Q2 2019 Earnings Call
At this time, all participants are in listen only mode.
Following the speakers remarks, we will conduct a question and answer session. If you would like to ask a question at that time. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press the pound key if anyone should require operator assistance. Please press Star then zero on your Touchtone telephone.
As a reminder, this call may be recorded I would now like to introduce your host for today's conference Jeremy Sussman, Chief Financial Officer, Mr. assessment, you may begin.
Thank you operator on behalf of Graham occur resources I'd like to welcome you all to our second quarter 2019 earnings Conference call.
With me. This morning is Randy Atkins, our executive Chairman, Mike Baur sack, our president and CEO and Chris Blanchard, our Chief operating officer.
Before we start I'd like to share our normal cautionary statement certain statements discussed on todays call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These forward looking statements represent ramcos expectations or beliefs concerning future events and it is possible that the results discussed will not be achieved. These forward looking statements are subject to risks uncertainties and other factors many of which are outside of Ramcos control, which could cause actual results to differ materially from the results discussed in the forward looking statements any forward looking statement speaks only as of the date, which it is made and except as required by law for Emeka does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
New factors emerge from time to time and it is not possible Perama code to predict all such factors when considering these forward looking statements you should keep in mind the risk factors and other cautionary statements found in the Companys filings with the Securities Exchange Commission included in our annual report on Form 10-K .
These risk factors and other factors noted in the company's SEC filings could cause actual results to differ materially from those contained in any forward looking statements.
Lastly, I'd encourage everyone on this call to go to our website remic or resources dot com and download todays investor presentation under the events calendar now with that said, let me introduce our executive Chairman Randy options.
Thank you Jeremy.
As always I want to thank everyone for joining us today to discuss our second quarter results.
There is an old Chinese curse, which goes you're she'll be a life lived in interesting times.
I think the events of the last few weeks in both the financial and coal markets certainly bear this out.
But despite the turbulence, we're happy to discuss today that we have printed or most financially successful quarter since we got started.
After my comments might be and then Chris we'll make some remarks on both recent operations and the sales and marketing landscape.
Jeremy will then provide a more detailed comments on our financial results as well as his macro perspectives on the market.
For those who have gotten used to tolerating my one liners last week I remarked at an Investor Conference that you really don't know who's wearing a bathing suit until the tide goes out.
This summer we have seen a riptide.
With some unusual and severe stress and certainly the coal space.
It feels like not a week goes by that we don't see another coal company either filing for bankruptcy optioning assets, reorganizing or announcing a senior resignation or management change.
The thermal coal market has pretty much dropped off the shelf.
Even met coal benchmark prices, which have held pretty steady at reasonably strong levels over the past year have now dropped by over 30%.
If you're in the coal business. These are the times the try you.
But his turbulent as the market looks right now I want to point out that while my co was born as a contrarian investment play in the depths of the last coal Ral earlier this decade.
We took some care at the outset to design this company to be very conservative in terms of both leverage and a aro liability. So they could financially withstand the historic volatility in the med space.
I believe we have largely succeeded.
We have basically the lowest debt and legacy liabilities in the industry.
We were also successful in choosing reserves, which were GMV was particularly advantage and as a result, we have some of the lowest cash mining cost in the industry.
As we look at where the markets now said, we're extremely comfortable that we are in a strong position to overcome these headwinds demonstrates the resiliency and emerge in very good shape.
An extra benefit to us is that our customers also realize all that.
We have heard from both our domestic and international customers that they are attracted to not only our coal qualities.
But the security of supply for most financially stable and growing counterparty.
As we said the sale shortly on the marketing discussions with our 2020 domestic customers. It is gratifying to be in that position.
On our last earnings call I stated that we were on track for our second quarter to be the highest adjusted EBITDA on record for the company.
I'm delighted to report that I actually got that one right.
We achieved over 19 million for the quarter and almost 33 million in adjusted EBITDA for the first six months of my team, which is a 36% bump from last year.
