Q4 2021 Warrior Met Coal Inc Earnings Call
Good afternoon.
My name is Betsy and I will be your conference operator today.
At this time I would like to welcome everyone to the warrior met coal fourth quarter and full year 2021 financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question. During this time simply press. The Star then the number one on your telephone keypad.
I would like to withdraw your question. Please press Star then two.
This call is being recorded and will be available for replay on the company's website.
Before we begin I've been asked to note that today's discussion may contain forward looking statements and actual results may differ materially from those discussed.
For more information regarding forward looking statements. Please refer to the company's press release and SEC filings.
I have also been asked to note that the company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the investors section of the company's website at Www Dot warrior met coal Dot com.
In addition to the earnings release the company has posted a brief supplemental slide presentation to the investors section of its website at Www Dot warrior met coal Dot com.
Also for more labor related information go to warrior met Colfax Dotcom.
Here today to discuss the company's results are Mr. Walt Sheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer Mr.
Mr Seller you may begin your remarks.
Thanks, Operator, Hello, everyone and thank you for taking the time to join US today to discuss our fourth quarter and full year 2021 results.
After my remarks, Dan will review our results in additional detail and then you'll have the opportunity to ask questions.
During the fourth quarter, we were pleased to deliver our most profitable quarterly results in the last three years on the back of strong customer demand and our ability to capitalize on a favorable pricing environment.
The global supply of met coal remain tight during the fourth quarter, even with China continuing to reduce its steel production.
We are well positioned from a cost and supply standpoint to take advantage of the current strong market for high quality premium met coal, which has been strengthened by robust economic growth.
In addition, we capitalized on favorable conditions within the capital markets to refinance our senior notes and extend the maturity of our ABL facility in the fourth quarter, which Dan will discuss in more detail later in his prepared remarks.
As reported cases of COVID-19 rose during the fourth quarter and impacted most of the country. We continued to take the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations and regulators to protect the health and safety of our employees.
<unk>, while maintaining our operations.
I would like to thank our employees for their hard work and dedication to safety during these challenging times.
Well, we've continued to run the operations had lower operating rates due to the USW strike, we never changed our philosophy, our dedication to providing a safe working environment for our employees.
In fact, despite the disruptions during the year, our safety incident rate dropped significantly last year to a 1.25 rate from a $3 three six rate in 2020, which we believe is significantly better and the underground mining industry.
Global market demand and pricing over the quarter were solid largely driven by strong ex China demand and overall supply tightness.
However, we did experience a higher degree of volatility as we saw see airport China prices dropped from their all time high of $615 per metric ton on October 21st to a low of $337 per metric ton at year end.
Most of the 45% price erosion occurred over a short period of four weeks and was caused by the combination of government mandated steel production cuts are governmental focus on domestic coal production.
And the clearance of stranded Australian coals from bonded warehouses.
Despite the release of these calls the bandwidth protocols remains fully in place.
During the quarter, we saw Chinese buyers retract from the spot market's, leaving very few transactions to support the indices.
Similarly, the F O B Australian index corrected from a high of $403 per metric ton in November 5th to a low of $315 per metric ton.
Contrary to the CFO , Charlie equivalent F O B, Australia index managed to claw back some of the pricing erosion closing the year at $357 per metric ton.
Supply tightness in Australia due to weather disruptions and maintenance was the primary driver for the late December uptick in the index.
It is interesting to point out that for the last 10 days of the year. The CFR, China Index was actually at a discount to the F N B Australia index.
Tuition that has persisted into 2022.
As recently reported by the World Steel Association Global Pig Iron production increased by four 6% for the full year of 2021.
With Chinese production decreasing four 3%.
The decrease in charters production was expected given the governmental mandate to reduce production year over year.
China was the only country among the major producing countries to experience a decline year over year.
Excluding China, which makes up 66% of the world's pig iron market. The rest of the world production grew at an impressive rate of 11, 4%.
That's the warrior our sales volume in the fourth quarter. This year was $1 5 million short tons compared to $2 2 million short tons in the same quarter last year.
This quarter was lower primarily due to the ongoing strike, which lowered total production.
We are now operating near normal inventory levels as well.
Our sales by geography in the fourth quarter were 44% into Europe , 10% into South America, and 46% in the Asia.
The higher than normal sales to Asia were primarily driven by Chinese demand that'll be capitalized upon during the fourth quarter, while capturing 100% of the CFR, China index price on the day of the sale.
Our spot sales in the fourth quarter were approximately 15% and were 33% year to date.
Our normal expectation of spot sales was approximately 20% the higher spot sales for the year were primarily attributed to the higher sales to China.
Our gross price realization for the fourth quarter of 2021 with 85% of the Platts premium low vol. F O B Australian index price and was lower than the 102% achieved in the prior year period.
The lower gross price realization was primarily due to a rising market this year versus declining market last year.
So 47% of our sales volume in the fourth quarter. This year occurred in the month of October .
So based on lower met coal prices from the third quarter.
Let me say a word about the gross price realization. The metric is a point in time calculation that can be significantly impacted by many factors, including the timing of sales shipments and the volatility of the indices and does not reflect the discounting of our product.
