlantic indices continue into the third quarter.
Despite China's continued band ban on Australian coal imports the Australian premium low vol index more than doubled in the third quarter from $190 a metric ton on July one up to a $401 per metric ton on September 30th.
This yielded much higher realizations for our for our Aussie linked tons during the quarter further confirming the importance of our decision to continue delivering on our customer commitments.
Throughout this brief period of lower pricing.
While the trade tensions between China, and Australia have not yet been resolved. This has created opportunities for other producers to fulfill China's need for high quality coking coal and alpha's products have been well received there.
Year to date, including business that has been agreed upon but not yet shipped alpha sold approximately $1 9 million tonnes of metallurgical coal into China for the 2021 calendar year.
While theres no way to know when circumstances may change between China, and Australia, we've been pleased to expand our customer base. This year.
And we hope to continue cultivating relationships that could develop into long term contracts in the future.
We are also strategically expanding our marketing efforts into several regions of Asia through a third party marketing agreements.
In order to grow alphas metallurgical coal sales into Europe into Asia.
Now for a word about our 2022 commitments.
As you know this is a busy time of year for the sales team and I'm proud of the outstanding work from all of my team members over the last three months.
Third quarter was another solid period for us with increased realizations on sales in the quarter alongside a tremendous amount of work to set up for success in 2022.
I am pleased to report that we have secured commitments for roughly $3 7 million tons of coal at annual fixed price terms with domestic customers and another nearly 400000 tons for export also at fixed prices.
There are still a few ongoing conversations with customers that have not that have the potential to result in additional committed business for next year.
But even with where we are today, we like our position for next year and it affords us the flexibility to capitalize on further export market opportunities, which remain at lucrative levels.
However, given the volatility in this industry are committed and priced tons for next year can be considered an excellent hedge since we know we have found a home for just over 4 million tonnes of ore coking coal for 2022, and an average price of $195 and 43.
But we do our best to analyze market signals, none of us can truly know what lies around the bend.
Therefore, we continue to work hard run our operations safely and responsibly and stay close to our customers.
This concludes our prepared remarks for the quarter.
Operator, we're now ready to take questions.
Thank you we will now proceed with the Q&A if you'd like to ask a question you compress star one on your telephone keypad. If you would like to withdraw your question you compress style.
Please ensure you're on mute locally when asking your question.
Our first question today comes from Lucas pipes from B, Brian any securities Lucas. Your line is now open.
Thank you very much and good morning, everyone.
First Dan So somebody asked me to ask you how it feels to be selling coal at these levels, but Tim.
All joking aside.
When we look out to 2022.
Very strong sales book to date do you expect to deliver at layer in additional fixed.
Fixed price contracts here or would you say that.
Fixed price season has concluded at this time.
Thank you.
Thanks, Lucas and I appreciate the question.
I do theres still opportunities out there for some fixed pricing the domestic market is not 100% settled yet and we're absolutely still seeing demand in the next several months from our other markets, whether it's India, Brazil, Europe, So theres absolutely.
The opportunities to layer in more fixed pricing, whether it's short term or spot medium term there's there's.
Just a lot of opportunities.
Okay. Okay.
Do you have a can you share where you kind of expect to end up on that.
Fixed price basis for 2022.
At the end of this year.
50%, 40%.
What would be your guess.
Yes.
Yeah, I don't have that number handy Lucas.
You mean on the overall book.
Yes on the medical book yet.
Yes, Lucas this is David.
We're we're in the high Twenty's, where.
We're opportunistic if we see opportunities that we like.
On the domestic front or a fixed price front.
We will seize it if not we're very comfortable where we stand today from a mix of domestic domestic fixed versus international so.
We feel very comfortable where we are right now.
Thank you. Thank you very much for that and then my second question is on the capital structure balance sheet side.
<unk> highlighted a number of times.
In your prepared comments how that reduction.
Liability reduction as a priority.
Given given the visibility you have today with.
