Q2 2023 Alpha Metallurgical Resources Inc Earnings Call
Greetings and welcome to the Alpha Metallurgical resources second quarter 2023 results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Please note. This conference is being recorded I will now turn the conference over to your host Emily O'quinn Senior Vice President Investor Relations and communications.
You may begin.
Thank you Paul 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 second quarter 2023 earnings.
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 all of his Chief Executive Officer, Andy Edson, and our President and Chief Operating Officer, Jason Whitehead also.
On the call are Todd Muncy, our Chief Financial Officer, and Dan Horn, our Chief commercial officer, and with that I'll turn the call over to Andy.
Thanks, Emily and good morning, everyone.
I'm pleased with our team's performance in the second quarter, especially in light of some challenging circumstances that we worked hard to safely and quickly overcome.
Our June operational update press release detailing the circumstances around the events at our road Fork 52 mine in West, Virginia, and the Dominion Terminal Associates terminal in Virginia, So I'll recap them here, but I will say due to the diligence of our team. Each of these challenges was resolved in a satisfactory and quick math.
As our press release. This morning stated the delayed tons from DTA shipped out in July as expected and the road Fork 52 production levels are back to normal and we expect to be able to make up the delayed tons impacted by this issue within the third quarter.
Despite these hiccups, we produce quite well during the second quarter.
In terms of realizations. The metallurgical indexes has experienced volatility in recent months, but are generally followed a downward trend coming off the highs of last year.
I believe alpha is well positioned to deal with this volatility in the coal markets and further softness in the indexes should that occur.
On the volume side, we were fully committed at the midpoint of guidance across the portfolio for this year as we continue focusing on safely and efficiently producing this coal for our customers. We are also looking towards next year and the best way to position ourselves for whatever may come in 2020 four.
The current weakness in steel demand, coupled with monetary tightening in the United States and Europe , and the residual inflationary pressure on supplies.
And materials are all considerations and while we expect the back half of the year to look like.
As these and several other geopolitical and economic factors continue influencing the coal markets over the coming months, we plan to keep our focus on producing safely optimizing our output based on customer and market needs and controlling our costs.
These are the priorities that will serve us well in all pricing environments.
Turning to our capital return program, we've not only seen great success around the buyback program with more than $850 million returned to stockholders in the form of buyback since the program's inception, roughly 17 months ago, but we've also heard from our investor base, but pretty certain unanimity that share repurchases are the preferred method through which they are.
Wish to have capital retired.
But that goal in mind, we decided to consolidate our capital return efforts into an exclusive focus on our share buyback program.
The dividend program will cease following the board's next dividend declaration to pay out with both of which are expected to occur in the fourth quarter.
We had previously targeted a $28 million annual dividend amount with quarterly unit dividend growth coming from the impact of the share repurchases, but this budgeted amount will now be available for redirection to the buyback program.
Management will continue to execute on the board's current $1.2 billion share repurchase authorization provided market conditions and cash flow levels awhile.
I believe utilizing all available funds for the share buyback program is the most efficient option. There represents the best return to our shareholders. So that's what we're going to do.
With that I'll turn it over to Todd for a discussion of our second quarter financial results.
Thanks, Andy second quarter, adjusted EBITDA was $258 million down from our first quarter level of $354 million, we sold $4 3 million tons in the quarter $4 1 million of which came from our met segment and 200000 tons from the all other category.
Quarter over quarter realizations decreased for the met segment as a whole with an average realization of $172.51 for the second quarter compared to $208 93 for the first quarter.
Export met tons priced against the Atlantic indices, and other pricing mechanisms in the second quarter realized $175.69 per ton.
Export coal priced on Australian indices realized $159.62. These.
These are compared to last quarters realizations of $211.31 per ton and $240 76 per ton, respectively, which benefited from a more robust coal pricing environment.
Realization for our metallurgical sales in the second quarter was a total weighted average of $176.04 per ton down.
Down roughly 17% against the prior quarter's $213.21 per ton.
Realizations and the incidental thermal portion of the met segment decreased quarter over quarter.
Coming in at $115 50 per ton in Q2 as compared to $137 65, since Q1, reflecting the lower thermal pricing for the period when the tons were sold.
Yeah.
Similarly second quarter realizations in the all other category were $99.66 down from $109.36 in the first quarter this quarter over quarter drop and realization was due to the declining pricing environment for thermal coal.
Cost of coal sales within our met segment decreased to $106 35 per ton down from $110.56 per ton in the first quarter.
Cost of coal sales in the all other category increased quarter over quarter to $88.59 per ton as compared to $74.69 per ton in the first quarter.