In addition, explaining the changes in our gross price realizations as a time intensive process every quarter, which we believe provides little to no value to our business all of our stakeholders.
We did not place any significance on the metric internally.
Therefore, this will be the last quarter. We report this metric instead, we will focus on average net selling prices, which we believe provide a more meaningful and relevant measure.
Production volume in the fourth quarter. This year was $1 1 million short tons compared to 1.8 million short tons in the same quarter of last year.
The tons produced in the fourth quarter resulted from running both long walls and for continuous miner units at mine seven mm one continuous miner unit at mine poor.
If I run into continuous monitoring units, our lead days or flow times have not materially changed since April 2021 and are still several months out into the future.
The noncore longwall remained idle during the fourth quarter we.
We finished the year running the mines with a combination of salary and salary employees, representing approximately 50% of the normal workforce, while producing almost 75% of the normal production volumes.
Capital spending in the fourth quarter was $24 million for the full year, we spent $58 million on capital expenditures, which was the lowest amount since 2016 and 34% lower than last year.
This is partly due to the idling of mine for during the year.
<unk> have been well capitalized by a significant number of investment since 2017.
It provides flexibility in managing our spending during pandemics industry cycles, and they'll be disruptive impacts to the business.
Now I'll ask Gail to address our fourth quarter results in greater detail.
Thanks, Paul.
As Walter noted in his remarks, the market for met coal was strong during the fourth quarter driving prices to levels never seen before.
The strength of the met coal and steel markets are still strong economic recovery from Covid and robust capital markets led us to capitalize upon favorable timing to refinance our senior notes maybe L facility.
We believe the timing of the refinancing was excellent as the markets have been experiencing a significant amount of inflation and we believe that the federal reserve would start raising interest rates sooner rather than later to manage it.
We believe that it would have been more costly and more difficult to complete a refinancing if we waited to do it closer to the maturity of the senior notes.
Our decision to refinance our senior notes and ABL facility during the quarter accomplishes several important goals.
It enhances our already strong balance sheet and financial position takes advantage of current low borrowing rates.
Which are expected to start rising in the near future.
Honestly lowers our cash interest expense and furthers, our financial flexibility with a maturity extension as we pursue the creation of long term shareholder value.
It will also position us to resume our growth strategy and increase our return of cash to shareholders in the future.
For the fourth quarter of 2021, the company recorded its largest quarterly net income in three years on a GAAP basis of approximately $139 million or $2 68 per diluted share compared to a net loss of $34 million or <unk> 66 cents per diluted share in the same quarter last year.
non-GAAP adjusted net income for the fourth quarter, excluding the nonrecurring business interruption expenses idle mine expenses and a loss on early extinguishment of debt.
$3.17 per diluted share compared to an adjusted net loss of 63 cents per diluted share in the same quarter last year.
Adjusted EBITDA was $240 million in the fourth quarter of this year the largest in three years as compared to $9 million in the same quarter last year.
The quarterly increase was primarily driven by a 193% increase in average net selling prices, partially offset by a 34% decrease in sales volume.
Our adjusted EBITDA margin was 58% in the fourth quarter of this year compared to 4% in the same quarter last year.
Total revenues were approximately $416 million in the fourth quarter compared to $212 million in the same quarter last year.
This increase was primarily due to the 193% increase in average net selling prices.
Offset partially by 34% lower sales volume in the fourth quarter versus the same period last year.
In addition, other revenues were positively impacted in the fourth quarter. This year by 121% increase in natural gas prices plus a noncash mark to market gain on our gas hedges of approximately $7 million.
The Platts premium low vol, Fob Australian index price averaged $260 per metric ton higher or up 241% in the fourth quarter. This year compared to the same quarter last year.
The index price averaged $369 per metric ton for the fourth quarter.
The merge and other charges reduced our gross price realization to an average net selling price of $274 per short ton in the fourth quarter. This year compared to $94 per short ton in the same quarter last year.
Cash cost of sales was $153 million or 39% of mining revenues in the fourth quarter compared to a $190 million or <unk>, 92% of mining revenues in the same quarter last year.
The decrease in total dollars was primarily due to a $65 million impact.
34% lower sales volume, partially offset by $28 million of higher variable costs associated with price sensitive wages transportation and royalty cost.
This resulted in a cash margin of $168 per short ton in the fourth quarter.
Compared to only $7 per short ton in the same period last year.
Yeah.
Cash cost of sales per short ton Fob port was approximately $106 in the fourth quarter compared to $86 in the same quarter last year.
Transportation and royalty cost accounted for $22 of the increase offset slightly by lower other production costs, which tend to be rather stable most of the time.
Cash costs on price sensitive items, such as wages transportation royalties. They vary with met coal pricing were significantly higher in the fourth quarter. This year compared to the same quarter last year.
As you May remember transportation cost lag on a one quarter basis and prices averaged $105.
Higher in the fourth quarter versus the third quarter this year.
As a result of significantly higher prices period over period favorable transportation and royalty cost are significantly larger components of the cost per ton than the normal approximately one third percentage.
