Q3 2021 Ramaco Resources Inc Earnings Call
Thank you for standing by your conference will begin in two minutes.
Can your conference will begin in two minutes. Please standby.
[music].
My name is already tried and I'll be your conference operator today I would like to welcome everyone to the remark of resources <unk> Arthur Lee Conference call. At this time, all participants are in a listen only mode.
Shall we just speakers from works there will be a question and answer period and instructions will follow at that time.
I will now turn the conference to your host Jeremy Sussman, Chief Financial Officer. Please go ahead.
Thank you.
On behalf of Grandma Covid resources I'd like to welcome all of you to our third quarter of 2021 earnings Conference call.
With me. This morning is Randy Atkins, our chairman and CEO, Chris Blanchard, our Chief operating officer, and JC fan and our Chief commercial officer.
Before we start I would like to share our normal cautionary statement.
Certain items discussed on today's call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements represent remco expectations concerning future events.
These statements are subject to risks uncertainties and other factors many of which are outside of our amoco's control, which could cause actual results to differ materially from the results discussed in the forward looking statements.
Any forward looking statements speaks only as of the date on which it is made and accept as required by law Remco does not undertake any obligation to update to revise any forward looking statements whether as a result of new information future events or other tour events or otherwise.
Lastly, I would encourage everyone on this call to go onto our website <unk> resources Dot com and download today's investor presentation under the events calendar with that said, let me introduce our chairman and CEO Randy Atkins.
Thank you Jeremy.
As always we welcome everybody joining us today.
The past few weeks have been a very good run for Amoco.
We wanted to discuss today not only our third quarter results, but also some significant post quarter results and events.
When we last spoke after the second quarter. We felt we were on the verge of a very special positive transition in our overall business.
Basically since the end of the second quarter, our stock prices climbed from 550, a share to roughly $17.
Our market cap is similarly grown from about 240 million in June to over $700 million today.
We take great pride in what we've accomplished and we've done this in less than five years starting from scratch.
As a commentary of where we currently find ourselves I am reminded of that line, which goes who says Christmas can't come a little early.
We are now three quarters through having our best year financial and operational performance since we went public.
As impressive as that is wood.
Would it fails to convey as the transformational period, we now find ourselves in.
Over the past few months and indeed, especially over the past few weeks a combination of factors have come together almost at once to move us forward into a different dimension as a public company.
I realized most of the recent news is already in front of you, but many points bear noting again.
We will print our strongest year financial results.
I won't handicap are full year 21 projections now, but Q4 will undoubtedly be the highest quarter. We've had since we went public.
It is an understatement to say that full year 21, we will show a multiple of our 2020 results of only $19 million of EBITDA.
What is more impressive is that I can tell you.
That 2022 will all show show a significant multiple of it but.
From what we will do in 2021.
We feel comfortable that our 2022 announced domestic sales.
On about only half of our production will translate into roughly $325 million in sales and about $190 million of EBITDA.
Analysts can do their own math on what the other half of our sales will generate but it clearly positions us into a different.
And much larger financial category as a public company.
We have already disclosed 2022 domestic sales of basically 1.7 million tonnes priced and an average of $196 per short <unk>.
Our cash mining cost or today and the first quartile of the industry and our main El Creek complex is produced cash mining cost averaging $63 per ton through September.
We expect to show consistent low mind cost carrying into next year.
And commenting on June 2022, we feel that both the domestic and international markets have continuing underlying strength and some distance left to run.
There may be occasional gyrations in price, but there is a fundamental demand for steel and met coal, which does not match available supply.
Essentially the lack of capital availability and overall ESG pressures have created an inelastic dynamic which will continue to put an artificial damper on any meaningful new long term supply creation.
Looking short term on the market. We're also one of the few coal groups that is maintained dry powder of unsold production for Q4.
We started the quarter with roughly 180000 tonnes left to sell and have about 100000 left.
Some tons might slip into twenty-two because of export logistics, but all of our new Q4 sales will be indexed exports sales indoor market, which is showing current.
Low ball Atlantic benchmark pricing north of $430 per ton.
These sales will match against our low cost production and Jason fan and we will talk more about our sales in a moment.
Speaking of sales are sales for 22, and the balance of 21 provide the financial foundation for moving us over 200% up from the 1.7 million ton production level. We showed at the end of 2020.
We will be at least at three 7 million tons or more by the end of 2023.
Ultimately, we hope to turn this over 5 million tonnes in the next few years.
As part of the planning for execution of that production ramp.
Earlier in Q3, we engineered a creative $35 million unsecured baby bond issuance.
This superb provided us excuse me liquidity to capture what we hoped might be a strong near term opportunity to acquire the <unk> assets from our neighbors at Coronado.