This increased cost level in the all other category is due to expected inefficiencies associated with the slab count minds approaching end of life.
SG&A, excluding noncash stock compensation and nonrecurring items decreased to $14 million in the second quarter as compared to $17 $7 million in the first quarter.
Q2, Capex was $54 $9 million down from $74 $2 million in first quarter 2023.
The lumpiness in Capex spending we mentioned last quarter has continued but we have reiterated our previously established capex guidance range of 250 million to $280 million for the full year 2023.
Moving to the balance sheet and cash flows as of June 30th 2023 we had $312 $4 million in unrestricted cash.
Up from $222 $5 million at the end of the first quarter.
We had $93 $1 million in unused availability on our ABL at the end of the quarter.
Alpha had total liquidity of $405 $5 million as of the end of June which is net of the $155 million in share repurchases during the quarter by.
By comparison total liquidity at the end of the first quarter was $315 $6 million.
Cash provided by operating activities increased quarter over quarter to $317 $2 million in Q2, as compared to $177 $4 million in Q1.
As of June 30, our ABL facility had no borrowings and $61 $9 million of letters of credit outstanding unchanged from the prior quarter.
Turning now to our committed position for the year due to some customer deferrals, we have reduced our full year guidance for thermal byproduct coal volumes within the met segment to one to one 4 million tons down from the prior range of one four to 1.8 million tonnes.
Walking through the committed table, 71% of our metallurgical tonnage in our met segment is committed and priced at the midpoint of guidance at an average price of $189.15.
Another 29% of our 2023 met tonnage at the midpoint as committed but not yet priced which means we were fully committed for the rest of the year at the midpoint of guidance the thermal.
Product portion of the met segment is 100% committed and priced at the mid point of the new guidance range and an average price of $99.67.
And we are fully committed and priced for this year in our all other category with an average price of $90.47.
Alpha's Board has declared a quarterly cash dividend of <unk> 50 per share, which will become payable on October 3rd for holders of record as of September 15.
Lord is also determined that the fixed dividend program will cease at year end to consolidate our capital return efforts on the buyback program.
Pursuant to the share repurchase program, we repurchased just over 1 million shares at a cost of $155 million in the second quarter of 2023.
Since the beginning of the program. We have spent approximately $850 million to acquire roughly $5 7 million shares of alpha's common stock.
At a weighted average price of $149.64 per share.
The outstanding share count has been reduced by roughly 26% from the time the program began.
As of July 31, 2023, the number of common stock shares outstanding was approximately $13 7 million.
I'll now turn the call over to Jason for some details on operations.
Thanks, Todd good morning, everyone.
As you've seen in our financial results our cost of wholesale numbers have come down but.
But not by a proportionate margin to the decrease in coal pricing over the last several months.
We realized a corresponding drop in sales related costs severance taxes and royalties.
But the other pieces of the cost of quake equation tend to take longer to respond to shifting dynamics.
Labor for example is an area, where we have not seen any reversal of the Covid era inflationary pressure.
The extremely tight labor market conditions are causing us to compete for talent with other mining companies as we normally do I will.
Now find ourselves competing with companies outside of the industry as well.
We are aggressively working to both retain our talented workforce and attract to our team the up and coming stars in the next generation.
In addition to higher labor costs, we've also seen stickier inflationary pressure.
Within certain aspects of our supply chain.
On a positive note many parts and services, having their availability has improved and we continue benefiting from our own processing Prost.
Processes are building parts and equipment in house.
Pricing for supplies and materials continues to climb as annual contracts come up for renewal and vendors are charging more for their products and services.
We remain focused on mitigating these cost pressures to the degree that we can.
Looking at the ops portfolio. In addition to the issues at road Fork 52, which faced a capsular processing plant.
We experienced some geologic challenges within our band Mill group.
The manville issues have improved and the counselor problems were resolved early in the third quarter.
Despite these interruptions, we continue to demonstrate our resiliency by flexing production at other locations within the Alpha enterprise.
Our large surface and underground mining fleets, which include 64 active continuous miners 16 production excavators loaders, 20, D Elevens and six hour monitors.
I believe that breadth of our operation capabilities give alpha a competitive edge.
We're not putting too many eggs in one basket and.
And we work hard to optimize each piece of the organization to serve us well.
As we've spoken about in previous calls our last remaining thermal coal mine slab can.
Has it been nearing completion.
We have set a date of August 31st 2000, 2020 2023, when this operation will mine out in idle.
The workforce at slab camp and the mammoth preparation plant that support slab can.
Have been instrumental in its success, we are excited to transition these employees over to our new Rolling Thunder Deep mine, which took its first developmental cuts on June six and is ready to staff up.
