Q4 2021 Alpha Metallurgical Resources Inc Earnings Call

Hello, and welcome to the <unk> also much electrical resources fourth quarter 'twenty to 'twenty. One results conference call. My name is that ethanol record in light vehicle today.

To register a question during the presentation you may do so by pressing star followed by one on your telephone keypad.

Like to hand over to our host Emily O'quinn. Please go ahead when you're ready.

Thank you Elliot and good morning, everyone.

Before we get started let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance contain forward looking statements and actual results may differ materially from those discussed for more information regarding forward looking statements and some of the factors that can affect them. Please refer to the company's fourth quarter and full year 2021 earnings.

<unk> and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures.

Participating on the call today are office chair and Chief Executive Officer, David Stetson, President and Chief Financial Officer, Andy Edson also participating on the call are Jason Whitehead, our Chief operating officer, and Dan Horn, Our Chief commercial officer with that I'll turn the call over to David.

Thanks, Tim Lee good morning to everyone and thank you for joining us this morning.

Today, we are pleased to report a record quarterly performance for Alpha.

With adjusted EBITDA of 316 million for the quarter.

We benefited from continued strength in the coal markets with the forward strip for Australia and prices predicting straight through the coming months and further into the future than many initially had projected.

Of course, none of US can know what will happen in days and months ahead, and there's a lot going on in the world right now, resulting in significant levels of uncertainty and volatility.

The war being waged by Russia to take over your Crane is especially disheartening and were especially troubled for the millions of innocent people, who are suffering and in danger because of this conflict I'll, let Dan discussed this in his remarks as well, but we will continue to monitor this conflict as it unfolds.

You wait any potential impacts to alpha or the broader Gulf supply chain.

Just a quick analysis of where we started 2021.

And how the year ended as evidenced that our landscape can shift significantly in a short period of time.

For our met coal has increased to and in some cases almost threefold over the 2021 calendar year.

The improved pricing for our products generated revenue levels that allowed us to embark on our aggressive debt reduction plan.

Over the last couple of quarters, you've heard me discuss the importance of debt reduction two alphas longevity.

And our steadfast commitment to being a good steward of your capital.

I'm pleased to report that we're progressing exceptionally well and the goal of eliminating our long term debt.

Fourth quarter, we paid $50 million of prepayments and since that time, we paid another $150 million on the term loan.

All of this outstanding work brings our current debt level to under 300 million.

To put that in perspective, we started 2021 with a total debt level of over $580 million.

And little over a year, we reduced our debt, including legacy liabilities by more than $280 million.

It's an outstanding accomplishment and we remain committed to our goal of eliminating the term loan debt this year.

Given the continued strength of the current coal markets in faster than expected pace, which we've been able to dramatically reduce our debt and legacy liabilities.

We are also pleased to announce a shareholder return program.

Our board of directors has approved a $150 million share repurchase program.

Allow us to buy back our stock in the open market with purchases beginning as early as this week.

We are grateful for the confidence our shareholders have placed in us and we are pleased to be able to offer this program to continue enhancing shareholder value.

We believe that both the share repurchase program and our continued debt reduction efforts are creating meaningful value for our shareholders and building a stronger company.

In this business.

Specially for any public company there.

There's a significant amount of scrutiny on the quarter and what's happening in the near term while managing the near term operations is a necessary and important part of an effective corporate plan.

I find it just as important to understand where the company is going over a much longer time horizon.

As you heard me say last quarter.

This is a cyclical business that can experienced dramatic highs and dramatic lows.

But we are long term thinkers here at Alfa we have a dedicated 3500 professionals, who make up the alpha team.

And our operation portfolio is comprised of eight preparation plants 19 metallurgical coal mines.

And for a few more months at least one remaining thermal operation that we'll mine out mid year.

That kind of portfolio complexity allows us the flexibility and optionality to meet extremely specific customer request, but it also demands a high level strategic planning and operational execution.

This is why we retooled routinely gauge and long term forecasting to be sure. We are maximizing the assets in our portfolio and planning for investments that will optimize our KOL rank and quality mix in the future.