Strong sales book, where pricing is today do you have.
Can you share with the market when you would expect to be net debt zero is that a target instead of go youre working towards and again like when would you expect to get there. Thank you very much for your perspective on that.
Well I'm not going to give a specific timeline on that because it takes us beyond what we normally disclose I can tell you that I stand by my comments I made I'm steadfast.
And the fact that we will use free cash flow to reduce our indebtedness and that is where my priorities are so.
Everybody can run their models and figure that out on their own but my goal is not altered at all we're paying down our debt building robust cash balance to take care of.
Ourselves or any kind of downturn occurs the market be able to fund our own capital projects in the future invest in our future. That's matched my focus is 100% focus at this point in time Lucas.
That's very helpful. Thank you I I I do ask more but I'll jump back in queue for now thank you.
Right.
Thanks Lucas.
Yes.
Thank you Lucas our next question comes from Nathan Martin from the Benchmark Company Nathan Your line is now open.
Hey, good morning, guys. Congrats on the quarter and are continuing to work those debt levels down.
Thanks Nate.
I wanted to start on the cost side as I guess I've been doing on most calls this quarter totally understand obviously, the inflationary pressures everyone's saying in the market.
Sales really costs.
Obviously, that's a good problem to have.
So I really appreciate the slides you guys put in your deck kind of bridging the guidance for 'twenty, one to 'twenty, two because I think that implies 20% or so increase was probably higher than what most investors were expecting but I was hoping maybe you could dissect this a little bit more with the $7 increase you have on the slide and sales related costs, maybe what net pricing.
Assuming with that and how about maybe rail rates as well and then with the $5 increase in labor and benefits.
Some of that temporary or is that more structural Andy I think you said that those levels are kind of expect it to remain high.
Price environment, So just any color on there thanks guys.
Hey, Nate its Andy.
Yes.
I think what we typically try to do and I think either you or Lucas asked this question for a couple of years and I'm going to try to maintain the same answer every time, we're pretty well informed by what the futures are.
For the met pricing so.
We may not adopt the exact same numbers, but we do try to adopt the same kind of curve and of course with the backward dated curve.
We're looking at.
Something pretty close to what what futures are trading are indicating right now.
We do tend to as always we tend to be a little bit more conservative so.
We locked for at least for internal purposes, but wed like to pull those numbers back a little bit, but our curve isn't terribly dissimilar from the futures curve as far as pricing that drops the.
The sales price related costs.
On the labor side, yes.
Look there's a Jason can answer this way better than I can but there's a real there's a real labor concern a labor issue in central Appalachian.
We don't want to be delusional and pretend that it doesn't exist. So we want to be very transparent that it exists and we're all I mean, we are all having to deal with it and it will be continued cost pressure whether it's.
Competition for labor in this hot market or whether it's just generally.
Shrinking labor pool for folks, leading the industry and finding other things to do so.
We we want to recognize our employees, we want to recognize our monitors they do a fantastic job, we want to make sure that they are very well compensated and <unk>.
In times like these we are actually happy to give a bump here and there just to recognize and let them.
Feel some appreciation, where we can afford to spend the money to support them and we got it we know just invest in Capex, we invest in our people too and this is really important to us so.
Everyone likes to keep costs low, but this is one of those points in time, where the cost has crept Donaldson for the most part it's.
These arent necessarily controllable costs because these are things we have to do to make sure. The coal continues to be mined.
Great. Thanks, Thanks for that color and then just any comment on the rail rates as that part of that $7 sales related costs increased two out of fear.
No no that that cost happens and that's captured.
And our net back realization numbers not in the cost okay.
Secondly, got 18 months about rail stuff anyway.
Okay, perfect and then maybe kind of going over to the new projects you guys have announced are they expected to change the cost structure of <unk> I guess, that's your from your table you know sito grocery replacement Glen alum kind of replacement tonnes, there as well how many tons of production maybe it could we expect from those spine once youre up and running and how does that really change the.