Making the timing on those trans art transition virtually seamless.
While it is something we've talked about for quite some time slot.
Slab can't mining out at the end of this month Alpha will compete our year's long transition to a pure play metallurgical coal company.
I'm proud of this accomplishment and all the hard work and planning and implementation from our nearly 4000 employees.
We look forward to Martinez occasion.
I will turn the call over to Dan for some additional information on the coal markets.
Thanks, Jason and good morning, everyone.
Due to several economic and geopolitical factors metallurgical coal markets have continued to soften as the economies across the globe attempt to find stable footing.
As the Russian War in Ukraine persists.
Asian area impacts remain and monetary tightening continues in the United States and Europe economic.
Indicators like manufacturing production data indicate that many of the regions of the world are still contracting instead of expanding.
The recovery growth expected following China's reopening from a zero Covid policy has instead been muted.
China's June producer price Index continued its month multi months declined fueling concerns of economic weakness impossible deflation in the world's second largest economy and a significant consumer of steel.
All of these factors are influencing steel demand in the metallurgical indices.
During the second quarter coal market indices experienced volatility as they continue the overall downward trajectory of recent quarters.
Each of the four indices alpha closely monitors decreased by 20% or more over the course of the second quarter.
The Australian premium low low vol index decreased from $300 per metric ton at the start of the quarter to $233 on June 30.
U S East Coast low Vol index decreased from $284 per metric ton at the beginning of April to $227 at the end of the quarter.
The U S East Coast Highball, a index dropped from $284 per metric ton at the start of the second quarter to $216 at the end of June .
And finally, the U S East Coast High Vol. B index decreased from $265 per metric ton on April one to $206 per metric ton on June 30.
Following the quarter close the three U S East coast indices further softened slightly from their June 30th levels with a low vol High vol, a and high vol. B indices, measuring 215, 208 hundred $93 per ton respectively as of yesterday.
The Australian premium low Vol index. However has increased from its core close level to $246 per metric ton on the same date.
The thermal market has also continued its downward trend with pricing dropping at more significant intervals than in the metallurgical markets. The API two index fell from $146 55 per metric ton on April 1st $222 per metric ton as of June 30th in the most recent reports show that.
Next dropping from its second quarter closed levels with V. A P I too add $112.90 as of August start.
As we announced in late June D. T. A dominion terminal associates in Newport News experienced a mechanical failure on one of the stacker reclaimer machines, which caused roughly three days worth of downtime and impacted approximately 250000 tons of office shipments due to vessel loading delays.
Tons were previously expected to ship in the month of June but they were made up in the month of July once the stacker Reclaimer was repaired and it came back into operation.
In terms of planned maintenance D. T. H a successfully completed their annual dumper outage, which occurred in early July .
Everything is back to normal.
Back to normal throughput levels and operating well.
In terms of getting our coal to the port we continue to be pleased with rail performance to D. T. A which has remained positive in recent months Jesper.
Transportation to and from some of our other locations had been more challenged at times throughout the quarter.
But we are continuing to work around those issues with some success and staying in touch with our transportation partners.
Finally, as we look ahead to 'twenty 'twenty, four volumes and where our coal will be sold next year. We're in the early days of discussions with our domestic customers about contracts for the coming year.
We look forward to productive dialog with them in the weeks and months ahead.
And with that operator, we are now ready to open the call for questions.
Okay.
Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is open question queue. You May press star two if you'd like to remove your question from the queue.
One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Lucas pipes with B Riley Securities. Please proceed with your question.
Thank you very much operator, good morning, everyone. Congrats on a on a on a very good quarter and also that a rolling Thunder just got a little bit louder. So so so great job across multiple fronts.
Hi, Dan I first wanted to turn to to the markets for a little bit to you you just gave a good summary.
But two to hone in on the seaborne market first.
What's your assessment.
It is the market still still little soft here or is it are you seeing signs of a strengthening dynamics may be it may be in Asia would appreciate if you could kind of walk us through.
The different regions across the globe and where we're at.
You're seeing opportunity somewhere where it's maybe a little stiffer headwinds. Thank you very much.
Hey, Lucas this is Dan.
I guess broadly speaking I'll say, we've probably seen a bit of a summer lull in the markets, which is not unusual a lot of buyers disappear from their desks and go on holiday and we've certainly seen some of that this year and in the in the Atlantic Basin I think.
For tuning into Asia been there all year, we're pretty selective on which ones we take or some are.
Pretty low pricing opportunities there, but I think our in office case, I'll, just say that I think we're pleased that our contract position this year into the particularly in the Atlantic Basin and also in Asia as kind of a Bob kept us from having to participate in a lot of us would probably spot opportunity. So where are you now.
