Q2 2022 Hallador Energy Co Earnings Call

Serially from those we projected or expected.

For example, our estimates of mining costs future sales legislation and regulation.

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 may be required by law for.

For a discussion 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 file with the SEC. As a reminder, this conference call is being recorded in addition, a live and archived webcast of this earnings call is also available on <unk> website. We encourage you to ask questions during our Q&A.

If you are on the webcast and would like to ask a question you will need to dial into the conference.

The toll free number is 844. She was there with 06205 access codes 393 to June nine now with that I'll turn the call over to Larry.

Thank you Becky and good afternoon, everyone.

Today, we're <unk>.

Reporting our second quarter operating results and before I get started I wanted to define adjusted EBITDA as operating cash flows plus current income tax expense less effects of certain subsidiaries and equity method investments plus bank interest less the effects of working capital.

<unk> period changes plus cash paid on asset retirement obligations reclamation plus other amortization.

We had a net loss for the quarter $3 4 million or 11 cents a share our year to date loss was $3 5 million or <unk> 44, a share.

Our adjusted EBITDA was $11 5 million for the quarter $14 1 million for the year and we increased our debt by $10 7 million for the quarter and $19 million for the year Our bank debt at June 30 was one <unk>.

$130 7 million, our net debt was $121 9 million and our leverage ratio, which is debt to adjusted EBITDA was three seven times.

I will now turn the call over to our CEO Brent build one.

Thank you Larry.

Okay.

In the second quarter, our accomplishments exceeded our expectations we were successful.

And returning our operating cost structure to historical levels.

We contracted for $2 2 million tons of forward sales of over $125 per ton dramatically, increasing our future sales prices.

We were successful in raising a total of $29 million over the second and third quarter to add to our liquidity.

All three of these events.

Lowering our cost structure, increasing our sales prices.

And adding to our liquidity greatly improve the current fees.

<unk> financial position.

Also during the quarter, we made significant progress towards closing the acquisition of the <unk> power plant.

Within the next few months pending governmental and financial approvals.

As we look to operating results.

One 6 million tonnes were shipped during the quarter at an average sales price of $40 23.

This was a $1 17 per ton lower than Q1.

And is expected to be our lowest sales price quarter for the next several years.

As we will experience roughly $8 per ton increase.

And the third and fourth quarter.

Significantly more than that next year.

Q2 production costs were.

$31 83, this represents a $7 71 per ton decrease over Q1.

Productivity at the mine improve dramatically accounting for the majority of the cost improvement.

During the second quarter, our operating cash flow was negative $2 $7 million due to increases in accounts receivable inventory parts of supplies and cash spent on reclamation.

Our bank debt increased by $10 7 million, which as of June 30 stood at $130 7 million.

Liquidity was $9 million and our leverage ratio came in at three seven times.

To put ourselves in better financial footing and to increase liquidity.

We issued $10 million of convertible notes during the second quarter.

Followed by an additional $19 million of convertible notes in the third quarter equaling a total of $29 million.

$10 million of the convertible notes were converted to equity during the second quarter.

The company was successful in executing an amendment with our bank modifying our debt to EBITDA covenant in our debt service Covenant for Q3.

We project being fully compliant with all future covenants.

During the second and third quarter, we were successful in executing forward contracts sales for coal averaging prices in excess of $125 a ton for the 2022, 2023, 2024, and 2025 time frame.

These new contracts will dramatically improve our average sales prices.

If you look at the first half of this year.

We have averaged $40 77 per ton.

In the last half of this year, we expect to average $49 per ton.

I expect that price increase to be a little bit more heavily weighted towards the fourth quarter than the third.

When we look at 2023, we expect our average sales price to be at $58 per ton. So this in.

In effect, we will more than triple our margins going forward.

In our prior earnings call, we had discussed our plan.

Taking up to 25% of our 2023 okay.

<unk> production to the main power plant.

As we felt that was the most valid valuable use of those tons at that time.

However, soon after disclosing those planned market conditions changed significantly.

And we felt was better used to sell the majority of those tons to third party customers.

I think this is a prime example of the Optionality of the mirror plant will afford us once.

Once we close on the transaction.

Yeah.

Mirror is the best use of tons, which I think the majority of the time it will be.

Where we'll take them but.

Like we just showed.

If third party customers are willing to pay more than we feel towards at the plant we are willing to execute on that plan as well.

These contracts allow how it or to generate $160 million of adjusted EBITDA in 2023.

And we expect very little profit premier of in 'twenty, two and in 'twenty three as the plant is still limited.