Overall metrics if at all thanks.
Hey, Nate this is Jason I guess I'll start with Cedar Grove, three which is basically just it's 100% sustaining.
So we have a depleting mine.
Basically the same quality the same geology with the same expected output. So that's just kind of a push.
The fourth section that Lynn branch.
You should expect up to 400000 tons a year of incremental production.
On top of where we are today.
With very similar to maybe slightly decreased cost structure for incremental tons as you normally autumn on.
And then the last mine, the Glen Allemande, which wont come into full production until the very end of next year. It's also a replacement mine, but it's kind of replacement plus because it is a significant improvement to the quality of their tomorrow for complex.
But if you look at incremental overall.
Tonnage increase it would just be the Lynn branch or section.
Perfect appreciate that Jason and then just maybe one more for now.
Strong shipments obviously you guys in the third quarter, congrats on that and like well above production is that driven by some inventory sales there or maybe even any purchases and then if we kind of look at the fourth quarter.
I had a client asking me already you know even if we assume the high end of guidance implication that sales will definitely be down maybe you can just talk about that expectation a little bit.
Okay.
Yes.
I'll, let Dan filling the gaps if I leave anything out.
Addressing the guidance question.
So thats kind of what it was kind of hinting at talking about the fact, when you get to year end. There is a chance that you could have some I think can happen either direction you could have some cargo slip into Q1 out of Q4 or vice versa fulsome cargoes, a little bit ahead, I think it feels like with the market being where it is there's probably a higher likelihood.
That would pull from and from Q4 or Q1 into Q4 so.
We could we could actually get above our guidance and beyond.
Comfortably at the higher end, but.
That's again, that's really for more.
Todd is shipping schedules and how supply chain is holding up and how the ports doing things like that so.
Probably going to start closer to the higher end, but we didn't didn't want to go so far as to change guidance on that piece.
Got it.
Thanks for those comments.
It's positive I think one of your competitors, so, but we're expecting maybe sometimes it could slip from <unk>. So that's good sounds like logistics might be growing a little bit better for you guys. So very helpful. Thank you guys for the time as always in the best of luck in the fourth quarter.
Thanks, Nate Thank you Nate.
Thank you Nathan.
A reminder, if you'd like to ask a question you can press star one on your telephone keypad.
Our next question comes from Lucas pipes from B Riley Securities Lucas Your line is now open.
Sorry, Lucas how are you can you hear me.
Sorry about that I was on mute. Thank you very much for taking my follow up question.
I want I wanted to ask about.
Modernization Capex and you may have touched on this in your prepared remarks, but but is this part of our sustaining capital of gross capex.
Hey, Lucas this is Jason when you were talking about the preparation plant upgrades that we that we mentioned today.
That is correct.
Yeah. So it's.
It's both.
So it's about replacing tired equipment.
With newer more efficient equipment.
But in both cases at Kepler <unk>, you know, we are expecting higher coal recoveries.
From from the raw coal so there is an incremental tonnage gain.
Bye bye.
Completing both of these projects.
Got it.
What sort of magnitude are we talking about order of magnitude both combined about 150 160000 tons a year.
Okay, Okay and in terms of dollars capital dollars.
Yes, we have I think we've indicated approximately $120 million of maintenance capex.
$40 million to $50 million of.
Of the capital.
<unk>.
Jason was outlining earlier.
Okay.
Yeah, No I was I was.
Curious about.
About.
About this it seems like a low hanging fruit. So I appreciate this.
These additional comments and then my my my second follow up question is.
It's in regards to.
Our commercial strategy as it relates to Asia.
I.
You may have missed the details, but did you comment on.
Additional third party partnerships for marketing colon Asia and do so.
What what scope to SAP partnership path.
Yes Lucas.
Really prepared to comment more on it but what we've said we are alpha will continue to sell our coal into the markets, where we have long standing relationships.
And Asia, including India, and China, but.