You know, we we think that'll continue through.
Through 2023.
That we won't have to play it and those are some of those local markets.
Thank you all thank you for that call. It that is helpful.
You commented on the domestic negotiations Tonight I I Wonder if you could remind us how how much you typically sell.
Into the domestic market on the on the met coal side.
And what is the flexibility to shift more into the seaborne market.
I assume there might be transportation considerations, but if you could kind of walk us through.
Some of the some of the flexibility you may have there.
Depending on how negotiations shape up would appreciate how you how you might think about it. Thank you.
Yeah, well I guess, you know I've been doing this a long time, there's really no typical number I mean, you can look at our historical numbers it could be somewhere between 3 million and 5 million tons, a year, we could place into the domestic market and well wait into that and see the.
You don't see what our customers.
Once in and look at the opportunities in those markets. So I don't have a typical number for you and and in some years it depends on the strength of the steel industry and the Coke and blast furnace production in the U S dictates that as well so.
And as far as flat.
Flexing the tons, we certainly can do that we have the ability to to move.
A lot of time to seaborne as you know and we could increase that if the opportunity makes sense.
Very helpful. Dan So so kind of historically, what what is typically taken you did it was a $3 million of the hull versus the 5 million level.
Well I guess, you said those would be in years, where historically the U S. The North American, let's say the North American steel industry would be in a weaker position west co production less hot metal but.
I don't necessarily see that this year.
North American history is running pretty well steel pricing is holding up pretty well.
I appreciate it thank you Dan and to turn it over to the cost side really quickly I wanted to ask kind of where where you're still seeing if any inflationary pressures and also where we're at a point where things might be easing from the cost side. Thank you all for your perspective on that.
Hey, this is Jason.
You know really it's a on the cost front with supplies and repairs. It's other than those that are linked to steal and indexes or fewer.
Fuel or something like that.
Really the cost pressure continues across the board you know, it's very competitive on the labor side, it's a very hard though to find skilled skilled labor.
A lot of annual contracts are coming up for renewal.
And you know as we work throughout the rest of the year.
And a lot of these people are coming and saying you know look we've been we've been underwater that's gone.
On track and you know it's time to you know what.
We've got to fix this so it's there's really not one area that you can pinpoint it's it's more or less across the board, but I would speculate that you know where were.
We're more than halfway through it as far as contract renewals for 2023.
And was there a second second part of your question.
It was I think you touched on most of it was kind of where you're seeing.
Pressures easing.
Anywhere in the funding cost side.
Well so you know this.
The supply chain constraints, I guess, the availability of parts and components that has improved.
So you know you would expect there'd be some lag where you'd see improvement on the other side, but we just haven't seen that yet.
Yeah, and and Lucas This is Andy if I could throw in one one more broader comment on that I've I've spoken with some of our suppliers and their issues are the same as ours. I mean this is all of these are all the cascading impacts of an extremely tight labor market. So as they staff up to try to get back to their regular run rates they're paying.
Wages, we're paying it paying higher wages in some instances, we may be competing over similar employee pool and so it seems to all boil down to a just a very constricted labor market.
Yet that has said that that is very helpful.
I guess with the increased Investor interest, maybe you should offer internships for finance professionals or something like that but oh jokes aside that.
Keep keep up keep up the great work.
Really really great job. Thank you.
Thank you Lucas I appreciate you.
Thank you. Our next question is from Nathan Martin with the Benchmark Company. Please proceed with your question.
Thanks, Good morning, guys Happy Friday, Thanks for taking my questions.
Hey, Nate.
I want to start on the marketing side as well I keep them busy here you know, we've kind of touched on Oh surprise moving up here a little bit to start the third quarter I think the CFR, China prices up about $30 or so as well.
Likely driven by increased domestic price there in China, but we have seen again the U S East coast net price and the teams are creeping lower so Daniel it'd be great to get your thoughts on the dynamics at play there you know, especially that widening spread of Aussie versus a U S indices.
And then I guess, you know I'll attribute some of that to supply and demand I think yeah. There's some the demand in Asia is stronger than it has in the Atlantic at the moment, so you're you're seeing some of the benefits of that demand on the Aussie pricing and as you know we saw quite a bit of coal in Asia using that index so that.
As you know we're pleased to see that on the on the U S East coast indices.
Probably some of that supply that you know there is some increased high ball supply coming into the market here in 2023 cut some new mines in northern West Virginia. So there's there's some additional supply out there that might be.
Contributing to that spread a little bit.
Yeah that's.
Kind of how I view it.