This transaction announced last week had our two companies circling each other frankly for years.
The industrial logic abusing the contiguous idled Amazon a prep plant to wash, our berwyn coal has always been compelling Fran.
Frankly, you can see the plant from the face of the Berwyn mine.
As much as the awarded trucking cost withdraw we were closer to full production and tell rather we were closer to full production of Berwyn, We frankly did not feel we have the liquidity to make the purchase.
The baby bond solve the liquidity issue.
And then the management at Coronado very professionally negotiated to allow us to move forward to acquire what was for them a non core asset.
The combination of Berwyn and <unk> operating together now creates a very formidable mind complex.
It is a beige production level of 1.5 million tons, a year of low cost high quality low ball call as well as a long life 100 million ton reserve base.
We also believe the combined mine.
Has some further production upside above the 1.5 million ton level.
Our basic economics at Berwyn change overnight from the trucking savings alone.
Combining that with the ability to double production makes this a highly compelling deal for us.
Which somewhat now brings me to the where do we go from here a moment.
First.
We start returning capital back to our shareholders.
We hope our shareholders have already noticed that this has been a very good year for them already and that we have over a 500% increase in our stock price but.
But we hope to make things, even a bit better in the years ahead.
For a long time, we have advertised that we wanted to be a dividend paying company. However.
However, beginning life is essentially a startup we needed to reach a point of being comfortable we had achieved a critical mass in terms of both size and liquidity as well as sustainable free cash flow generation.
Basically we wanted to ensure that once we started paying a dividend we would continue on that path and indeed grow it over the years.
Our board has now approved the payment of the regular dividend and we will announce details of that before year end and after our next board meetings.
Next we wanted to look forward to make sure we were securely on track to reach our overall production threshold of approximately 5 million tonnes.
Reviewing our portfolio of organic growth projects, we can easily add incremental new tons to get there.
First there is the 500000 ton expansion of our Elk prep plant.
Then we add another 500000 tons from our jaw bone.
Mine near Knox Creek, as well as 250000 tons from the newly acquired Laurel Fork Man, which came with the Ammanati purchase.
These projects along with the three 7 million tons from our current El Creek in Berwyn Mountains push us to roughly 5 million tonnes.
If we were able to complete the permitting of the Ram mine in Pennsylvania that will push us over 5 million tonnes.
As important as the tonnage.
We can complete the expenditure to complete all these projects from internally generated free cash.
We may look to equipment lines, where appropriate but we are essentially now in the position of being self financed to achieve all of our overall future production goals.
We will always continue to be opportunistic, but we do not feel the need to look at the purchase of the existing operation of other companies to get where we would like to be.
So where does that put remco.
My answer would be to expect we will continue to meaningfully grow and returned capital to our shareholders at the same time.
As for growth for 2022, we are already looking at a 10 X of our 2020, EBITDA and that counts only half of our production.
We expect to grow using a fortress balance sheet with little to no that little to no aro or.
Other liabilities and to end up bluntly with a lot of cash ran.
<unk> becomes a very formidable cash generation machine, which will continue to throw off increasingly larger amounts of free cash flow from adding low cost production.
We hope to continue to be somewhat insulated from market pressures because of that low cost of production as well as our strong financial condition.
We also look forward to hopefully soon sharing with you what we regard as a future transition for Amoco that is both in addition to and beyond its core business as a supplier of metallurgy colder or steal customers.
Many in the financial community have commented that one of the headwinds for coal related equities, even in a strong market conditions is the lack of a credible vision for what comes next.
We live in a world faced with the declining use of the commodity as a thermal coal feedstock.
Looking further into future there is concern that perhaps hydrogen might one day supplant met coal as one of the base ingredients and blast furnace steel production.
Although with respect met coal that expensive possibility may probably be almost two decades away. We're still starting to look ahead.
I will leave you then in the months ahead, we will be describing what our version of the concept of the future for Amoco may look like and what comes next.
Now with that I would like to turn the floor over to the rest of the remco team to dive into more detail on finances operations and market. So Jeremy Please run down our financial metrics. Thank.
Thank you Randy I'll start by going over our third quarter of 2021 financial highlights.
This quarter with both our highest overall third quarter of adjusted EBITDA in our history, and indeed, our third highest quarter overall.
Earnings per share of 16 was up more than 240% from a year ago, while third quarter adjusted EBITDA of $17.8 million was up over $17 million from a year ago I would note that revenue for the past quarter with negatively impacted by a sales mix whereby.
Whereby 75% of our coal with previously contracted at lower legacy 2020, domestic price contracts versus only 48% in the first half of 2021.
Turning to our forward outlook for the third time. This year, we are increasing our 2021 production and sales guidance.
We know anticipate overall 2021 production of 2.2% to 2.4 million tonnes.