Some of the other Asian markets, we're excited to.
The announced partnership but I don't have any other color to give you on that at the moment.
Okay. Okay.
I appreciate that thank you Dan and then.
Another follow up question.
Yeah, Yeah, adding incremental production here, obviously terrific to see that in this in this market environment and I wondered kind of.
With this fit in with your average cost structure are you looking to lower your average costs with for example, the 150000 tons of additional recoveries.
Recoveries from the prep Atlanta that that should have very low cost to it so it's a kind of.
Obviously there are these are there are a few moving pieces here on the cost side you are adding production.
We have the sales related costs nearer the inflationary pressures, but but if you kind of were to tease out the.
Cost.
Of the incremental tons, which they shake out relative to Europe.
Legacy cost structure.
Hey, Lucas this is Jason again, so I.
I guess first you know the the $50 million of.
Efficiency or or improvement Capex that David spoke to.
Not all of that are and these preparation plant upgrades, yielding 160000 tons a year.
But to your point, yes, the 160000 tons. Once once these projects are commissioned our ultra low cost.
But it's not material enough to move the guidance across 15 million tons.
Yes.
As we've always maintained.
We had.
Developed a business model, we develop operational practices that.
Do give us flexibility to ramp up and ramp down.
As the markets dictate these markets today as positive as they are we're taking every advantage to meet those demands.
But at the same time as Jason has indicated in the projects. He's brought forward to us on the facilities. They will make us more efficient not only now to take advantage of these markets, but more importantly, as the markets.
Began to fall into a normalized area, we'll be much more efficient as an organization as a result of these this capital we're spending on our various facilities. So we're excited about it we do not look at those from a perspective of our cost, but but rather meeting long term investment in our future here.
Yeah, that's kind of what I was getting at so I really appreciate the color and again best of luck.
Thank you Lucas.
Our next question comes from Matt Russell from Hudson Bay match. Your line is now open.
Hey, guys. Thanks for taking the question.
On the on the 400000 of net export business. That's contracted for next year is that is that just like a normal cadence of shipments or do some customers. There that are actually doing term business.
That's actually some of both that there is some fixed some near let's call. It medium term deals in there and there's some that's got a.
Let's call it a full year cadence, so a little bit of both.
Got it and then if I if I look at the.
Cost of sales bridge from the slide deck, the $7 that sales related.
If I just like should I, just apply sort of your historical royalty rate.
And assume that that means your price deck has call it plus plus 100 plus $120 of.
Net sales realization delta year over year.
Well, that's one way to do it Matt I mean, it doesn't account for because there are different royalty rates and they have shifted a bit as we've moved to new.
Mines.
Pretty significantly over the past three years, particularly moving into.
Black Eagle Road Fork 52, and land branch, so that's probably a decent proxy.
But again, it's not going to be terribly exactly like I said, we always try to start with is the futures.
The futures curve.
And then we.
For our purpose, we'll dial it back just a little bit for conservatism, but I.
I don't think what Youre, saying is this is terribly crazy.
Thank you Matt not the clinic concludes today's Q&A session I will now hand back over to David Stetson for any closing remarks, David over to you.
Thanks, I want to thank the entire alpha team for an excellent quarter, we it's been a.
Phenomenal time, and we look forward to the future quarters as well as usual I'd like to direct everyones attention to the investors section of our webpage, where youll find an updated investor presentation that will accompany our call today.
In closing I want to reiterate how pleased I am with the team's performance in Q3, it's truly an outstanding quarter and executing on our vision to advance the goals of organization, we plan to keep up the good work and look forward to providing an update on alpha <unk> full year 2021 performance. During our next earnings call I want to thank everyone, who joined us today.
This call and for your interest in Alpha Metallurgical resources have a great rest of your day and your weekend.
Thank you for joining today's call you may now disconnect.
Wow.
Uh huh.
Okay.
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Right.
Yes.
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[music].
Okay.