Favorable transportation and royalty costs were 43% of the cost per ton of $106 in the fourth quarter. This year compared to only 27% in the same quarter last year, driven primarily by higher met coal pricing.
As we look forward into the first quarter, we expect our cash cost per ton to increase over the fourth quarter as transportation rates reset in the first quarter based on the average of higher met coal prices in the fourth quarter.
Keep in mind, the index prices averaged $105 per metric ton higher in the fourth quarter than the third quarter of 2021.
Also we expect a favorable cost royalties to increase in the first quarter based on the higher met coal prices.
Buying transportation and royalties per short ton will be a higher percentage of our cash cost per short ton in the first quarter than the fourth quarter of 2021.
Cause our production on mining costs remain fairly stable.
For the smaller variable labor cost.
Also we expect to see increases in labor costs next quarter as we increase our hourly head count at the mines plus the impact of expected inflation on material and supply costs.
Depreciation and depletion expenses for the fourth quarter, this year with $39 million and flat compared to last year's fourth quarter.
However, the fourth quarter of this year include the immediate recognition of $8 million of expense related to mine for depreciation that would have normally been capitalized as inventory as it was produced.
However, since mine four was idled in the fourth quarter. It was instead directly expensed.
This increase in expenses was offset by $8 million due to the 34% decrease in sales volume.
SG&A expenses were about $9 million or two 3% of total revenues in the fourth quarter. This year and were higher than the same quarter last year, primarily.
Primarily due to higher employee related expenses, partially offset by lower audit and legal expenses.
During the fourth quarter, we incurred incremental nonrecurring business interruption expenses of $7 million directly related to the ongoing <unk> strike.
These nonrecurring expenses were primarily for incremental safety and security legal and labor negotiations and other expenses.
As my four remained idle during the fourth quarter, except for the one continuous miner unit that was running and as mine seven ran at a reduced rate of production.
$14 million of idle expenses.
These expenses were for electricity insurance maintenance labor taxes and are primarily fixed in nature.
The amounts were higher than the second and third quarters as we incurred more labor from higher head count and mine poor.
Cost associated with restarting one continuous miner Union at mine four and.
And preparation work and anticipating restarting the longwall mine four and the first quarter of 2022.
Net interest expense was about $9 million in the fourth quarter and included interest on our outstanding debt interest on equipment financing leases plus amortization of our debt issuance costs associated with our credit facilities.
Partially offset by interest income.
The slight increase quarter over quarter was primarily related to new equipment financing leases.
He will also on the early extinguishment of debt represents the write off of debt issuance costs and premiums paid in connection with the refinancing of our senior notes during the fourth quarter.
We recorded income tax expense of $27 million during the fourth quarter. This year on pre tax income of $165 million compared to a benefit of $11 million in the same quarter last year on a pre tax loss of $45 million.
The fourth quarter tax expense was primarily due to pre tax income.
Partially offset by benefits, where depletion and additional marginal gas well credits.
The fourth quarter expense, primarily represent the utilization of our Nols and therefore, we paid no cash income taxes.
Turning to cash flow.
During the fourth quarter. This year, we generated $151 million of free cash flow, which resulted from cash flows provided by operating activities of $175 million less cash used for capital expenditures and mine development cost of $24 million.
This resulted in free cash flow conversion of 63% this year versus last year's fourth quarter of 13%.
Free cash flow in the fourth quarter of this year was negatively impacted by a $34 million increase in net working capital.
Increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing offset partially by lower inventories due to higher sales volume.
Cash used in investing activities for capital expenditures and mine development costs were $24 million during the fourth quarter of this year compared to $29 million in the same quarter last year.
Cash flows used by financing activities were $24 million in the fourth quarter. This year and consisted primarily of payments related to the refinancing of our senior notes of $14 million.
Capital lease payments of $7 million and payment of a quarterly dividend of $3 million.
Our total available liquidity at the end of the fourth quarter was $479 million, representing an increase of $123 million or 35% over the third quarter.
And consistent with cash and cash equivalents of $396 million and $83 million available under our ABL facility.
This is net of outstanding letters of credit of approximately $9 million.
With the refinancing in the fourth quarter, we have no near term funded debt maturities.
We believe our total liquidity position strong balance sheet.
And low and variable cost structure, our strengths of the company that will allow the company to navigate volatile markets and challenging business conditions.
As a result of the uncertainties facing the business. These past two years. The company has been stockpiling cash result.
<unk> and net debt of less than zero.
Further strengthening the balance sheet and providing the company a significant amount of flexibility to navigate challenging markets.
We continue to appropriately adjust our operational needs, including managing our expenses capital expenditures working capital liquidity and cash flows.
In addition, we have delayed the development of the Blue Creek project and our stock repurchase program also remains temporarily suspended while we.
We accumulate and preserve cash and liquidity.
Combination of strong met coal markets with high prices and the refinancing of our indebtedness pushing out the maturities has resulted in a stronger balance sheet and positions us to resume our growth strategy and increase returns of cash to stockholders in the future.
However at this time, we're taking any patient wait and see approach to capital allocation and have not made any other significant changes to our capital allocation policy.
With our recent announcement to increase the fixed quarterly dividend by 20%.