Up from two 175 to 2.4 million tonnes previously and compared to 1.7 million tons in 2020.
We have increased our 2021 sales guidance from two four excuse me from 2.2% to 2.4 million tons to now to three to 2.4 million tonnes. We know anticipate 2021 cash cost of 63 to $65 per ton at our Elk Creek complex up from 61% to 50.
$5 per ton previously, but down from $70 per ton in 2020.
The increase is due to higher sales related costs is spot pricing continues to both move higher and hit new record each month.
We now expect total year, and 2021 capital expenditures of $26 million to $28 million up from $23 million to $26 million previously simply due to incorporating our newly plan spend at the <unk> complex, Chris will discuss the Ammanati acquisition in more detail.
In terms of our booked 2022 sales, we now have roughly 1.7 million tonnes secured with north American customers and $196 per ton.
Our year to date 2021 cash costs are $67 per ton overall, if we adjust upward for higher sales related costs on these book tons and keep everything else constant we would be looking at margins of over $115 per ton are over $190 over $190 million.
And adjusted EBITDA.
Now move into our balance sheet I am pleased to announce that our principal lender Keybanc has increased our revolver from $30 million to $40 million.
On the back of <unk> are anticipated production and earnings growth.
We have also extended the maturity date of a revolver to year and 2024.
I am also happy to note that we continue to be the only publicly traded use coal company with virtually no net debt.
Furthermore, we ended the quarter with another record liquidity figure of $74 million. These.
These liquidity metrics of course do not reflect the payment of the <unk> acquisition, which we expect to close later on this month.
Importantly, however, we anticipate that the fourth quarter of 2021 will produce the strongest quarter of EBITDA on record for Amoco.
This year, we started with an $89 per ton average price for our domestic contracts for 2022, we start with half of our production now priced at $196 per ton for our domestic contract for.
For 2022, we expect to produce more EBITDA frankly by a wide margin than remco had accumulated cumulatively generated since inception.
While we will be internally refining our 2022 budget over the next month or so.
At this time, we expect 2022 production of approximately 3.1 million tonnes. This incorporates roughly 200000 tons of production from the Laurel Fork mine from our new Amanita reserve.
When the additional production from the rest of the acquired Manada reserves reaches full production capacity of 700000 tons by year end 2023, we anticipate that we will be producing at an overall three 7 million ton per annum run right.
We now have fully permanent growth to hit what we are now calling and medium term goal of 5 million tons per year of production.
<unk> show this progression on slide six and slides seven we.
We expect the capital expenditures for achieving all new production to be internally finance from free cash flow with that said I would now like to turn the call over to our Chief operating Officer, Chris Blanchard.
Thanks, a lot Jeremy.
As mentioned, we certainly have a lot of exciting activity moving forward.
However, before discussing that I want to highlight some of the operational milestones that have been reached since our last call.
First we completed a very solid quarter at our Elk Creek complex.
Despite the welcome increase in our sales related costs from higher pricing. There has been some less welcome inflationary pressures on our raw material pricing.
The last cost controls remained firm and overall cash cost for the company remained low at roughly $71 overall.
But at 67 for our main Elk Creek complex.
Our third quarter performance also saw some impact from an unfortunate surge in COVID-19 cases, amongst our workforce and their families.
Which widely tracked with similar cases throughout Appalachia and the nation.
In response to this we rolled out a vaccine incentive program throughout the entire company for the workforce.
I'm happy to report that it was well received the.
The percentage of our workforce that is fully vaccinated.
Now as well over double where it was prior to the program rollout just two months ago.
We hope these steps leave us much better insulated from any possible future searches and the virus.
We also we have also reached a number of operational milestones in the past several months.
At Big Creek or surface mine reach full production levels during September.
Our high wall minor on that job was delayed slightly by logistics issues related to COVID-19, but reached full production in October.
The mid volatile quality from this mine has met expectations and we look forward to shipment on our first sales later this month into the strong pricing environment.
At our Berlin mine slipped construction activities increased pace during the third quarter and we reached the Pocahontas number foreseen and that horizon in October.
Work continues there on infrastructure related tasks, but nominal coal production has started and will ramp throughout the fourth quarter as we transition from construction to production.
Looking ahead in Berlin. This first operating section will be developing the mainline entries and setting up the start areas for the sick and future mining sections.
As previously noted we.
We expect to reach full base level production from the Berlin mine in the second quarter of 2022 when.
When we transition equipment and crews from our adjacent triad, Oklahoma is for mine as it exhausts reserves.
By year end 22 will be at full 750000 annual tons of low volt production from Berwyn mine.
Turning to the future the <unk> acquisition.
When this when this transaction is closed in a few weeks, we will have acquired advantaged low ball reserves and five primary themes.