However.

The cash flow will be so great that we project that we will be net debt free.

Before the end of next year.

So we're very excited about that.

If we're able to alleviate miram steel limitations. There is further upside to <unk> 2023 adjusted EBITDA.

Looking at the closing of the acquisition.

We feel we've made great progress towards closing the Meramec position on both the regulatory and the financial front.

We anticipate closing will occur in the next couple of months.

Subject to obtaining our final government and financial approvals.

Our team our operating partner in Cam, our energy partner and Aces have all worked very hard.

Twosies to ensure a successful transition.

And for many of them to perform.

As it should on day one.

We've never been more excited about the future of how it or we're thrilled of our new sales contracts.

We feel comfortable that we are on solid ground financially and we look forward to the promising opportunity the manpower plan.

<unk> and its shareholders.

So with that I'll open up the line for questions and comments.

Thank you we will now begin the Q&A session, if you'd like to ask a question. Please press star one on your telephone keypad and if for any reason you'd like term if that question. Please press star two.

As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.

I'll pause here for just a moment to compile the Q&A roster.

Our first question comes from the line of Lucas pipes with B Riley Securities look.

Lucas Your line is now open.

Yeah, Hi, this is Nick Charles asking a question on the on behalf the Lucas.

What does the $160 million of EBITDA assumed for <unk>.

Volume and cost respectively.

Okay.

I'm, sorry, I didn't catch your name.

Hi, Yes. This is a this is Nick Charles asking a question on the behalf of Lucas.

How's it going alright. Thanks.

Outlook.

Our cost.

Yes, Larry I don't want to misspeak on the costs I know that we're bringing on some additional production next year.

Out of a surface pit that has a little higher cost.

And we've reported that number.

Going forward as.

Larry I'll, let you fill that in.

34% to $35.

The fourth quarter and while $36 for next year.

Got it got it Okay. That's helpful and then and then the follow up there.

Does the $160 million does it require the transaction to close at narrow or is it independent of the power plant acquisition.

That's independent as we've said we.

We.

Very little profit out of the plant and less.

Unless we.

We were able to procure additional tons for the plan, which we are working on.

So if we are successful in securing additional tons for 2023 year than there is upside.

To the profit potential beyond just the $160 million.

Great great. Okay. That's clear thanks, thanks for that color and then I.

Last one for me.

Do you need to make any investments in mine infrastructure equipment.

Hiring any labor to get to that $160 million target.

While we've made great progress on the hiring front.

That's an area that we've struggled since.

I think our initial plan started.

Timber of.

Ah.

2021 that we had a goal of hiring an additional 200 plus employees.

And I think we've now.

Last count.

Added about.

100.

<unk>.

90 of those so.

We're almost to the target number that we want to be yet.

As far as on the equipment front, though we have the equipment we have are.

I take that back we have added some capex.

Two.

Reopened a surface pit.

And three 1 billion, Indiana.

And we've added a little bit of surface equipment.

To that.

Two the company to bring that bring.

Roughly 600000 tonnes.

Out of that pit for about.

Sure.

Basically fourth quarter of this year.

And the balance of next year so.

Coal prices were seeing at levels that are just quite frankly unheard of.

And.

And we're seeing a little bit of turn to that as well.

And so yes.

Justify bringing us a little bit of higher cost production, which is why we're showing.

Our cost jumping up in the $36 range because it is extensive surface mining coal.

But.

When you can sell as we've said over 2 million tons north of $125 a ton.

Margins.

Those margins work so.

Gas prices have stayed strong.

European prices have stayed strong I think.

I saw a price for <unk>.

Power in Europe next August $600, a megawatt hour I mean as long as that keeps happening youre going to see us coal flow.

To Europe , and that's going to keep our market pretty.

Pretty tight so.

And were seeing and.

An extension of.

A lot of political firepower plants that had announced to retire I can name three kind of in our backyard.

That have all now extended saying all right, we're going to we're going to put a couple more years on.

On these plants just because capacity is really hard to find which is why capacity prices went from <unk>.

Almost nothing to legal limit this past auctions so.

We still see more.

Power plant retirements announced which is going to keep capacity prices tight.

And elevated.

We'll see disruption in Europe , which is also keeping prices elevated and we're still seeing.

Really for the next three years.

Pretty high natural gas prices so.

All of those things.

Our good for <unk> business.

And.

We are just tremendously excited about the future of being able to profit both as our coal company.

And with the addition of the Marin Powerplant, which we're feeling.

Good about that transaction.