The Capex projects, we share with you last quarter Orange.

Excellent example, those kinds of actions that will position alpha well for both the near and long term.

Tina are currently completing an in depth analysis of Alpha's 15 year plan and we look forward to publicly sharing some high level takeaways from this work once it is finished.

We're excited about what lies ahead for alpha and the ability to continue investing in our future successes.

I'm now going to turn the call over to Jason for some details on our operational performance. Thanks, David and good morning, everyone before I talk about some of the details of the quarter I'd like to start with a general statement about last year and what our operations teams were able to achieve alpha remains the largest most diverse U S metallurgical producer having shipped to <unk>.

It'll of $16 8 million tonnes in 2021, with $13 9 million tons of that being metallurgical coal.

That doesn't happen, especially in the midst of a global pandemic.

Without our thousands of team members continuing to focus on safe production.

Taking ownership of the safety environmental and productivity goals for their respective operation and work location.

What the team was able to achieve is impressive but we also like to specifically recognize operations that go above and beyond to exceed expectations.

Our best in Class Awards programs allows alpha to compete against one another for top honors within their operational category.

Winners were chosen based on a strict set of criteria that includes performance against safety environmental stewardship and productivity goals for the year.

In 2021 Road Fork number 52 earned the trophy for the deep mine category.

And 88 surface came out on top of the surface mine category that included Highwall miners.

Mark worked processing impacts load out one in the processing and load out categories respectively.

While our mammoth belt system climbed top bragging rights for the belt transfer system category.

We congratulate every employee who contributed to the success of these winning operations and we look forward to another year of robust competition in each category.

Speaking of awards, the Virginia region received two awards from our metallurgical coal producers Association.

Mine 44, one the 2021 best active deep mine owner and deep mine 25, one of the best completed deep mine.

Congratulations to the Virginia team on this well deserved recognition.

I'll now share a couple of operational and cost updates before handing the call over to Andy during the fourth quarter Alpha closed on two separate transactions to divest noncore properties, which included the Dell Barton preparation plant guilty mine and Ed White mine.

All of which were idled together. These divestitures resulted in a combined decrease of $18 million in alpha asset retirement.

We remain committed to firmly further streamlining and optimizing our portfolio as we look ahead.

Additionally, you may recall from our 2022 Capex projects list that we announced four section will be added to our land branch mine.

I'm pleased to report the development progress on this additional section has advanced as planned and the photo section that Lynn branch began production in February .

While none of the other 2022 Capex projects have been completed as of now significant progress is being made and.

And we remain on track with our expedite expectations for each of these developments.

Turning now to our cost as you can see from our release. This morning, we continue to face elevated cost of coal sale levels in the fourth quarter.

This is a result of several factors outside of our control.

Higher royalties and taxes due to higher sales price make up a significant part of the equation.

All inflationary pressure and increased labor costs are also weighing in to the overall figure.

My focus and where I expect our operations teams to continue managing each day is on controlling the elements that are within our direct influence.

During our budgeting process towards the end of last year, we established our 2022 guidance based on a number of internal estimates as well as the then current forward pricing estimates.

At that time met coal was predicted to enjoy strong pricing at the start of the year and began to decline in the second half.

Knowing the impact at higher pricing has on cost of coal sales, we established guidance based on the best available estimates of coal pricing at that time.

Anticipating that earlier cost may be higher than those later in the year.

Ever if coal markets end up carrying more pricing strength through 2022 than was previously predicted.

We will likely adjust our estimates accordingly.

I will now turn the call over to Andy for some additional details on our financials for the quarter.

Thanks, Jason and good morning, everyone.

I've had a very strong into the year with fourth quarter, adjusted EBITDA of $316 million more than double our third quarter adjusted EBITDA of $148 million.

For the fourth quarter Alpha sold a total of 4 million tons with $3 8 million tons of that coming from our met segment. This overall volume is lower than the previous quarter in part due to the holiday season, and some transportation delays we encountered during the period.

As expected our realizations on the export business continued to improve quarter over quarter with tons linked to Australian indices, realizing just over $239 for the quarter.