The existing idled preparation plant in several active mining permits.
We will immediately start on nine development development and rehab construction projects to make this acquisition accretive as quickly as possible.
The first of the two most critical projects will be the restart of an adjacent underground mine in the low volatile mid volatile <unk> referred to as Laurel Fork.
This mine has been on Karen maintenance, while controlled by Coronado and can be brought into production quickly within we hope six months.
Our second priority project, while underground teams are working at the mine is simultaneously to refurbished and modernised the existing ammonoid preparation plant.
Our current plans are to bring plants into production at less than full capacity as quickly as possible.
With 50% utilization expected by early summer.
This will allow us to begin use of the plant to capture our avoided trucking cash cost savings earlier.
We expect a full refurbishment of the preparation plant to continue throughout.
2022, reaching full name plate processing by the end of the year.
This will coincide with the full ramp up of the Berlin complex beginning.
We expect to continue some work at the plant into 2023 with a rail and loadout upgrade to be more efficient floating trains for our customers.
Additional operational and cost synergies will be realized as additional mining units are deployed in our borough in mind to mind, the adjacent ammonoid reserves.
These reserves were all but stranded without access as they are located well below drainage and miles from any processing facilities.
However, we are able to access them underground by simply mining across the property line from our existing Berlin people of mine.
We expect this additional production to start coming online one plant reaches full production with.
With expected upper productivity levels of up to 1.4 to 1.5 million tonnes per annum of high quality low volatile coal.
Also we will not part of our current planning we believe there are multiple other opportunities and other reserves and themes acquired with them in order to further extend our Big Creek operation and provide additional production to our Knox Creek preparation plant.
That largely hits the high points of what we've been doing in field the past quarter, what we plan to accomplish and 22.
It's been a productive year, thus far and it seems we will only step on the gas is the year changes.
With that I'd like to lead yield the floor to our chief commercial officer adjacent fan to give some color on the market supporting our growth plans.
Thanks, Chris and good morning, everyone. In my remarks, I will share an overview of what we're seeing in the market and.
Our current in forward sales outlook.
We see the current supply and demand in balance remaining well into 2022 and likely beyond.
The remains of severe global shortage of hard coking coal relative to the amount required to make coke to support pig iron production going forward.
The market is very exposed to any sort of supply disruption or demand increase.
On the supply side year to date 2021 U S met coal production is down 15% from 2019 levels. According to IHS Judy.
Suggesting much of the production that was idle due to COVID-19 demand destruction never return despite current record prices.
On the demand side with steel pricing of production remaining strong we believe the coking coal supply deficit and historically strong price momentum will.
Will last longer than past market upswings, providing strong tailwinds for Ram ago.
Turning to our sales book during the third quarter, we continued to fulfill domestic commitments book during the low point of the market during August last year.
With our sales mix split around 75% domestic and twenty-five percent city-born.
However, we were also able to add three new customers to our customer base during the quarter.
Looking ahead to the fourth quarter.
With the additional volumes from our Berwyn Lowball mine and big creep mid vault mine, which will largely move seaboard or.
Our domestic seaborne split will move closer to 60% seaboard.
Anecdotally, we have been getting way more inbound calls from customers asking for spot trains they only have availability for those.
Thus, allowing us to be very selective and pushing for pricing above prevailing indices.
Moving on to 2022, we have recently concluded our most successful domestic coking coal sales efforts since inception.
Placed 167 million tonnes into the North American market for 2022.
At an average price of about $196 for net done at the mine.
Based on our projected 2022 production of roughly 3.1 million tons.
This leaves roughly 1.5 million tonnes remaining to be sold next year.
Thus, we expect our of 2022 sales mix closer to 50 50 domestic versus exports.
In terms of 2022 exports, we are similarly, seeing more demand for our coal.
What we will have available supply for at least for the early part of the year.
As a result, Q1 prices that being discussed are in excess of our 2022 book domestic pricing.
With that said I would now like to return the call to the operator for their Q&A portion of the call operator.
Thank you.
At this time to ask a question.
I'll need suppressive fire whine and carry telephone.
Which tickets are your question just press the pound key please standby, while we compiled the Q&A roster.
Our first question is from the lineup Lucas tiresome be O'reilly Securities. Please ask your question.
Good morning, everyone and congratulations on the terrific cap across multiple effects.
Like.
My first question is in regards to Ah Menotti.
It sounds like there's some really terrific synergistic.
Opportunities with this acquisition and I wanted to see a way to put a.
A value on that how would you frame up the savings between now crossing the boundary line.
I'm walking the additional reserves et cetera, I would really appreciate that that perspective.
Well Lucas I mean, I think first and foremost obviously we've.
We we've been developing our borough in mind since 2017, so obviously we're.