We look forward to continued strong results for the balance of 19.
I might add that we sold more than 940000 tons of company produced coal in the first half and are close to completely sold out in price through year end at an average of roughly $115 per ton.
As Mike is going to discuss we completed the silo rehab this past month at Elk Creek.
And her back to full processing capacity.
Despite the lingering effects of the cyber incident in the second quarter, we have been able to hold Elk Creek mine cost in the mid Sixtys and are still leaving our overall 2019 <unk> cost guidance of between 63 to 67 per ton.
Chris will discuss some further details on cost.
And although Jeremy is going to provide a deep dive on financials. Some selective metrics for Q2 are as follows.
The spot price realizations of $116 per ton cash margins of $45 per ton on company produced coal.
This improved by 23% from Q1.
Capex for the quarter grew from 8 million in Q1 to almost 12 million this quarter.
We are on track for a 2019 overall capex spend still in the $35 million to $40 million range likely coming in towards the upper end.
This estimate I might point out also includes the capitalization of our losses of Berlin complex as we continue to develop until we hit the Pocahontas foreseen by summer of next year.
Building from the start strong start.
We look ahead to the balance of.
2019 under predicting that the second half will look very similar to the first half in terms of both production and earnings.
For production at Bell Creek, we continue to estimate roughly 1.8 plus million Todd.
At Boro wouldn't we expect about 250 million to 50000 tons for the Pocahontas three seem continuing through mid 2020.
On sales and marketing we continue to guide that we will sell roughly 2.2 million tons for 2019.
Since we are in the middle of the annual North American sales negotiations for 2020.
We basically not discuss either forward pricing our volumes on this call.
I can't say that we are now engaged with every major domestic steel company and in most cases are an incumbent supplier.
As I mentioned on our last call. We are continuing to explore various ways to increase our overall sales profile in some of the export markets, which Mike will address.
At our Elk Creek complex now than we were back to some degree of normalcy, we're looking to expand the capacity of the prep plant by roughly 500 to 600000 tons of clean coal per year above the nameplate throughput capacity.
This would take our elk overall production targets to 2.5 to 2.6 million tons.
Assuming that we Greenlight. This project our next board meeting in late September we would initiate a portion of the roughly $8 million in total new Capex projects in late Q3, Q4 COVID-19.
With the balance being spent next year.
The project, we anticipate we'll take 10 to 12 months to complete once we initiate.
We also discussed on our last call, adding some new high vol. A production that are not creep Nox Creek complex and what we call the tiller job rather than mine.
This would ultimately add 500000 tons of production in the job.
Hi, Bill lysine at full capacity.
Given the current turbulence in the markets, we're considering to defer moving forward on deploying the capex for full opening of that new mine until we see some clear direction on the overall market.
We continue however to be active in pursuing various additional accretive add on or bolt on opportunities around all of our mine complexes.
We hope to be in a position to offer clearer guidance on a number of these projects as the year progresses.
As berwyn ramps up and Elk Creek continues as expected to produce we're currently guiding to roughly a $2.3 million companywide annual production rate in 2020.
I note that this number does not include any of the potential expansion projects, we just discussed.
We continue to guide, but that by 2020 223, we will have production in the four to four and a half million ton range.
In summary, although we see some choppiness in the near term both financial and coal markets. We feel the intermediate outlook is still good.
We have just experienced our best quarter and are essentially sold out through the balance of 2019 at very attractive prices.
We expect this will produce a record year on earnings for us as the balance of the year plays out.
As for our stock price.
We have designed our operations to take advantage of strength in the market in good times and to weather the storm and be resilient in turbulent times.
We continue to operate on the theory that ultimately our cash flow generation will speak for itself.
And we're confident that the stock market will ultimately reflect that value over time.
However, it is certainly not reflecting it today for us or frankly any other coal name.
I would note that at current levels were trading in a roughly a two times EBITDA ratio on 2020 consensus numbers.