Getting closed here shortly.

Got it got it that's that's very helpful really.

Really appreciate all the detail there.

I guess, just one last one would be do you have a.

Can you put some numbers around around the incremental capex that you mentioned.

Yes, I'll defer to Larry here, So I don't misquote the number.

Yes, so the answer I think the incremental capex for the surface mine and is about $6 5 million.

Got it got it.

Really really appreciate all the color and congrats on the progress so far in <unk>.

Best of luck.

Alright, Thank you Mike.

Thank you Nick.

The next question comes from the line of John Moran with <unk> <unk> Company. John Your line is open.

Hi, Bryan Thank you.

I had a quick one.

On the $2 2 million tons.

You sold during the quarter.

You have a disclosure on these forward sales and all of your 10-Qs that references our customers.

Options our ability occur.

Reduced tonnage or increased content.

Subject.

How much of that would come.

Come into play on the on the new tons that you saw for example.

For the coal price collapses next year.

And these customers.

Walkaway from portions of that.

Of those contracted tons.

Sure.

The $2 2 million tonnes I referenced those are fixed tonnes theres no plus minus on the volumes.

So thats it.

Fixed price and no ability to get out of there.

Correct.

Yeah.

What about on the.

On the.

2024 to 2027 volume.

How much of those that were in place prior to this these new contracts.

[laughter] would be subject to increasing volumes.

I guess, what I call steel pricing if any.

So we disclosed what 7 million tons of sales I think in the.

24 through 'twenty seven.

We were successful in selling.

Some of the some of the $2 2 million ton like I said it wasn't that 'twenty two 'twenty three 'twenty four 'twenty five timeframe.

And beyond that with legacy.

We do have.

Hang on Illinois.

Yes, the legacy.

Out in that 'twenty six 'twenty seven timeframe is on price. So we have volume commitments, but not pricing commitment.

So you will see the pricing come up.

Okay, and maybe two to 300000 of that 7 million is.

You can go up or down by two or 300 Grand.

Okay, and the rest of us here.

The rest of us either.

Unpriced or tricks.

For Iraq.

Okay great.

And then just a question about <unk>, so assuming that closes.

As you expect.

Does that look like next year, you said your fuel.

<unk> limited can you say.

I assume some of that.

Information is public I don't know where to find it but.

Sure.

So they must have contracts with third party.

Producers so.

I guess there is no coal available for next year.

Yeah.

So.

I think that.

I think there has been.

Yes. There is there is some fuel purchase for that plant.

A few of them.

Electric.

You will be dedicated to generating Hoosiers electrons.

We've set a price with them on that.

But we expect again that price.

That plant to run at low capacity factors it will run.

It will make a small profit.

But.

This.

Hello, John you are the guy on the last call who said.

If you can sell coal versus take it to the plant at these higher prices why wouldn't you do that.

And I think it was a couple of nice later.

So.

And offered to assist at pricing that was.

Above our expectation so.

So we made the decision.

To do just that and so instead of taking.

A couple of million tonnes through the plant we took it to the market.

So like I said, its not that Theres no fuel for the plant. It's just feel limited. So it's not it's not going to run a lot of hours, we do see some opportunities to acquire additional tons to bring to the plant.

But those those deals are not finalized and.

And.

So, we'll assume theyre not going to happen until they do.

That decision.

So just wondering if I can maybe went out.

Uh huh.

All we wanted to really point out was.

Traditionally we've been about $50 million of EBITDA.

We are now fully contracted through 2023.

And at the prices, we're talking about and the production cost numbers that we're expecting we think that will generate $160 million of adjusted EBITDA.

So we basically have triple our business that will generate enough cash flow to pay off all of our debt.

Almost here over the next let's just call it 13 months.

So.

Take that decision it seem like it makes a lot of sense.

I was just trying to figure out.

For example.

Plant will be running at a 25% capacity and you make a little bit of money or breakeven.

And that.

I just don't know what the economics look like from that standpoint is also.

Or can you say and we haven't.

We haven't released any of the economics on the <unk> plant and we will not do that before closing.

I'll tell you is correct is going to run at a very low capacity factor. There is parts of the year that will run more than others. So it gets a little confusing.

As to <unk>.

Why did it run harder in the first quarter than it ran in the third quarter.

But.

So but at the end of the day.

If we are successful in finding more fuel for the plant.

There is upside to our projections right power prices are still pretty healthy capacity prices are extremely healthy.

Sure.

And so for all those reasons.

We're excited about.

The potential of this company and you were talking about a company that is.