Basically at the at the advantaged Pocahontas number 14, now, which which we had a few weeks ago.
So so we're tracking that coal right now to our to our Knox Creek Prep plant.
Let's call it on a clean ton basis kind of low double digits per ton when we when we hit full berwyn capacity seven.
750000.
The year. So just on the trucking savings alone I think when we say millions of dollars.
It's significant.
The second thing to note that is.
The <unk> call is owned in fee.
So.
Effectively.
There is no royalties.
No meaningful royalties.
That need to get paid.
On the mining of those times so.
So clearly.
Take your upper signal digit royalty rate and put it on spot pricing today, and you come up with a pretty big cost savings.
On top of that so when when we stay on our slide that we think that there is a one and a half year.
Payback or less.
We're incredibly excited about this opportunity and certainly thank the Coronado team for their hard work on this transaction as well.
I would just echo what Jeremy said, but add to that obviously.
We're picking up 700000 tons of additional production.
It's low cost production.
It's going to be very accretive to us.
Ties in.
Operationally with what we've already got started it Erwin so in most cases will be mining Franklin just through our own existing berwyn minds to get some to some of the themes that will call you in the Ammanati area. So there's just.
Host of synergies across the board Lucas.
So it's a very meaningful acquisition for us.
Terrific really fairly helpful and congrats on.
Seeing that value and being able to turn it back on it.
My second question Randy in your prepared remarks, you mentioned on kind of what.
What might come next.
And kind of preparing the company.
For for for the future of longer term.
It sounds like we should stay tuned.
For more details, but I wonder if you could share a little bit more color specifically around.
Potential capital intensity every talking heads.
Tens of millions of dollars on an annual basis more or less than that.
And any additional color with what.
What what direction you may take off that would very much appreciate.
We don't want to sort of open the kimono too soon but it will be something that.
I think we'll be a very logical transition for us and that will not be capital intensive from.
From the standpoint of what we're talking about it.
Okay. Okay. That's helpful. And then my last question I'll turn it over.
You touched on kind of walking and chewing gum at the same time in terms of pursuing growth and also Katherine returns and.
I wondered if you are able to.
You said, a little bit more light on.
What do you envision from a couple of return perspective.
And beyond what's been announced so far how you think about that over the course of.
What will be a very strong 2022.
Sure Lucas and I am sure as you can appreciate.
As I've said in the remarks, we have a board meeting in early December.
The way it was.
Teed up is that the board recommended we go ahead and proceed with the dividend.
Beginning in the first quarter of next year.
They wanted to sort of see how we finished up the year.
Which I think by December will have a pretty good sense of and so I don't want a handicap, what the board's decision will be but as I said, we hope to start with a a highly competitive dividend in our space.
And continue to grow it over the years.
Okay.
Thank you very much Randy Jeremy and team and continued best of luck great job.
Okay.
Our next question is kind of line of paper and kicked me Anno of BMO capital markets Youre Linus Outback.
Hi, and congratulations as well on.
Very impressive operational turnaround over the last.
Few years.
It just in terms of like the capital spending plans for 2022, if you can give a sense I'm actually in the 2023, what are what are the overall expectations for capex, given given everything going on at the company.
So David Jeremy here and thanks again, so from a.
Ah maintenance perspective, that's.
Unchanged at let's call it six $7.
Six $7 a ton.
In the.
Maybe talking about it in context of the overall <unk> acquisition, we've earmarked about call at 22 $23 million worth of.
Of of of capital the majority of that is going to be in 2022. So.
At 15, 16 17 million somewhere in that.
Some somewhere in that range and then obviously we.
We're going through the budgeting process that as we speak right now clearly kind of Randy rents went through the the slate of kind of potential growth, which again, we kind of layout pretty you guys on slide six then.
And seven so I would say the last component of that mix is kind of dependent on the budgeting process, which for with which we're going through as we speak.
Okay, Alright, that's helpful and then just on the.
The cash cost commentary, obviously the contracts.
North America already done.
Fabulous price implied cash causes.
82 Bucks a ton for that piece of the pie, if we can sort of slice up that way.
So implicitly 167 million tons of the two Bucks can you talk about the.
Cost of the remaining kind of 1.5 million tonnes.
And or an association with that is there.
Additional costs that we should be thinking about.
On top of that 82 dollar number now I think that easy at all and number was basically.
Price driven or the inflationary cost so we should be adding as well.
Yes, David all Teared up and then let Chris Jeremy and so I think you're a little heavy on the $82.
$63 right now Adele Creek MLT has jumped 20 bucks.
But as far as 22 is concerned there is going to be some pressure.
Obviously, we've got sales related cost increase would probably have modest increase in terms of inflationary car costs for parts and equipment.
