Q4 2021 Hallador Energy Co Earnings Call

Thank you Elliot. Thank you everybody for taking the time to join US today. As a reminder, this event is being webcast live and the repay play will be available on our website. Later today yesterday afternoon, We released our fourth quarter 2021 financial and operating results on Form 10-K .

Followed by a press release containing a certain financial metrics, which are now posted on our website.

Today, we will discuss the results and our perspective on market conditions and outlook.

Following the prepared remarks, the call will open up to questions.

This call may contain forward looking statements.

That is statements related to future not past events.

In this context forward looking statements often address our expected future business and financial performance.

While these forward looking statements are based on information currently available to us if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect actual results may vary materially from those we projected or expected.

For example, our estimates of mining costs future cost sales legislation and regulations relating to the clean Air Act and other environmental initiatives in providing these remarks, we have no obligation to publicly update or revise any forward looking statements whether as a result of new information future events.

Or otherwise, except as may be required by law.

A description of some of those risks and uncertainties that may affect our future results you should see the risk factors described.

From time to time in the reports we filed with the SEC.

Today on today's call, we have bill Flynn, our president and CEO and Larry Martin our CFO .

And with the preliminaries out of the way I turn the call over to Larry.

Thank you Becky and good afternoon everybody.

First I wanted to get a definition out of the way we define adjusted EBITDA as operating cash flow gain on extinguishment of our PPP loans.

Income tax expense.

<unk> of certain subsidiaries and equity method investments.

Thanks, Chris.

The effects of working capital period changes plus other amortization.

So for the for the year ended December 31, 2021, we had a net loss of $3 eight.

8 million or 12 cents per share our adjusted EBITDA was $50 3 million.

That decrease was 26 million.

At the end of 'twenty, one we had 111 7 million of bank debt, our net debt with our with our cash on our balance sheet was $109 2 million and our leverage ratio, which is debt to EBITDAR was 234 times.

I will now turn the call over to Fred <unk> our CEO .

Thank you.

As we reflect on 2021 and look forward to 2022 and beyond we.

We feel that last year was the year the economy reopens.

2022 will be the ramp up year and integration of our soon to be acquired their power generation station.

The 2023 in the years following appear to have.

Yes, it would be fantastic for the outdoor shareholders.

But first let's review 2021.

We shipped $6 2 million tonnes.

And produced $5 8 million tons of coal during the year.

Pricing for new business in Q1 was terrible and we.

Chose not to participate in making new sales at that time.

As the year wore on the market strengthened dramatically we chose to make for sales for the years 2022 through 2026.

Totaling $5 8 million tonnes.

With $4 6 million of those tons being delivered over the next three years.

In the fourth quarter as markets improve.

We began focusing on increasing our production ramping from $5 8 million tons of production.

So our target of 7 million tons.

A 21% increase.

To date, we have increased our head count by 17%.

Our productivity increases have been challenging.

And when do you think turnover into consideration we had a lot of new employees require extensive training.

Additionally, we mined through a handful of difficult areas to enable settlement setting up our underground for additional units of production.

Or is it the whole mine is reaching mynheer of its reserve life, resulting in higher than historical cost.

Ace will find out in a few months and we will open a new pit, which will result in lower mining costs.

Despite the higher cost, we were able to generate $48 million of operating cash flow.

$50 3 million of adjusted EBITDA and reduced our bank debt by $26 million.

As of December 31, 2021.

Our bank debt was $111 7 million, bringing our liquidity.

The $35 9 million.

And our leverage ratio to two three or four times.

Within our covenant of three acts.

Turning our attention to 2022.

We anticipate producing and selling 7 million tonnes.

Our production volumes have increased.

So they're still not at the 7 million ton pace. So we expect more shipments in the back half of 'twenty two.

In the first half.

Our average sales price of 30 cents, a pound higher than 2021 and we expect both count to average.

Roughly $31 a ton for the totally full year 2022.

So we expect slightly better margins on more tons in 2022.

Capex for our cooperations are expected to be $25 million in 2022.

Our Big News was recently made public on February 15th as Howard or analysis, New wholly owned subsidiary, Alabama Power Company will acquire.

Energy is one gigawatt.

Generation station.

Located in Sullivan County, Indiana, and returned for assuming certain decommission cost.

And environmental responsibility.

The transaction, which includes a three and a half year power purchase agreement.

The scheduled to close mid July upon obtaining required government and financial approval.

We expect our power to contribute little to outdoors profit in 2022.

There's still limited, meaning it doesn't have enough field too.

Procured throneberry many hours of 2022.

However, this acquisition is significant starting next year as we begin to have additional fuel to put to the plant.