Tonnage sold based on the Atlantic indices, and other promising mechanisms realized just over $251 per ton in the quarter.

Looking at the met segment as a whole we realize roughly $181 per ton an increase of approximately 60% over the prior quarters $114 per ton.

As Jason commented earlier, the current pricing environment includes a number of factors outside of our control that do ultimately yield a higher cost of coal sales you.

You mentioned, the labor cost inflation higher royalties and taxes, so as those roll down for fourth quarter. We saw met segment cost of coal sales increasing to $92.62 per ton in our all other category cost of coal sales ROE rose to $60 77 in the fourth quarter.

Driven by those factors.

SG&A, excluding noncash stock comp and nonrecurring items increased from $14 $1 million to $18 $1 million in the fourth quarter, largely due to higher incentive bonus accruals and outside fees. Our capex for the quarter was $22 9 million roughly flat against the prior quarter of $22.

$3 million.

Sure.

Looking at the balance sheet and cash flows alpha closed the year with approximately.

$81 million in unrestricted cash and about $34 million in availability on our ABL for total liquidity of $150 million.

These levels are net of our $50 million payment of term loan principal during the quarter.

Cash provided by operating activities for the quarter.

It was $104 million at the end of the quarter. The ABL had $121 million of letters of credit outstanding and no borrowings.

As you recall from our prior disclosures, we refiled the ABL in December of last year.

Primarily to cover our letters of credit in the reefer amended and extended the ABL through 2024.

Looking at our committed and priced business for 2022, the metallurgical tonnage in our met segment is 39% percent committed and priced at the midpoint of guidance at an average price of $204.75, an additional 39% of our met tonnage at the midpoint as committed but not priced.

Thermal byproduct portion of the met segment is fully committed and priced at an average price of $52.46.

And we're around 82% committed in price for 'twenty two in our all other category at an average price of $57.24.

As David mentioned at the top of the call. We continue to make significant headway on our debt reduction efforts in the fourth quarter, we made a prepayment of $50 million in principal on the term loan subsequent to the quarter close we made an additional $150 million in prepayments, bringing down our current debt level too.

Just under $300 million 299 to be exact.

We're very proud of these accomplishments and more importantly, we strongly believe they position the company very well for the future.

As David announced we're also implementing a $150 million share repurchase program is effective immediately and will allow us to begin buying back our stock on the open market as early as this week.

The visibility we currently have on our near term cash flows allows us to tackle two important goals at once.

First continuing to advance our aggressive debt reduction goals and while also offering a robust capital return program that enhances value for our shareholders.

And naturally we will look forward to updating you on the progress on the repurchase program on our next quarterly earnings call.

As a final note given our strong fourth quarter performance, we've adjusted our maximum 22, NOL deduction utilization from $392 million to $285 million as shown in our updated investor presentation, which is now posted on our website.

We expect these nols to provide a significant cash tax benefit during 2022. So we've appropriately saw today's announced capital return action to protect those Nols from any kind of section three two limitations.

That that could come into play with.

This sizeable share repurchase and naturally we'll be monitoring that throughout the coming quarters.

So with that I'll turn the call over to Dan for market analysis.

Thanks, Andy and good morning, everyone.

Before I go through some of the statistics that we usually consider as part of our market overview.

I want to mention the very serious circumstances across the globe in Ukraine.

In addition to the geopolitical significance of such a phrase and challenge to democracy. There are many other global economic and trade related impacts of Russians actions Russia's actions against Ukraine, including increased volatility in stock markets, which we have already seen.

According to the latest data from IHS more key rush.

Russia accounted for over 37 million tons or over 11% of seaborne metallurgical coal exports in 2021. So the ongoing conflict in related sanctions may result in further supply.

Yeah.

With specific regard to our company at this time, we do not expect any material direct impacts to alpha as a result of the war.

However, the situation in Ukraine, the sanctions imposed on Russia, and the diplomatic relations between Russia and other nations continue to evolve and all of the potential effects of these developments cannot be known at this time.

And of course, we remain deeply concerned for the people impacted by this finding especially our customers in Ukraine, we have been and will continue to be in touch with them as the situation unfolds.