We continue to evaluate market conditions for 2022.
While expecting a met coal pricing reset to lower levels and continue to negotiate with the union on a new contract to resolve the ongoing strike.
And we continue to monitor changing Chinese policies that may significantly impact the net coal in global steel markets.
And finally, we expect to reevaluate the prospect of developing our Blue Creek reserves in the coming months.
Now turning to our outlook and guidance for 2022.
We believe we are well positioned to fail anticipate customer commitments for 2022, and the current operating environment and without a need union contract. We believe that our production and sales volumes will be as outlined in the outlook section of our earnings release.
The volumes outlined include the restart a mine four although at lower production rates and running mine seven at lower operating rates and normalized production.
I will now turn it back to Walt for his final comments.
Thanks, Dale before we move on to Q&A I'd like to make some final comments on our outlook for the first quarter and full year 2022.
As Joe noted earlier in his remarks, our cash cost per short ton in first quarter 2022 is expected to be higher than last quarter and possibly the highest we've ever seen in our business as a result of met coal prices at all time highs.
This is not necessarily a bad thing because our margins are expected to be higher as a result of the higher met coal prices.
However, this negatively impacts our variable costs for wages transportation and royalties.
We expect transportation and royalty costs, which are normally about a third of our cash cost of sales to be a significantly larger portion of our total cash costs in the first quarter and previous quarters.
The other factor that may negatively affect our cash cost is the impact of inflation.
U S inflation hit its fastest pace in nearly four decades in 2021 as pandemic related supply and demand imbalances along with stimulus measures.
Tended to shore up the economy pushed the consumer price index up to a 7% annual rate.
That rate of inflation continue to rise at the end of January to seven 5% or 40 year high.
We expect COVID-19 to continue to impact global supply chains, resulting in shortages and extended lead times and increased inflation, thereby impacting our operations and profitability in 2022.
While we did not experience any material inflation in 2021, we're expecting anywhere from 10% to 25% increases in steel prices freight rates labor and other materials and supplies in 2022.
These increases effect among other things the cost to build structure roof bolts cable magnetite rock dust and machinery and equipment purchases.
We're applying a number of different strategies to mitigate the impact of these challenges on our operations.
Including extending our demand planning, placing purchase orders earlier utilizing short term contracts and leveraging our supplier relationships.
Looking ahead, we understand that there are questions about the status of the USW negotiations.
What's the potential outcomes and possible timeline. Unfortunately, we cannot speculate at this time on any of those topics for various reasons.
Let me just say we value and appreciate the hard work of our hourly employees our priorities have always been keeping people employed and working safely with long lasting careers and ensuring the company remains financially stable in a particularly volatile met coal market.
We are disappointed the union continues with the strike we continue to negotiate in good faith to reach a resolution.
Since the beginning of 2022, we've seen a renewed interest from Chinese customers, albeit with limited transactions and expect the country will reestablish its normal purchases of seaborne coals to supply their steel mills once the Chinese new year holiday and Olympics were well behind them.
The new year is also exposed the well known vulnerabilities of the global met coal supply chain for both mining and logistical operations with extreme rain in Australia winter storms in North America disruptions in Russia, as well as the upsetting force that the new coronavirus variant had on labor.
As such we expect pricing to remain strong throughout the first quarter. However.
However, we do acknowledge that the risk of a price correction is high given the extreme levels. We are currently experiencing.
But we also know that predicting the timing and magnitude of such a correction is difficult if not impossible.
For that reason, we expect relative strength in prices for the short term and we hope to have them on our pricing correction does start that it will be a slow and steady decline back towards historical levels.
We remain prepared for a quick and steep correction however should it come.
As a reminder, if we encounter a steep downward correction in the quarter, our cash cost will lag to the price decrease as we've previously indicated by about one quarter.
You May have noted in our earnings release that we began providing our annual guidance again for the company.
We believe that we are well positioned to fulfill our customer volume commitments for 2022 or approximately five five to $6 5 million short tons.
This range assumes we are unable to reach a new contract with the union in the near term.
We expect this range of production from operating both long walls and mine seven at lower operating rates and regarding the longwall in mind for on a limited schedule at about 50% capacity.
We will continue to ramp up our continuously monitor units and the long walls at both mines as we expect our head count to increase during the year.
By continuing to run the minor units our lead days are still months into the future and have not deteriorated significantly since April 2021.
If we are able to reach an agreement soon with the Union. We believed that we could ramp up to a run rate of production of approximately $7 5 million short tons in about three to four months.
Before I close I wanted to take a moment at the end of our fiscal year to reflect on what it's been an extraordinary journey for our company over the past two years.
Between the impact of COVID-19, pandemic and the ongoing USW strike, we've had to manage through significant headwinds and market volatility.
But when adversity appears you have the opportunity to show our crude strengths and warrior has shown these three strengths across the company.
The resiliency of our business model has been tested time and again over the past two years.
Financial results show our ability.
It only to endure a persistent challenges, but also to overcome them with significant outperformance.
I encourage our stakeholders to look at our strengths and acknowledge our achievements.
So our resilience in particular is attribute to the dedicated employees who come to work every day. They are the real heroes of this story.