At which time, we believe in outdoor power will begin to double our energies are done.

Excuse me adjusted EBITDA.

Additionally.

At the end of the plants useful life.

Howard one who's your expect to finalize the PPA to allow for a renewable energy development appetite.

This transaction makes how old are very easy.

It is as it is an example, how how old are can help as customers transition to renewables, providing critical capacity to them in the near term.

Maintaining grid reliability.

While creating a path to renewal went through a PPA in the future.

We are working to increase our liquidity to allow for increased working capital and enable for power sales.

On March 25th.

We executed an amendment to our credit facility to maintain our leverage covenant at three act.

We anticipate adding more liquidity to our balance sheet prior to our anticipated acquisition in.

In mid July .

All of these actions.

Our setting up 2023 and beyond.

To be very special for Alabama.

First.

Uh huh.

$5 3 million tons, we have sold outside parties in 2023, our average sales price.

$3 29 per ton higher than in 2022.

Additionally, we have.

2 million tonnes.

Of course beyond the $5 3 million to sell so the mayor of power plant.

Removes the seal limitation apparel.

Yes.

Additionally, Russian division of <unk>.

Rain has fundamentally changed the world's focus energy independence.

Take care and be to use for the next few decades from supply other than Russia.

But all forms of energy experiencing much higher prices power prices are higher as well and we have a large open position.

Proposed power plant capacity and energy starting from June of 2023.

We had previously stated.

We believe there's propel and we're in a position to more than double its adjusted EBITDA in 2023 and beyond.

Maintenance Capex for outdoor power in 2023 is expected to be $16 million.

In order to run the plant had a 2025.

We will be required to spend some money on environmental controls.

Currently evaluating how best to meet those requirements.

In summary, Howard or energy is becoming a fundamentally larger company.

Our wholly owned subsidiary.

<unk> coal will increase its production by over 20% going forward.

And our new wholly owned subsidiary will generate adjusted EBITDA equal to or greater than Sunrise coal.

All of this points to a very bright collapsing future for our shareholders.

With that I'll open the mic up for questions.

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

Thank you very much and good afternoon, everyone.

My first question is on the.

Post transaction.

I just wanted to make sure I understand what happens after this initial three and a half year term.

Is that when the power plant is retired or is that when you would switch to what would you be able to extent.

Operating life of the Coke plant beyond those three and a half years.

Yes, so we're contracted.

Sure.

To sell.

All of the capacity of that.

Through may three.

And then it steps down 30 to June 23 through December 25.

To roughly 30% of the capacity is 20 something percent.

Below 20%.

Of the energy.

We do not have to do any environmental upgrades to the plant to run through 2025.

Does it extend beyond that we will have to send somebody on the yield.

We're still evaluating.

What's the best way to comply with that with those cost structures are.

We'll pull the trigger on that decision sometime next year.

At current market prices, we think it absolutely makes sense to make those investments, but we will evaluate all of that.

Over the coming 12 months.

Okay.

And if you make those investments.

What would be the operating life of the.

Plant.

Well, that's largely based on economics.

Right now.

The markets are.

Theres just not simply is not enough capacity rated capacity.

Two.

So really getting a lifetime I think the grid operator, if you read what MISO was saying.

You know the reserve margins have come down significantly.

They declared a state of emergency in MISO January 1st second third.

Oh yeah.

They have publicly stated they say that.

Their grid could reach 80% renewables by 2050.

I don't think anybody really knows how long this transition takes Ah I think MISO was saying, it's going to take longer than what the headlines are saying.

The market will determine how long are these the capacity from our plant, but we.

We are seeing strong demand.

Our excess capacity.

Since announcing this transaction.

During.

We have one supplier.

How was it for hours at announcements I'll take all the capacity out.

So.

Yeah. The issue is is all of the utilities also like a deal, especially one of transition.

They all have the same game plan and you can't.

Cut down.

Generation, that's right it has a rated capacity.

Of the 92% of nameplate.

And replace that with generation.

The rated capacity.

It's a 25%.

To do that you'd have to overbuild.

The lower rated capacity and you have to do an enormous amount of transmission lines.

Yeah.

How long does that take.

Finally, this is transmission projects typically take about a decade.

From planning to the permit being issued and then they have to be built.

So you know I think Kirk is doing some things to try to speed that up.

But we've yet to see how long that transition so how long those plant went totally it would be determined by the market.

We don't know the answer to that.

From my Vantage point like it's got a long life ahead of it.

But markets change every day so yeah.

Yeah.

I'm confident the economic takes us through 2025.

And we are studying with our environmental.

Yeah.

Cost would be to extend the life of the plan beyond that but.

Yeah.

We're optimistic.