There may even be labor cost increases in there, but I don't think we're going to be near the number that you've cited Chris you want to chime in here more granular basis.
I mean, whatever whatever number you choose to use for your model.
For those costs on the first 161 7 million.
Frankly, the cost basis for the additional production will be largely the same as that just however, you would factor.
Sales related cost whether you're.
Currently hire the spot prices are currently higher than.
And what we put so depending on how you want a model that but the base cost of producing the coal on that the additional 115 million tonnes would be the same because that that is available.
And then.
Not sure that we have put a lot of color on it but at full production we expect the.
Mining cost at Berwyn to basically be in line with our help create costs.
<unk>.
Upgrade costs productivity will be a little bit lower due due to the low volt theme and some of the the geology there but.
As we get into the full production there we expect we.
We expect that to be much less of a drag on our overall cash cost as it has been historically.
Okay, just to come back here at $82 number I reference it was just because I glance over and I think perhaps what we're doing is adding including SG&A in there but.
It's basically 196 million $196 realized price and then.
The expected EBITDA coming.
Coming from covering from.
The overall 1.67 million times.
So if you back into it you back into an $82 implied cost that's what I was referencing.
It's just a map on the numbers that were provided.
I guess the question is does that implied $82 number include SG&A and how much.
Yeah, So basically David.
We're taking the.
So so.
I think Randy was talking about Elk Elk Creek, mostly so when we look at the 1.67 million contact does include some portion of.
Of of low ball so yeah.
I would get I would get basically to just above $80 on an all in basis certainly below 80 from.
From from out Creek cash cough. So yeah. It does not include SG&A, but there's a little bit.
Mix in that to think about.
Okay understood. The overall for the company cash cost 82 Bucks is a reasonable number for next year for the time that have been committed that's the assumption that embedded in the numbers provided is that correct overall for the company. So yes.
Yes that also includes low balling remember you're not going to have the trucking savings from the Berwyn mine until the plant is up and running which we've earmarked.
Some time in queue too.
So the first first portion of the year, you will see higher costs than the back half of the year because again the back half of the year of course will Allah will include the trucking statements.
Okay. That's helpful. Thank you and then just to switch back to the capital allocation question.
From Jeremy earlier.
Sorry, Lucas earlier.
The.
Obviously, even with.
All the numbers that we just talked about quite a bit of free cash flow.
Lucas referred to.
So it does vary capital allocation plan beyond regular dividend include special dividends.
And how would you think about that relative to buybacks. If that's something that's on the cards as well given.
Ownership structure, yes.
David of course, all cards are on the table, but I think the reality check here is we're going to walk before we run and.
Just talked about creating a regular dividend we will certainly does.
Aside what we want to do in terms of capital allocation once we get beyond our first steps.
And and take a look of course or whatever other capital requirements, we might need for purposes of build out of the remaining production slate et cetera, but.
I'm not going to I'm not going to game ahead, what what our plans are for dividends beyond payment of regular COVID-19 at at this point.
Okay and then just the last question for me sorry on the on the capital allocation piece.
You mentioned, obviously the vision of the future.
And then you mentioned logical capital intensive does it include.
Mmk activity acquisitions.
No. It does not now okay. So.
So when we get to that point, which I hope to be able to talk about hopefully before the end of the year.
Will sketch that out enough.
Details so that you'll understand what we're talking about.
Okay sounds good thanks very much.
<unk>.
Our next question is from the line Nathan Martin from the benchmark. Please ask a question.
Hey, good morning, guys and also like to Echo my congratulations on the acquisition as well as the successful point to domestic contractor.
Great. Thanks night.
I think most of my questions have been addressed but drilling down on cost a little bit more can you guys quantify any of those inflationary pressures, you're seeing obviously labor seems to be pretty tight to the percentage of issues hiring for your clan sure that emanated assets and then if you could give us an idea of their kind of what portion of your.
Costs are sales price sensitive or transportation related thanks.
So I'll just start.
Start so on the in terms of the costs that we discussed over the last 10 minutes or so.
To be clear all we're doing is taking a year to date cash costs.
Companywide.
Adding sort of the sales related component increase so that's everything from royalties severance taxes, so let's call that about 13, 14%.
And that's that's how we get to the number where we back into Canada 190 of of of EBITDA. So we're not making any assumptions in terms of.
Other cost increases decreases as we said in our prepared remarks. The other portion is sort of keeping keeping costs constant from from the year to date, but I'll, let Chris talk about kind of the hiring or inflationary pressures or anything of that nature.
So.
Obviously.
Enjoying.
Met prices, where they are and that translates into the steel prices, where they are and so we've already seen.
Increases in steel surcharges on a lot of our raw materials that carry through.
Already in the costs. This year, so while we don't necessarily expect those to drop off I am not sure we expect them to go too much higher either so.