Moreover, there are efforts to build on the foundational and in some cases unique building blocks of our company which are.
A dedicated and high performing workforce, maintaining a safe work environment.
Premium products in high demand that achieved the highest prices.
Even in adverse price environments.
Our variable cost structure that flexes with prices that delivers profitability through the cycle.
While logistical cost advantage to the global seaborne markets.
Our strong balance sheet with low leverage and no significant legacy liabilities.
And disciplined financial policies to ensure sustainable performance.
Finally, after achieving what we have in the past two years, we entered 2022 with great optimism for our business and the confidence that we can weather any new storm that caused that disrupt our momentum we're proud to have proven ourselves in the most difficult of times.
With that we'd like to open the call for questions operator.
At this time I would like to remind everyone that to ask a question. Please press Star then the number one on your telephone keypad.
I'll pause for just a moment to compile the Q&A roster.
The first question today comes from Doug.
And now with BMO. Please go ahead.
Hi, Thanks for taking my questions.
I just wanted to ask you about the capital allocation policy.
Considering the cash generation. So you know were generated about.
It looks like the equivalent of about a 40% annualized free cash flow yield.
In the quarter and that was on lower than current prices and higher than 2022 targeted cash costs.
Balance sheet is in great shape, and I understand the ongoing strike.
You know and concerned about prices falling however, my question as well warrior payout special dividends, even in the midst of the ongoing strike.
Thanks, Dave for your questions and Dale.
It's a possibility.
Named a few factors that we want to get a little more clarity on.
You know such as what we think the market will look like for the rest of the year.
As we said look when the Chinese coming back after the new year and the Olympics.
Want to see exactly what kind of policies and the impact on the markets. They may have.
The strike as well and.
Taking another look at developing Blue Creek.
That date is about two years old on Blue Creek, and we want to pull together a refresh on the total cost of that project metrics and everything and see if that still makes sense.
And so once we get a little clarity on those things.
I think we will.
We may have a change or an update on that.
Capital allocation policy, we did up in.
Or increase the quarterly dividend 20%.
<unk> was a small change but steel.
Very good for us.
Okay, and what's the reasonable timeline to expect those updates should be completed and.
They have a more definitive capital allocation policy and plan in place.
Well, there's really nothing changed in our policy and but you know maybe in the next few months.
Okay. That's helpful and as you as you think about Blue Creek versus returning cash to shareholders.
As Warner thinks about those those two options.
Whats the preference at this point.
Well as we've said we don't have a particular preference we're going to try to balance both we said that but you know in the past.
We'll just have to see how Blue Creek rolls up in what.
The capital construction cost are there.
The inflation that you're seeing in the current business how is that going to impact the project.
And will it allow us to balance both the way we want to so.
We don't have a one or the other kind of decision point, we're looking at how do we do both.
Okay, great. Thanks, and my last question.
The 95 to $100 cash cost range.
You mentioned that was on lower than current prices, obviously, what's what's sort of the sort of what's the.
Our reference price embedded in that 95 to 100 dollar assumption for the full year and what would those cash cost fee if magically prices happen to stay where they are now for the full year.
Well, if they stay where they are now.
You're still going to see an increased till we get out because of a one quarter lag for transportation. So.
So.
You could see a first quarter cash cost per tonne, 10% to 15% higher than the fourth quarter.
Which may include some inflation there.
And you know.
There's a lot of factors you've got to think about in that cash cost guidance.
We are you know.
Building in a steep correction.
Starting second quarter through the rest of the year.
So you got that but you get the benefit of the higher volumes, we expect over the year offsetting that and then the same thing happens with transportation lagging a quarter the royalties correct.
Sooner or later so.
You know the guidance the cash cost guidance might be a little a little conservative, but when you factor in all of those different puts and takes.
You know, we think prices are going to correct pretty steeply the rest of this year. Some of these supply chain issues get worked out.
Okay. Just so I can help me I'm, just sort of help me level set what's embedded in that.
Steep decline again, what's what's what's a reasonable like what assumption was made on the on the benchmark price for the full year to get to that 95 to 100, so I can calibrate that.
To summarize we're making in our model.
We're still working on.
Somewhere near a 200 dollar number.
Okay, Alright thats helpful. Thanks.
The next question comes from Lucas pipes with B Riley Securities. Please go ahead.
Thanks, very much and good afternoon, everyone and nice job on the quarter.
I wanted to follow up a little bit on Blue Creek in and.
I think you used the word reevaluation is it.
Can you share or update us on on how broad this reevaluation is it.
The capex cost.
A component of this project or strategically also how this project fits into your longer term vision of the coking coal market, but it would really appreciate your thoughts on that thank you.
I think we're pretty settled on where this fits in from a long term standpoint in the company's portfolio for.
For us the issue is especially with the.
Changes in steel prices.
And labor shortages and things like that what's the impact going to be on construction and capital spending.
And timeline for development. So we're redoing network to make sure we're confident about where those sit today.
That's very helpful.
But what what's the timing when would should we expect.
An update on on that.
That revaluation.
This ends the capital allocation policy, where we're looking at both right now and our expectation is over the next few months.