Changing gears to look at some recent steel production statistics.

Might've expected that the inconsistent growth landscape borne out by the latest World Steel Association data.

Globally, the latest crude steel production statistics show, a 3% decline in year over year total production for December .

China's December production grew 7% lower than December of 2020, though this was not altogether unexpected given the country was preparing to host the Winter Olympics.

Steel production in the EU held roughly flat against a year ago period with a slight one 4% decline.

However, north American crude steel production increased seven 5% against the year ago period.

U S steel mill capacity utilization rates dropped from its highs at the end of 2021 to hover around 80% for the last couple of months as steelmakers here match production to demand.

While this indicates a slight slowdown also continues to receive interest in our products and we've had quite a few discussions with our domestic customers about potential for incremental tons on top of our committed 2022 volumes.

In the fourth quarter coal indices remain quite strong in relative terms, but dropped from their record highs by the end of the year.

The U S East Coast low Vol index represented the largest decline having started the quarter on October one and $412 per metric ton and ended the year at $320.

That has since jumped to $440 per metric ton as of Friday.

Yeah.

The U S East Coast Highball, a index moved from $377 per metric ton at the start of the quarter down to $344 per metric ton on December 31.

And it's now up to a level of $445 per metric ton.

Finally, the Australian P. L. P index went from $390 per metric ton at the start of the quarter down to $357 per metric ton at quarter close and now was up sharply in recent days to over $560 per metric.

Yes.

Even at the low points in the fourth quarter. These are still very strong levels historically, and we continue to be optimistic about our realizations for 2022, especially at the current committed in price levels for the year.

Yeah.

Before I wrap up my remarks, I also want to briefly touch on the transportation challenges that have been a common topic within our industry of late.

While we have encountered delays and challenging circumstances.

Far our team has been able to overcome these obstacles and meet the needs of our customers.

We remain in close conversation with our railroad contacts.

While we certainly understand the hurdles that many companies have been facing with regard to labor availability and workforce readiness programs as a result of COVID-19.

Our business relies heavily on the satisfactory performance of our transportation partners.

We hope to see continued improvement of those issues.

And we welcome the ongoing opportunity to work with our transportation partners towards the goal of consistently reliable service.

That concludes our prepared remarks for this morning's call operator, we're now ready to open the call for questions.

Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two.

I wanted to French ask your question and please ensure your phone is on mute locally.

Our first question today comes from Lucas pipes from B Riley Securities. Your line is open.

Yes, thank you very much and thank.

In particular for your comprehensive comments and these are.

Really truly unusual times, especially for the commodity markets and.

Kind of in that vein I wanted to ask you how you think about kind of capital allocation.

It may be through the medium term you have had.

Historically, the opportunity to kind of grow opportunistically.

And obviously in this market that.

It has proven to be a terrific terrific investment, but how do you think about capital returns.

Versus growth from here.

Would you like to be kind of from it from a net debt perspective at the end of the cycle. Thank you very much for your perspective.

This is David I'll start and pass it over to Andy.

Thanks for the question.

As I have said on the two previous earnings calls I think I've started to get them. This one debt elimination is our goal so from an asset.

With respect to even our allocation of capital perspective, our goal has been to reduce it.

And now eliminate our long term debt, we were very fortunate because of our cash position to be able to do a capital return program of $150 million and we'll continue to evaluate that as we move into future quarters, but these are uncertain times.

We have some limitations.

For the near future on our ability to buyback.

Beyond what we offered the 150, but our board on a quarterly basis reviews, our cash flows reviews, our future. It makes decision. So we will do that again from a from an acquisition standpoint or a growth perspective, we have a large reserve base you've heard Jason discuss the.

Glen Allen mine in the Cedar Grove minds.

We're evaluating some other opportunities to grow internally, we believe organically, we have the ability to utilize capital.

That manner currently and a better form than looking too.

The acquisition, so Andy did I Miss anything there that you'd like to.

Discuss no no I think that's it I think it's again.