As a market cap of a little over $200 million and it's going to do a $160 million of EBITDA is going to pay off $131 million of bank debt in that timeframe I think thats punching above our weight.

Alright. Thanks, a lot I also wanted to just compliment to the company and the directors on the on the capital raise.

Anybody.

<unk> solution, but.

It seems like it's a little over 10% at a decent <unk>.

Rice in reasonable terms, so anyway for what it's worth thank you Bob.

I appreciate that thank you Tom.

Thank you John .

Again to ask a question star one on your telephone keypad.

Okay.

We have a question from Robert Baker private Investor Robert.

Yeah, Hi, Thank you for taking my questions.

I was with my first one I was curious about the.

The $2 2 million tons priced at 125 ton just.

Any context, you can give around that as far as.

Is that kind of more where the overall market is currently pricing that was at a customer who is extremely short just trying to lock in tonnes or anything you can provide on that would be appreciated.

Well, we actually transacted with five separate customers.

The market is backward dated meaning that.

Coal in 'twenty two.

More valuable in 'twenty, three and 'twenty three is more valuable and 24.

What we're seeing generally is.

I think utilities are.

Pausing from buying a little bit we're going to get into the RFP go out for RFP here in September October .

And see where market prices are.

Thanks.

We're trying to get a handle on what railroad and transportation performance is going to be like.

In the third and fourth quarter I mean, it's one thing to buy tons. It's another thing to actually get them shipped.

<unk> has done a reasonably decent job with us thus far.

I would say about 85% of everything that we have.

So that has been shipped.

But our our moves are typically a little simpler than.

And then some of the other people out there trying to go to export.

As gas.

We basically keep seeing gas pricing high priced gas keeps extending out further and further and as that happens.

We think that adjust power prices up further and further.

Yes.

Will push higher pricing out the curve as what.

We think will happen.

And again.

As long as there is disruption in the market, meaning we had a tight market.

And then Russia.

In Ukraine.

Altercation wherever you want to call it.

That has created enormous disruption to the market.

Again, Russia is the.

Third largest.

Coal export around the world.

And now you've got Europe , basically, saying, we won't take those.

This is the largest natural gas export around the world Europe , saying, you won't take those beta use or not.

Well, you are saying or let's just say I don't know, but this is.

Art.

Flowing and so Europe is getting those from the United States we've seen.

Several contracts for LNG to leave the United States and go to Europe and other countries.

There's been an enormous amount of activity activity.

Of new contracts being signed is a 20 year term contracts.

So that that removes a lot of gas in the United States.

What's been kind of.

Gas is a competitor to coal so we've gone through this period.

This is where our legacy contracts Kemper almost five years six years seven years of really cheap gas.

Now we've kind of entered into this environment, where we.

The price of gas has doubled or tripled depending on what timeframe you are looking at so.

Cause of that.

The market then looks to get more of its electrons from coal.

There really hasn't been a dramatic supply response from coal production.

Due to nobody is putting a new mines.

It's been hard to hire people to hire to get capital all of those reasons.

It's kind of kept a lid on.

We've seen some supply response that it hasnt been dramatic.

Not going to see the U S coal production double just isn't going to happen.

No.

So.

From that perspective.

<unk>.

We're excited about the future, we're seeing pricing that we've quite frankly would never have seen before.

And.

Selling coal versus in.

In the mid 30% versus selling coal at the 130.

Uh huh.

It's a magical experience sell very much of it but.

There is all sorts of of <unk>.

Pricing charts out there to show where its all trading at transportation is hard.

But it is it is moving.

And so.

We think as long as gas and as long as there's disruption in the market.

To see pricing.

<unk> two.

Okay.

To push out the curve now, let's say above a $125 a ton.

Your guess is as good as mine high prices to insecure high prices.

But we.

We don't see.

We don't think its going back to <unk> anytime soon so for that for that matter.

Thank you.

We're seeing average prices now up around 52.

Our average price moves to $58 next year, we've made great margins that we produced a hell of a lot of cash flow with that.

<unk>.

We just see we just see a lot of opportunity, particularly with the addition of the plant that's a very beneficial thing to our company and we're looking forward to.

Getting that transaction behind us.

Okay.

Great. Thanks.

Okay.

My next question.

China already starting to answer when you mentioned <unk> doing about 85%.

There was in the Q3 2018 activity did mentioned the delivery of all of the tons could be delayed by transport logistics.

I was wondering if you could elaborate on that a little bit.

Yes.

One one rail line in particular are kind of all of them are or.