We'll have more clarity around those topics.
That's that's very helpful. Thank you for that and.
Hi.
On the on the volume cadence for the year I I may have missed it but.
In.
In Q1 should we expect higher volumes, because you don't have a longwall move or how should we kind of split split the volume call. It mid point 6 million tonnes currently.
The four quarters.
The real uptick in the first quarter is going to be the fact that we are now running the longwall mine four.
So we just started that longwall up so it won't be our expectations were that it'll take a little water ramp.
But the additional tons.
As we go out through the year, we said, we expect <unk> to be at about 1 million tons for the year. So you can expect that it won't be.
Vermillion quarter by quarter, it will it should ramp a little bit.
But it is not going be far off from that.
So that's the real additional that's where the additional tonnage is coming out of.
Yeah look consistent Dale so we've been like the last two quarters about $1 1 million tons produced with mine seven.
Running at a slower rates so annualized at four four.
AD.
1 million tons for the mine four longwall five four and then we have the.
The continuous miner units that are running in mind for two so that just kind of round you to the bottom end of that range.
Perfect perfect that's super helpful.
Really appreciate that.
That addresses my most important questions for now I'll jump back in the queue. Thank you and best of luck.
Thanks.
The next question comes from from.
Martin that's the benchmark company. Please go ahead.
Hey, good afternoon, guys congrats on the quarter. Thanks for taking my questions.
Some of my.
The bigger questions were already addressed.
Just some more modeling related questions. I think you guys mentioned about 46% of sales in the quarter, where she apart China prices.
Any comments on how many sales you might expect to sell to Asia, if our China prices within your 22 got it.
You know what it's much more difficult to look at 'twenty two because as we've said, it's kind of flipped in terms of CFR versus.
F O B, Australia, right now and it doesn't make a lot of sense.
With where the market is today to be moving coal into China from our standpoint.
But we don't expect that dynamic to stay long term, so we could still see.
You can still see tons moving into China, we always move tons also into.
Japan, and Korea, as well, but as far as specifically into China, that's just going to be a wait and see what happens with the with the market in China.
And then maybe just waterfront something sure can I, just clarify something there and actually your question.
<unk>, 47% was the amount of volume that went in went out in the month of October total volume so not just China.
The other maybe where you got that confused as the other comment was during the fourth quarter. We did sell all of our CFR, China at the 100% of the index during the quarter and I think that's very similar to what language very close by to each other so maybe that was what was confusing.
I couldn't misunderstood they'll appreciate that yeah, I thought it was 46% sales to Asia like you guys, usually break down Europe , and South America checkbook, but thanks for clearing that up.
Maybe I'll just shift over real quickly to inventories.
You guys exceeded your full year 'twenty, one sales guidance by.
Pretty good amount, which you had said what's possible in the last call, but your inventories got down at about 243000 tons of it looks like previously I think you referenced maybe a 400000 ton level kind of a good comfort level.
Does your 'twenty two guidance kind of assumes staying at these new levels are you looking to kind of build inventories back up a little bit to that prior level.
Thanks.
You know I would expect us to build a bit that's running down at that $2 40 level. It gets pretty lean down at the port in terms of being able to load vessels. So we'd like to have a little higher than that but that doesn't mean at the end of the year. We don't try to push an extra vessel or two out quickly and get that number back down where.
At 250 to 300 range, but what's comfortable warehouses closer to that 400 level.
Got it thanks, and then maybe sticking or pushing an extra vessel or two well I think I asked this last quarter and I know transportation doesn't always work exactly how you want but maybe just some updated thoughts on your rail and barge service currently thanks.
We've been very you know.
We have hiccups, just like everyone does with rail, but by and large we had been very satisfied with both barge and rail service.
And we're able to get our cold down to the port.
Timely fashion.
There's not been a.
Major issue for us.
Great and then maybe just one more I think I heard in your prepared remarks, you guys were adding hourly employees I think there was a part of the discussion of labor costs, maybe we get a little more color. There is this specifically just for the mine for ramp.
Any thoughts thank you.
No. We continue to have hourly employees from the mine $4 seven Workforces that continue to cross the picket line and join the workforce and we're also having new hires as well and our intention is to continue to see that occur throughout the year and to grow month by month additional employees and as we get to the point, where we can.
Add a cm unit, we'll have to see him unit when we get to the point, where we've got enough cm units to add another shift the longwall operations at <unk>, we will do that so it's just a matter of.
How quickly we're able to get people in here, we're up to over 300 hourly employees at this point and continuing to grow.
Great very helpful guys. Thanks, Pavel I'll leave it there I appreciate the time information best of luck in 'twenty two.
Thank you.
Your next question comes from Matthew Fields with Bank of America. Please go ahead.
Hey, everyone.
Not to keep.
Keep beating the Blue Creek of course here, but you know.
It was I think the Capex for construction was $5 50 to 600.
That was way back in February 2020, before everything started costing a lot more.
When you gave that presentation.
You had some some discussion about the flexibility in what you had to fund it.
Through cash balances equipment leases cash flow and capital markets.
Assuming we're looking at a higher overall price tag here.