And hey, Lucas by the way I think it's important to note as I mentioned, the our Nols are a factor that we're keeping an eye on as far as any kind of a constraint on share repurchases right now, but at the rate that we look at these prices, we could burn through our Nols at a relatively quick pace and in that.

That does indeed happen.

Should.

That opens consideration for additional actions in the coming quarters, and then also as far as the debt goes you know the plan is as David mentioned, we keep hammering away with it.

Edits with as much aggression as we can.

I really don't don't stop until it's gone.

Awesome.

Really really good to hear.

Super helpful. Thank you and then.

You know.

My myself or.

Nate I asked this question last quarter or two quarters ago.

I'm starting to lose track of time, and how how long prices have been high good.

Good problem to have but can you can you remind us about.

How how would the pricing book would've kind of take shape from here given what you have committed in terms of fixed prices versus what is left open when when prices would be locked in and you mentioned in your prepared remarks that prices in the on the index in the high five hundreds.

With those flow through.

Your your segment.

EBITDA.

Or any any any issues to take into account such as quality and things of that nature. Thanks. Thank you for your additional guidance.

Hey, Chris This is Dan I'll take a stab at that so when you think of our our book and the coal remaining to be sold I guess.

As we've outlined we have.

Okay.

Okay.

Okay.

Yeah.

That's right.

Okay.

Okay.

Got it.

But we will we do have opportunities in that regard.

We also have as I said domestic opportunities what we'll have to do is we will match the products that we have still available.

With the.

Requests that our customers are bringing to us and we will find the best numbers. So there's no single answer there.

It'll depend.

But certainly we're aware of the indices and we'll make the appropriate decisions.

That's that's helpful. Thank you and then.

Another.

Question.

I'm starting to get a fair bit and I would be curious on your perspective is around.

Demand destruction.

Obviously, that's yeah.

Kind of macro bigger a bigger level of problem, but.

For you specifically have you had customers.

Turn away because of where prices are would you say look theres. A reason why prices are so high and that demand is strong and that they need the product how what's what's what's your read of the market on that.

Well short answer is no we have not seen any by the turning away from the fact that it's been the opposite at least so far again things are changing but we've seen Russian coals coming.

Theoretically coming out of the market as customers at least initially we're moving away from those calls so that.

Is is bringing customers to shippers out of the U S and Australia, mostly.

Looking to fill those gaps.

So that's what we're seeing here in the short term and I'll step back and say prior to the invasion of Ukraine. We were seeing a strong market. We were seeing good demand coming out of all of our markets, including India and the far east so.

That hasnt changed.

So in addition to that.

Some markets that were receiving Russian kohl's.

We are looking to replace those calls.

Understood.

Very helpful. I appreciate all of your color continued best of luck.

Thanks, Luke Thanks Lucas.

Our next question comes from Nathan Martin from the Benchmark Company. Your line is open.

Hey, good morning, guys congrats on the quarter.

Thanks Nate.

Yeah, Yeah no problem.

To start with maybe it's two guidance.

It's like everything largely unchanged, maybe maybe on the sales side real quickly.

Given some of the discussions we've already had with what's going on today in the World, Russia, Ukraine, obviously extremely tight supply on really both in met and thermal side.

Successful ramp up Lynn branch last month.

Thoughts on any more incremental production you guys kind of have your eyes on here in the near to medium term.

Nate I'll, let Jason grab that as well but.

We like where we are right now we're in that sweet spot of being able to meet customer needs. We've we've intentionally.

Diversified our portfolio, where we have multiple offerings.

<unk> differentiates us from some others in the industry and but we feel very comfortable where we are.

But Jason I'll, let you.

Add on anything additional to that sure.

<unk> heard good morning by the way that you've heard our plans for the Glen Allen mine, which will it is on pace and we will start as planned and as projected this summer.

<unk>.

I think it's just going to be an ongoing evaluation.

Or is the market going to go.

What what used to be looked at as coal resource will announce a KOL reserve.

<unk> management margins not not necessarily managing cost.

We will continue to evaluate if there are opportunities to you know stretch of mine life. It makes good economic sense, then we will definitely looking to do that.

Yeah.

Got it thanks, thanks for that color Jason.

David.