Yeah, just any more detail or elaboration on that.

I think that all forms of transportation are struggling whether that PSX.

<unk> or truck.

Everybody is running at their maximum.

So we sell the coal we produce the coal.

But as our customers responsibility to deliver the freight to us once we loaded.

Once we load the transportation may provide.

<unk> title.

Transfers and Thats when we effectively have made a sale. So one of the things we have to be diligent on is to make sure that we're working with are.

Partners to <unk>, primarily and trucking companies to make sure that our product is flowing to the customers.

What I'm, saying is that there's been a lot of press out there.

For railroad performance.

I've, usually found that the railroads.

Take a little time to get wound up but once they get going they performed pretty well.

Struggled with Covid, they've struggled with hiring people just as we have we have seen on our front, it's gotten a little easier to hire people here I would say in the last two months.

Is that a reasonable success that were experienced in others arent I don't really know.

But from our standpoint.

We've made.

Gains there so.

<unk>.

Uh huh.

So anyhow.

We feel good about transportation at this point it is something we're keeping an eye on.

Yes.

Okay.

Thanks, and just to be clear when we said all of our tons. We didn't mean every single ton could get delayed we met all of our contracts to any to all of our customers could have some delays, we didnt meet 100% delays.

No no.

Yes, I didn't I wasn't interpreted as a 100% Joe just said, yes delivery of.

Well I guess I wasn't sure if that was just for the $2 2 million tons or potentially.

Tons could have.

However, I want to.

Yes, it wasn't quite sure if that was specific to the to get there. There is a percentage of anytime we deliver that could be delayed but I mean, it's not.

It's just every customer as Brent said, all transportation is having.

Issues now so any customer we have could have some carryover or delays this year.

They are.

<unk> been doing a lot better so.

Okay.

Alright thats good.

Yes.

Another question regarding labor needs.

I think it was.

I hope I have the name right Nick asked about it.

And you had mentioned that you.

<unk> been able to hire 190.

200 employees.

And I just wanted to clarify was that 190 200 that you needed to hire for oak town and separate from the hiring you have to do for prosperity and free window.

That's correct I think we won't add to 10 at old town and we've done we've done about 190 185 of that something like that.

So just to try to gain scale.

And we're not quite where we need to be at a town, but we're getting much much more comfortable.

With on the hiring front.

We've had much higher turnover with new hires and we have a historical employees.

I think we are starting to see some experienced people come back.

People that have left to try a steel company or try to work that a car manufacturer or something like that we're starting to see those.

So.

Some of those people and found that the grass isn't greater on the on the other side of the fence.

Come back which is great.

People that.

No the drill on a very efficient when they show up.

Correct, we will be hiring.

Some people associated with the surface mines both of prosperity.

And but you got to think about it this way it may so we're winding down as.

Is it buys out and we're winding up prosperity and for you and bill so.

Some of those people will be moved from Ace and some of those people will be new hires.

We have found is it's much easier to hire surface miners underground or so.

Haven't really experience.

Any trouble with that.

Yeah.

Where we've struggled over the last year has been to.

Higher underground or <unk>.

Okay.

And I understand alright.

And then.

Last question I was wondering.

With you mentioned that.

Possibility as being net debt free at some point in 2023.

As that progresses throughout the year.

What thoughts if any the board has regarding what to do with cash flow.

As leverage comes down.

And I mean in terms of either dividends or buybacks or so for it or.

No.

Yes, I think at this juncture.

We've been.

Raising money to make sure that we have enough liquidity to get to our high price contracts.

We want to get the mirror plant closure behind us to make sure there's no surprises there.

And we'll see where the opportunities bring next year as far as.

Is there room for additional investment at the plant or.

Are there other plans that can be acquired.

Or does it make sense to buy in stock.

These are all things that we'll lay out what the opportunities are next year.

Address those with our board at this time, but to date, we're not.

We're not in the mode of.

A buy in stock.

Okay.

Alright, great. Thanks, Thanks for answering my questions I appreciate it.

Thank you.

Thank you Mr Baker.

Again to ask a question it is star one on your telephone keypad.

And as a final reminder, it is star one to ask a question.

Okay.

Crudes, our Q&A session for today, I will hand, the call back to Brent for any concluding or additional remarks.

Okay.

Well, thank you everybody for their time and.

We look forward to executing on all the things we've laid out today. So thanks again, and we'll talk to you next quarter.

Yes.

That concludes the <unk> second quarter 2022 earnings call. Thank you all for your participation you may now disconnect your lines.

[noise].

Okay.