Do you plan on.
You know obviously, there's there's levers you have but like what's the philosophy on how to fund.
A big capital project like that.
And you know kind of what's the sort of <unk>.
Overall balance sheet, what should that look like through our construction and then you know look on the other end like how.
You know, what's the right level of debt for Warrior, you know kind of to fund. This and then maybe on the other side.
Yeah.
Well some of that we don't have the answers to but we still have all the options available to finance it and we're going to look at you know had the best optimal capital structure. We can during that construction period of roughly five years, so things will change there'll be periods when.
Prices will be low times when prices are high so we will have to manage through that as you know we pulled together the updated cost and see how that how that.
You know again, what what's the cadence of that and you know honestly, we have a better starting point.
Now than we did in 2019.
With you know almost $400 million of cash at the end of the first.
Fourth quarter and with prices, where they are we should be generating some more.
In the coming quarters. So it gives us a lot of flexibility to pick and choose our options rather than be forced into a certain path. So.
We're keeping all of our options open we don't we're not looking at a single path either way here.
So and how much debt what.
We're a net zero today.
I would imagine that if we did start Blue Creek, we would increase our minimum liquidity target.
Just to make sure we protect that balance sheet.
You know, we've always said in the past before Blue Creek, a $100 million.
Should be safe during these pandemics and things like that so in 2020 are pretty much prove that so I think we would increase some minimum amounts like that too.
Is to work through the construction period I just don't know what that is now I'm just going to largely depend on what the project looks like now versus before.
Okay, and then I know you are still you know kind of reevaluating things.
Like you said for the next couple of months, but what do you think about kind of maybe at this stage.
You know as a growth strategy building something like this over a series of five years versus you know.
Being able to take a minority stake in it maybe appears kind of large scale met coal operations.
I think one of your one of your peers was.
On the news today, saying, you know maybe 10% of their stake might be in the market for for for a buyer.
You kind of take on build versus buy for something like that.
Well, we look at any and all talk about them as acquisition opportunities, we compare everything to Blue Creek.
And it's going to have to be a darn good project for us to look at it even though you are right. Its a five year project and it takes time to get it up and get them productive, but we're very confident in the quality of the coal and the demand for what this code will be.
And as a result of that.
We'll look at anything and we will consider other options, but this has just been outstanding project.
And one that deserves and needs to be needs to be built.
Okay.
That's great I appreciate that and we look forward to hearing the clarity on capital allocation and the Blue Creek decision in the coming months.
Thanks.
Thanks, a lot.
The next question comes from John Osborne with internal values limited. Please go ahead.
Hello, guys. Thank you very much for the presentation.
I do have a few.
Robert.
Quickly.
Oh, China.
What percent of sales last year.
As previously I was just wondering if you have any business with China with total in previous years.
And then if.
You know the market changes, Australia. It comes back and what that mean you would.
Going back to minimal China.
And.
I mean that question out.
Okay.
Okay.
Okay as a whole.
Some commentators have said that if the borders.
Australia.
Bonnie is removed then met coal prices will be sort of tumbling very fast.
One of you know my view would be different because.
Like climate change.
Concerns of constrained supply globally of Cowen.
Wow.
Oh, sorry.
A big ramp up in <unk>.
The Cowen to see this year or the full reopening of economies of scale.
Demand is going to be actually going up. So there is a case to be made bull case.
Supply and demand so we couldnt have a strong year this year.
Trust and get your thoughts on that.
Hey.
Well see massive.
Tom that you have committed this year is that fixed price is that based on.
Our benchmark.
Zane.
What's your full royalties and transport fixed.
<unk> always done.
Instead of ratcheting up with fans.
His favorite transfer.
This number then.
If you can give us a bit more detail than that.
And then finally, if you will.
Is that let's.
Let's see I thought you just strip out the transport. So you just take everything back right.
You can just kind of compare apples to apples.
Kind of an awesome boats again.
Thank you for that.
Man you loaded it's up there we've got so many questions in that well I'll try to start where I can walk through a few things first of all let's start with transportation and royalties.
Our transportation cost is and royalties royalties are based on a percentage of coal sales price.
Whatever the.
Prices of coal tar and so that varies on a percentage basis. When the prices are higher naturally the royalty value per per ton is much higher.
In terms of our transportation cost, we have a formula through which we work with the railroads that adjusts based on coal prices in the previous quarter.
So we see that that's completely variable as well.
So that's kind of where we go with that on the key upon F O b.
Yeah, we have that occur.
Our current last year, where the.
The delta between the F O B, Australia, almost CFR, China got to the point, where it made sense, even though we are normally out of transportation disadvantage for us to go ahead and shift to China.
CFR China.
And we saw that that that clearly reversed itself more than reverse itself because the CFO up prices actually below the F O B Australia price.
So for us to move coal into China, We're gonna have to see a situation where it makes sense for us because the majority of our coal the vast majority of our KOL in normal years, well sold on contract based on formulas.
Oh that follow the market.
But last year. So we don't normally have about 20% available for spot sales last year, we sold far more on the spot market, because we were able to because of this.
CFR spread versus the F O B, Australia price.
So we you know.