Maybe if I think about shipments kind of as we look across 22 of them.

Any thoughts on cadence.

You know as it relates to that you guys did give a little color on transportation and labor.

How might that affect kind of the progression of shipments throughout the years, but as we look ahead here.

Hi, This is Dan.

We look at it it's pretty much pro rata, we have a little bit of exposure to some Canadian customers that their nine month customers and then we have a little bit of.

Shipping 12.

12 million tons overseas, we have some lumpiness for lack of a better word vessels come in and out during the year, but think of it largely as pro rata I don't I don't see any one quarter at this point being stronger than another.

Got it so basically just kind of the domestic business is split up equally and hopefully.

Inspiration cooperates and exports similar.

Correct.

And maybe Dan while I have you you mentioned some customers in Ukraine.

Any comments on how much coal you guys so to the Ukraine.

Okay.

No.

There have been a regular customer Nate.

No I don't.

We're not going to get granular on our individual customers.

Got it just figured I'd try if people were wondering so I.

And then maybe just one last thing you guys mentioned, obviously this quarter a couple of divestitures I know you're continuing to kind of look at your assets.

All the time.

And any other potential divestitures you see in the near term and maybe what kind of potential savings could you see from those.

Well I'll take a shot at that Nate This is David.

We're constantly evaluating our portfolio, we do divestments, you can pretty much guarantee we view those assets as non strategic to our long term future.

And.

We do not usually when we won't make comments on either an acquisition or divestment until its completed so.

I like where we are right now our portfolio of assets of our properties.

In extremely good shape, we've worked really hard to get to where we are today.

So I don't see anything on the horizon, it's material, but that will move the needle for anybody.

Got it appreciate that David.

Maybe actually just one more on the cost side I know, it's one that is usually kind of kind of hit on.

You know in the prepared remarks, I think Jason mentioned Aerojet cost guidance for 'twenty two I've changed at this point very fluid situation in the market from a pricing standpoint. It seems like we hit records on the ultra side every day now.

And maybe just.

Any help kind of triangulating, where that full year guidance could move I mean, if I just use the fourth quarter is kind of a reference point you know we're around $92 50 and costs on the met side have you also benchmark was staring at $3 70, and here in the first quarter or once you index linked prices and a three nine days I believe so.

Again that 90 to 50 is already above your full year 'twenty two guidance, so I mean any thoughts on it.

How do you kind of triangulate, where that could move to if that pricing kind of space.

Even where it was in the first quarter or maybe even just a better way to think about that.

What were you guys kind of assuming for full year 'twenty two about price.

Baked into that current guidance. Thanks.

Hey, Nate its Andy.

Yes, so I guess when we talked about when we first introduced guidance, we were kind of talking about.

We base our costs are really coming out of our budget. The revenues are assumed to kind of follow what the strip. The futures were showing at that point in time naturally the world has changed substantially since then so.

And we have been waiting a little bit longer to get further confirmation of how long. This market is going to last before we make any significant changes to guidance, but I would say just broadly speaking.

You factor in the.

The sale of the impact of sales related costs, the royalties of severance taxes those kinds of things that are a percentage of gross sales price.

You're probably looking at an eight to 10 dollar step up your non he can turn into 100 relatively quickly now we as we see these things going on we do see some portions being offset by the continued productivity improvements adjacent and the operations team.

Defined quarter after quarter.

But again, if I think it's safe to say if this market holds for the full year, then you're probably looking at some.

Some quantum of 10%.

Bump up in and the cost of coal sales.

Yes, that's really helpful and it should change substantially.

To say the least right so.

He obviously at a high high class high class problems to have costs going up in prices.

<unk> done what they've done so.

I totally get it I really appreciate the thoughts there so I'll leave it there. Thanks for the time guys as always and best of luck in 'twenty two.

Thank you thanks, Nate I want to thank everyone again for joining the call. This morning, if you're interested in alpha metallurgical resources, we look forward to updating you on our 2022 progress on our first quarter call in a couple of months everyone have a great rest of your day. Thank you so much.

This concludes today's call. We thank you for joining you may now disconnect your lines.

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