Okay.

That's helpful. Thank you and then.

And in terms of your balance sheet. So on on on my numbers.

It appears that.

Wouldn't generate sufficient.

Free cash flow between now and maturity to.

Essentially just pay this off out of out of out of out of cash.

So could you share with me kind of how you think about.

Refinancing opportunities.

What sort of what sort of options you're considering here at this at this time.

Okay.

Yeah. So what we're looking at is.

So we save clothing are subject to.

Perfect transfers.

Financial approvals so.

And so we have to get permission from our bank group to allow.

Our power and then the.

Some are on plan.

And two our collateral position.

The same point in time.

Our credit facility goes current towards the end of this year.

And.

We want to increase our liquidity.

So that you know.

As we take off or working capital.

And we want to we want to make sure we have enough liquidity.

Market gives us the right opportunity to hedge at a valuation that we think is appropriate.

That week.

We can put up the Lcs to take advantage of those opportunities. So.

Power prices keep rising.

Energy prices are on Brian .

Well I think it's a secret.

The world.

Change.

Russia Ukraine.

I mean, China or Russia.

The worlds largest gas this quarter.

Number two oil last quarter in the world number three coal exporter in the world.

Record exports equal roughly.

A third U S coal production.

And suddenly you know 80% of the World says, we can't touch Russia coal, so euro dollars as well.

Looking to the states.

Yes.

Has dramatically.

Increased pricing.

Which is pushing out.

Power pricing here as well because the power architect to decide.

Do those need to use overseas so do they stay home.

Did that is because we now have is how has the choice.

We want to put tons to the plant.

To generate electrons.

Or do we want to sell those.

Elsewhere.

So yeah that is something we'll continue to evaluate at this time, we think it still makes up even though gold prices are much higher.

It makes sense to put it.

Total the plan to generate electrons, we feel there's more power more profitable.

Plus we have some obligations as well so.

Those are the things that we're evaluating we just think it just puts us such a unique position to.

To be able to.

Decide where.

Where are the best place.

The best places to put our tons.

So for the retired at the outdoor shareholder so.

Whereas static about what we see like I said the company is becoming bigger both on the coal side and now with outdoor power.

This is gonna have a tremendous effect.

And our share price.

In the coming years.

Thank you and so so the way to think about.

Maturity is that this is this is being renegotiated here as part of this transaction.

Correct it is being renegotiated.

Sure.

We're looking for a term extension and we're looking for.

Liquidity.

And to allow them to the collateral package of those conversations are ongoing now.

But yeah.

Yeah, we feel good about it.

That's very helpful. Thank you and then my last question.

I mean, we all know and feel the inflationary pressures.

What's what's your guidance for.

For cash costs, I mean, if I may have missed it but.

How do you think about the cost pressures affecting your operations. Thank you.

Yeah, they were all seeing inflationary pressures.

And supply pressures I mean, you have to fight.

Right now to get inputs such as glue.

Parts various thing I think I. Thank all of our suppliers are stretched.

Towards the upper end of their lineup as well.

How long that last I think it's.

Everything you read says well this will dissipate throughout throughout the year.

Interest rates are rising.

Fuel prices electricity prices food prices are all higher that will have a slowing effect on the economy at some point in time.

I think what we see is.

For this year.

We're showing an increase in our cost structure. We said, we thought we would average $31 a ton of those out.

For the year.

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So again, we've added people our productivity is coming up it hasn't come up as fast as we would like.

We're seeing gains every day, we're seeing light at the end of the double we're getting.

So we're spending a lot of time and effort.

To take a mine from.

Five five and are happy with the production of the seven right now it takes some time to get set up to get everybody in the right location get people hired to get people trained.

That is happening so kaufman.

Costs were great in the fourth quarter.

I appreciate everybody's patience on that.

Lee.

We think we are absolutely headed in the right direction.

And the potential of what we see coming.

This year should be better than last 2023, and 24 25 for that matter. We think are just fantastic.

So when we look at.

The type of cash flow that we think will be coming out of.

Company today that has a market cap of somewhere north of 100 million.

I think that.

I think the return on investment for the shareholder.

Potential to be outstanding.

Thank you very much Brent.

All the best of luck.

Alright, Thank you Lucas.

As a reminder to ask any further questions. Please press star followed by one on your telephone keypad now.

We have no further questions I'll now hand back to Brent Bill Flynn for closing remarks.

Okay.

Okay I appreciate everyone's time today and interest in the company.

Again, I just want to reiterate how excited we are about what we see coming around the corner or the opportunity.

Yeah.

And thank you for your continued interest.

This concludes today's call we'd like to thank you for your participation you may now disconnect your lines.