Considering our strong fundamentals I think I am safe to say that we are perhaps the most undervalued name in our peer group.
So if anyone likes bargain I would suggest another look.
So with that I would like to turn the floor over to Mike to talk about some operations.
Thank you Randy.
Our overall results were very good and are indicative of a clean quarter from an operation standpoint mining and shipping occurred without any noteworthy incidents our infrastructure modifications undertaken due to the silo collapse have been completed.
The two remaining silos have been modified it became fully operational in August .
Their uses decreased our preparation plant downtime and should enable us to work through the last remaining impact from the silo collapse highwall coal inventories.
We also have a permanent silo bypass in place.
This provides redundancy, but also allows us to see coal to the plant that might have a tendency not to flow well through the silos.
We anticipate consistent performance from our Elk Creek mines for the remainder of 2019.
Each mine is currently operating in good mine conditions.
In the case of the animal mine, we have taken delivery of mobile roof supports and we'll be conducting secondary mining for the remainder of the year.
The biggest impact on production in the third and fourth quarters will likely relate to the multiple vacation days in which the mines will be idle.
Development mining at our Berlin mind is continuing without any adverse geologic conditions.
The second section is now fully functional and production is increasing.
It is mining mostly insane versus cutting additional height.
In our development section.
Our view of Appalachian production is the depletion and lack of capital will create production voice going forward.
Thus, we continue to look for smart capital deployment.
As Randy mentioned, our current shortlist includes potentially adding processing capacity at the Elk Creek preparation plant and ultimately developing a mine in the high volatile a job focusing at our knocks Creek complex.
Both of these projects have compelling rates of return.
In all cases as Randy noted in his remarks. These investments will only occur when both market conditions warrant and an appropriate amount of liquidity is available.
Fortunately, our LOE per unit costs, and good balance sheet affords us opportunities that others can't pursue.
In any event, we plan to take up these investment options at our upcoming board meeting in September .
At this point it is too early to comment on what project or projects will receive the green light to proceed.
We are witnessing some unprecedented occurrences in the coal industry.
We currently have three of our direct and closest competitors in the metallurgical sector in bankruptcy or reorganization.
Many of their operating assets are available for sale, but today, we have not found assets that were compelling enough to pursue.
In our view some of their minds lack the capital to continue to operate.
Accompanying infrastructure in many cases.
As equally challenged.
During the last few years, we've had a stable metallurgical coal pricing environment.
It is hard to envision that many of the assets now in bankruptcy will be able to operate in a less attractive marketplace, let alone secure sufficient capital to upgrade the mines and rebuild equipment.
We opportunistically acquired geologically advantage metallurgical coal assets, so that the capital to develop them properly and continue to deploy capital to keep them productive.
We paid our dues and have been able to enter into a traditional bank deal with a strong regional bank.
We bought assets and avoided the assumption of long term liabilities, which continue to weigh heavily on most of our competitors.
From a marketing standpoint, we are pleased with our current position.
We have a domestic book of business with 80% or approximately 1.7 million tons committed to the North American markets.
This business includes almost all domestic coke buyers.
We remain confident in our ability to market, our coal and retain a large portion of our position and customer blends as we enter domestic negotiations for 20 Twond.
While exports are currently a small part of our current business, we still intend to grow that business.
Depending on how pricing develops with north American customers, our outsized domestic business could be modified downward in favor of more exports.
Our new head of marketing, Kevin peer Xia has recently physically circle the world.
Meeting with a large number of potential new export customers, our pursuit of new International business should result in an increasing number of test cargos over the next six months.
While international customers of welcome to recent pull back and coal prices their biggest concern seems to be the cost of iron ore as well as the underlying health of the economies, where they directly or indirectly ship that product.
Our take on the marketplace as a whole is that the recent fall in international indexes is primarily related to the pull back in demand, especially in Europe .
And in short term uncertainties regarding Chinese port restrictions.
As opposed to oversupply.