And then the other pressure is just on the labor side and labor is tight throughout all the areas that we work.
We are maintaining our workforce I think we have a compelling wage and benefit package that we've.
We're enhancing as we roll into 22.
And if we need to make changes there to remain the employer of choice will do that of course, but.
Right now don't see any issues with staffing our growth plans.
And the way that it rolls in next year with the build out at ammonoid, it's not.
It is a meaningful growth year over year, but it doesn't happen.
Immediately January one of 2022 somewhat answers your question.
Yeah.
It's very help for guys appreciate that color.
That could transportation is for a second how search been there. Thank bread that you mentioned that prepared remarks, or some transportation delays smart of effective factor perfect. Thanks here in the fourth quarter any more color there, maybe what kind of price and you guys sing from the rails at this point.
I'm going to adjacent pick that up on the transportation.
Yeah.
He is Randy did missions prepared remarks, some of our queue for open tons.
Could potentially slip into 222.
Even though they'll they'll likely be.
Earmarked for sales this quarter just basis some of the.
The slowdown we've seen on the logistics side.
As your question on rates.
Our seaborne rates are largely driven by indices. So certainly they've moved up as the as the seaborne pricing has moved up as well, but not unexpectedly.
And are those rates.
Still kind of on a quarter lag almost for the rails.
We have a mixed basket of rates.
Some are and some are more.
Month lag.
Jason Tech, especially that and then maybe just finally.
You guys have it mentioned updating load out at in and out what.
What which rail with those trends are the shipping.
That's currently Norfolk, southern load out and it would remain there just go from a single car.
Type situation to a more of a batch way loadout.
Got it thanks, Chris.
I appreciate your thoughts guys and I'll leave it there thanks for the extra time and best of luck in the four quarter.
Right.
Our next question is from the lineup Tom Fisher from increased rates. Your line is open.
Good morning.
Congratulations on the.
Good fortune here is going forward.
Great. Thank you Don we like we like your stuff.
[laughter].
Notwithstanding.
Standing the very bright future, we had a pretty big list or Q through.
As far as analyst Circle coal.
16 coal versus local focus of 43 cents.
But looking ahead analysts are out there at 52 cents.
Q4, which makes look a little nervous.
Central Q3.
Almost 390 for 2022.
Includes 97 Q1, it takes a little nervous.
And I was just wondering what would you say.
You should keep in mind.
Okay.
Overall estimates.
Late night B.
Thanks, Tom So yeah, I mean, not not commenting on estimates specifically, but I think one thing in.
In Q3 that we tried to highlight in this release was.
75% of our coal went domestic this quarter.
And.
Yeah at basically 80 $80 a tonne remember this is this is coal that we contracted.
The worst part of Covid.
In summer of 2020.
In the fourth quarter we.
We will have a higher export.
Percentage than we had in the third quarter I would put it sort of somewhere between first half of the year and third quarter. So let's call at about 60% domestic about 40% export.
Somewhere in that range, so that means about 60% of our coal again will be on these low price legacy contracts.
Which is better than 75%, which was the case in the third quarter now as it relates to next year.
Those adwd style is indexed.
I am sorry.
And the other 40% is exported that's indexed.
Either indexer index linked yes.
That's correct.
More based on where the pricing is today. The 60% goes domestic is based on pricing that was sign over at well over a year ago and so as it relates to next year.
That $80 contract gets replaced by $196 a tonne contract.
And that that could clean slate basically when the calendar turns over those those those legacy contracts Bill from 80 to 196. So now all I can say is the fact that we booked what we believe is about $190 million of EBITDA on base.
Basically just half of our tons next year.
We're incredibly excited about that if spot holds where it that clearly spot pricing is actually well above where that.
That that 196 dollar level is.
Is contracted.
We'll let you all make your own assumptions on kind of where pricing goes on the on.
On the unpriced portion for next year, but needless to say.
We're excited to get the heaviest quarter of these domestic contracts behind us.
Yeah me too.
I just wanted to ask about the tax situation there was.
The amount of into income tax in the current quarter was was $1.6 million, which is basically.
And there was basically nothing in the first half and I believe you said it was kind of going to go back to minimal.
Going forward.
One is that true in to see.
<unk> what happened with this unusual 1.6 million then.
Q3.
I'll take that as well so.
Just.
When we give our our effective tax rate guidance remember. This. This this is not this is all non-cash though I mean, we are paying virtually no cash taxes in 2000 were guiding to virtually no cash taxes being paid in 2021.
I think it was sort of a confluence of factors I would say the first half of the year was unusually low it came in around 9% or so excluding discrete items and we've always been guiding to tax rate in the low to mid double digit. So inherently Q3 Q4 was going to be higher in Q3 I think.