That's helpful Dan and then I'll.
I'd say related to that somewhat you guys mentioned, you're now 100% committed for 23 at the midpoint, but then the met segment. So it'd be really helpful. Maybe get some insight into how you're thinking about alphas export mix between it was off the index tons and maybe some of the other pricing mechanisms for the back half of the year.
No I think that the.
The breakdown that you see in our tables is probably similar to what we expect the rest of the year Nate I mean shipments will come and go there'll be some vessels.
Some some changes but broadly speaking are there the breakdown that we gave you. This quarter is probably a good barometer for that going forward.
The breakdown between you know the exports on listening to Osaka.
Yeah, we have a pretty detailed table there that breaks that out.
Got it yeah, that's roughly 33% or so at a third to Aussie and about 40% or so I think two other mechanisms with the balance domestic okay. That's that's helpful. Oh.
I appreciate those thoughts and then.
Maybe maybe shifting to the domestic market and you just mentioned some high vol.
Production likely coming online here towards the end of the year, but we've also had some supply coming offline in the U S. Some of the operational.
Theres been some islands as well so assuming tightness that's helpful to you guys, but it would be great to get your thoughts specifically on the supply demand here in the U S. And then how do you think there needs to be any more idling or would you expect any more just would be great to get some color.
There's a lot to unpack there.
I guess, what I'll say is.
Yeah, the the domestic market.
I really don't want to touch on that I was going to say that the types of coals at the domestic market typically buys are on the higher quality end of the spectrum and so some of the supply demand issues that might apply to the seaborne market doesn't necessarily apply to the domestic.
Domestic market.
But I think the demand I think I would say that across the globe supply demand is still fairly tight and it doesn't take a lot of it just takes one event to make it move up or down a little bit and I think all the calls that are coming onto the market will find a home they'll find a home in the domestic market.
They'll find a home in the seaborne market.
Got it I appreciate that I think that's all I had left guy. So I really appreciate the time and best of luck in the second half.
Thanks Nate.
Okay.
Thank you. Our next question is from Jonathan <unk> with Cowen and company. Please proceed with your question.
Great. Thank you and good morning.
I think markets have been pretty much will cover right now so only one for me and that is related to the dividend. So what would need to occur for two to reinstate the dividend and let's say, let's give you a scenario, let's say medical prices skyrocket with share repurchases remain the preferred.
Of capital return or would the dividend be considered again in the future. Thank you.
Hey, Jonathan.
It's strictly has to do with how the market values. Our company. If if we believe the valuation is appropriate then we might consider going that direction, but it seems like we're pretty long ways away from that so and as we saw back in.
The last two years, you know we've seen market co market prices spiked a $600 a ton and 400 and everywhere in between.
And company valuations didn't catch up so I think we're very content to to get to this pure share buyback program and stay there until.
The market determines its gonna appropriately value us and then we will consider some adaptation to the program.
Thanks.
Sure.
Thank you. Our next question is from Lucas pipes with B Riley Securities. Please proceed with your question.
Thank you very much operator.
You all for enduring one more question from me.
So that.
There's extensive media coverage.
Texts efforts up in and in and out valley and separating.
Ah the coal assets and.
There's a lot of.
Talk us steelmakers from around the World India, Japan.
B being potentially interested and.
One are you now.
Very interesting just in terms of how strategically met coal is it's it's it's important and.
And so my question to you is as you engage with steelmakers around the world are you sensing.
Are you also having a sense that there is interest in and on the vertical integration side.
Would appreciate your color on that I know, it's a kind of higher level question, but any color you could provide would be interesting. Thank you.
Yeah, Lucas I'm, you know I don't I don't want to.
Declare myself a mind reader here. So these are strictly guesstimate, but and in my data set is limited not a huge sample size here, but over the past 13 years or so that have been closely monitoring you know back in the M&A World.
Theres been waves of discussions around vertical integration.
A lot of a lot of heat a lot of activity and nothing really has ever happened nothing material.
So.
I think I think things get start up when the market gets weak and.
Perhaps people smell a bit of blood in the water that these discussions began but until until a big one happens it's kind of hard to imagine it.
In this current world. So I don't know there are some instances where it makes a lot of sense.
But I just don't know when when anyone will actually get to the point of executing on something like that.
Okay.
That is helpful.
And he really appreciate the color.
Best of luck to you and the team.
Thanks Lucas.
Thank you there are no further questions at this time I.
I would like to turn the floor back over to Andy for any closing remarks.
Well, thanks again, everyone for dialing in and we appreciate your time and your interest in Alpha and we hope you have a great rest of the day and a great weekend.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.
Yes.