I don't think it's reasonable to assume that our sales to China will remain in 2020 to what they were in 2021 again unless this thing flips back over in the are.
Ah you job there again this year.
So we'll look at that again.
Again, the vast majority of our tons are contracted and are simply a price based on what the market is.
From there Dale what do you remember one of them I missed what did I forget here.
Yeah.
But in the past.
We had a very very very small amount of volume into China in 2020 and before that.
Cause the price differential for freight.
Never had any sales to China. So it was all become become an issue this year, primarily because of the difference in those two indexes.
So when you net them down on a comparable basis. It was still more profitable sell to China. During this year.
Then it wasn't a past and you know if that.
It reverses and stays with you now.
Versus to where.
It's no longer profitable for us to sell into China, we won't probably be sending any volume there.
I think from a demand and supply standpoint from what I'm looking at I think things are.
Slightly.
We're slightly negative on the supply side compared to demand. So I think we will remain having a strong market this year, but a strong market.
Yeah.
We are not expecting prices to stay anywhere near where they are today.
And we're not dependent on that but I think right now with what we see out of all of our customers.
And it's still prices have come off some but what we see is a real strong demand for products. So I don't see I don't see that being the reason it.
Pricing crashes I agree with you that I think what happens in China will have a huge impact on what happens to global pricing.
<unk>.
But.
As we've said we hope to.
It returns to normal levels.
In a slow measured pace, but we're prepared if it's.
Kind of a very rapid decline as well.
Hi, Thank you just a quick couple of small follow ups, so what you're saying is that okay.
Yeah.
Clients your traditional clients.
Great well always work.
Is that right and that is just looking at the two.
More price.
If it makes sense.
That's correct.
Thank you.
Okay.
Hum.
Chinese met coal production.
Basically.
Big hobbies shall we say.
And that is a very mature area. So would you expect.
And the company is China structure, we will need to import coal.
Therefore that simple.
So for the seaborne market.
I think China will be continue to support the seaborne market and I think thats evidenced by where they put.
They're newer steel mills closer to the coastal areas.
I think they will always try to supply at least some of the domestic with domestic coal, but I think there'll always be.
A big importer of metallurgical coal as well.
Yes.
Okay. Thank you very much indeed.
Thank you.
All the reminder, if you have a question. Please press Star then one answered the question Keith.
Next question is a follow up from David Gagliano with BMO. Please go ahead.
Sure. Thanks.
Have a really quick follow up on Blue Creek in the past. There was also talk of perhaps bringing in a joint venture partner would that also be under consideration.
Yeah, I mean, everything always stock options are still on the table David.
Yeah, but if we're in a position to do this ourselves I mean, why would I give away the project.
So it's all good depend on what kind of terms.
And if anyone can afford to do it.
Yeah.
So you know there is some some other peers are in some pretty challenging position. So I'm not sure. They have the wherewithal to do it but it's still an option.
As well as you know traders marketers.
Customers are all of those have expressed interest.
<unk> be looking at possibly trying to do an offtake agreement or something like that too.
Lower your risk, but we think given the feedback from our customers.
We can sell our whole volume.
And.
Not have not be in a position where we have to do that so we will have plenty of options available.
Right so in considering that youre going to have more cash.
The total capex of the project and the <unk>.
Pretty short period of time here, where the preference preference be to just just go it alone so.
Is that the preference or is it more complicated than that.
Well I don't want you know.
Say that right now until we see how this thing rolls back up again, and the cost and everything.
I think we want to kind of wait and keep our options open until we see what that looks like now.
Alright. Thanks.
Thank you.
The next question is from John Ogden.
Please go ahead.
Yes, Hi, guys, a quick follow up to one of your previous bounces.
Just Tom you mentioned that no one time as you would have 80% tonnage for the committed and 20% spot.
Just want to clarify that that 80%.
It's completely variable pricing.
Based on actual quite.
Quite recent benchmark prices.
Would take.
100% of the benchmark company price because you probably are in line with that quality I just wanted to sort of clarify that because somebody sees some of your peers will be lucky natural dollar prices.
And all of Us, which will be price later on the benchmark and is your.
Your strategy, which I agree with that.
Yeah.
Explain why traditionally youll prices will be in line with the benchmark.
And then it sounds we seen last quarter, he's very volatile on the east coast.
To keep up with it thanks for clarifying.
Sure.
The vast majority of our tons.
In our contracts we have.
<unk> formula that are built around the benchmark pricing and quality.
That's determine what the price will be and it may be based on the previous two to four weeks.
Prior to loading of what the average of what the spot price was through that period.
Occasionally we will have a customer that will want to lock in a little some of their tons.
For a longer period of time at a fixed price and we certainly consider that and if we think that we can come to a reasonable deal on what we both look at pricing, we will do that that doesn't happen very often but once in a while we'll reach those types of agreements.
And.
But by and large it will flow out along with the market.
Okay. Thank you very much for clarifying.
Thank you.
At this time there are no further questions I will now turn the call back over to Mr. Sherman for any comments.
So that concludes our call. This afternoon. Thank you again for joining us today and we appreciate your interest in warrior met coal.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.