Unusually high in part based on sort of how we forecast are.
Our taxes quarterly the reality is we had a good problem, which it's spot prices continued to go out go up our forecasts went up and therefore are expected tax rate sort of had to get chewed up a little bit in Q3. So.
Again this is all non-cash.
Which is I think the biggest thing.
Like to emphasize.
Okay, but.
As far as models are.
2000.
Q4, and 2022 kind of work.
We'd be thinking.
So with 2022, I'd say, we'll we're going through the budgeting process right now so we'll.
When we kind of give 2000 2022 cost guidance et cetera that that's when will come.
Come out with the tax rate for the fourth quarter, I'd say it'd be closer to the third the guidance of 10% to 15% implies sort of.
Closer to somewhere in between lower than the third quarter higher than the first half of the year, so somewhere in between that nine to kind of 20% range.
Okay and.
You mentioned several times sales related cost increases and then you said something about royalties and and another thing that I didn't catch and I was just wondering if you could just tell us how that works and the percentages roughly yes.
Without getting too specific.
Basically within the sales related cost component, probably a little over half is just direct royalties the.
The majority of the rest is things like severance taxes, and then they're kind of a small other bucket I mean, I think that's about it.
As good.
Good a breakdown as well give.
Okay. That's what I thought you said severance taxes.
So that's a new one for me sorry.
Yeah, I mean, it's basically just start.
Taxes on.
Mining coal that ultimately goes too.
Right now.
Alright, okay, well thank you.
Thank you.
We have another question from David.
BMO capital markets. Please ask a question.
Hi, just a really quick clarification on the fourth quarter.
I think you said Jeremy can you can you just go through the Lions again better.
Natural times that are open for pricing at this point.
And the next between domestic and export.
Yeah. So.
I think David we're looking at about <unk>.
60% call it domestic.
40% export give or take and that'll that'll get you.
The 1.4 million tonnes for the full year of fixed price business that of course, we have it.
$89 a ton.
As Jason mentioned.
We do have about 100000 tonnes open we've got another so.
100000 tons that are.
That are committed but committed at indexer again index linked.
The hope is of course, all the train show up on time, and we were able to get everything out by December 31.
The reality is I mean.
It doesn't matter what industry you're in.
Labour tight supply chains are tight so that.
That 100000 tons that are open I, certainly wouldn't be surprised if some of that slipped into to 22.
Okay, and so somewhere between 100 200000, that's kind of open the pricing.
But that is open on pricing yet with with about Oprah on pricing sorry, depending on when it's chefs right.
And then.
40% of that is export and 60% of that is domestic is that what you are saying.
Almost all of that is going to be export. So if you take our alcohol Q4 number.
Whatever number you back into I think.
We kind of get the full year guidance you come back into the queue for number that total number what we're saying is about 60% of that'll be domestic.
40% of that will be will be export.
Okay and then just the last question for me given prices are all over the places you know given all the different mixes.
Ultimate destination.
Can you give us some color on just like a reasonable.
I asked this question on other calls so.
Consistent question, a reasonable realized price for the fourth quarter, given everything that we've talked about.
The open times.
I mean.
Again, I think at least with the 60% you basically know what that what that number is.
The open ton.
I would say what what's.
What's committed an indexed is is more on the hi, vol side David.
What's what's open so that 100000 tons that left to be sold the majority of that is kind of low on mid fall, which which I think is what you would expect given that's coming from a course that our minds that are that are ramping up hence.
One of the probably only players that actually has opened tons for for Q4.
Okay module modern David.
Open tons are all going to be indexed.
We're looking at low volume numbers of over $400, obviously at the moment.
Right just to kind of managed expectations appropriately.
When we see those $400 per ton numbers should we be lagging our assumptions, who replying discounts and if so what kind of discount. So that's really where I'm going with us just want to make sure everyone's kind of I think we're going to turn the table on to hear Jason Elam about our our non discounts.
Yeah, No no no discounts.
Again, just getting back to the.
I was just the global imbalance on supply.
And then looking I think when you drill down into the U S supply to the seaboard market in queue for.
The Grandma goes one of the few companies that as available volume still a place in queue for.
We're not entertaining any any talk of discounts.
And essentially pricing at index basis is.
Right around the time of shipment or just before.
Some sort of some sort of period average so.
We are effectively capturing all are more than all of the the current numbers.
Okay. That's helpful. Thanks very much.
Okay.
This concludes our question and answer session I would like to train to CONTRAN software it back to Mister Randy Atkins, Chairman and CEO.
Right well again, thanks, everybody for being on the call. We will look forward to our next one which I guess will be next year, but we also look forward to a very strong fourth quarter and again, thanks very much.
That concludes today's call. Thank you for participating you may now disconnect.
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