Alongside that news, India continues to grow.
We just saw an announcement from Tata steel relative to plans to increase steel production capacity from 18.5 million tons to 30 million tons by 2025.
The intermediate fundamentals looks solid for strengthened demand.
While we see a slightly lower but still profitable metallurgical market the steam market isn't very poor shape.
In most cases from a spot perspective, it is now virtually nonexistent.
Many of our major direct competitors have substantial exposure to the steam markets.
Well, we have sold some steam coal it has been far less of our sales mix than even we anticipated going into 2019.
And just 4% or less of our overall mix.
For clarification all of our limited steam coal production is generated by our surface mine at Elk Creek.
Overall from a business development perspective, we remain focused on acquiring synergistic infrastructure in reserves versus acquiring another company's operating assets.
Most of our current activity is focused on leasing coal.
We continue to have a bias for developing mines.
We're also focused on cost savings investments most of the current opportunities to deploy capital or internal projects that meet our investment criteria and high operational standards.
One of the benefits of a less robust market might be that some assets could become available at lower upfront costs.
In summary.
Coal production increases within the metallurgical coal industry have not materialized is evidence that there is still a number we producers and undercapitalized mines that may be unable to sustain current production levels.
Let alone grow them.
It production can be grown are maintained in what has been a very good market. We believe it to be more likely not that production will be reduced by marginal players at a moderating market.
We continue to believe that our business strategy is not only viable it's been proven to be insightful.
Especially in light of recent bankruptcies.
We look forward to advancing these efforts in the second half of the year.
I would now like to turn things over to Chris Blanchard, who will provide some operating highlights relative to our second quarter.
Thank you Mike.
As Mike and Randy you, both mentioned second quarter operations were largely in line with our previous expectations and guidance.
We are also pleased with the continued strong performance from operations in both employee safety and environmental and regulatory compliance.
Having one of the strongest workforces.
Nearly 400 miners now in southern West, Virginia, and southwest, Virginia, certainly helps.
I would like to point out a couple of operational highlights from the quarter and looking ahead for the second half of 2019.
Turning first to our Elk Creek complex.
At our Eagle mine, we completed mining in a challenging geologic areas during may and the first half of June .
We had anticipated these conditions in advance, but as a result of.
Actually mining through them overall productivity for this mine was reduced by 10% as measured by feet per shift for the second quarter compared to the first quarter.
This resulted in production of over 20000 clean tons less quarter over quarter.
These conditions and the lower production also led to a higher cost.
Of just over $7 per clean tons produced from this mine for the quarter.
Mining was completed in this area at Eagle and Productivities have returned to first quarter levels by the end of June .
This has also continued into the third quarter.
Through the acquisition of an adjacent lease we have extended our projected full seen mining area for an additional 12 month.
We expect mining rates and mining costs that are equal mine to return to the first quarter levels.
Over the balance of 2019.
As Mike mentioned at our album on we have completed advanced mining advanced mining on one of our sections and have begun to retreat mine.
We have approximately 14000 feet of panels to be retreated and we expect that given the mining conditions. This should last throughout the remainder of 2019 and into 2020 before we return to advance mine.
The secondary recovery will be fully mechanized and we expect productivity to remain relatively steady during the period.
With the reduction in mine costs throughout.
We expect cash costs, the download to decline two to $3 per clean tons for the remainder of 2019 based upon the reduction in both and costs and reduce maintenance cost on equipment during the ordering activity.
The Elk Creek, how we'll monitor operation will complete construction of the high voltage line power project in the third quarter. This will enable to how we'll monitor to operate on the existing Elk Creek power system instead of relying on diesel generators for electricity.
This should further reduce one of our lowest.
Cost operations by another $2 per ton going forward.
At the Elk Creek plant as Mike mentioned, both remaining silos are now back online.
Our permanent bypass system remains in place, allowing redundancy.
As well as the ability to perform required maintenance on either system without having to also idled preparation plants itself.
Ultimately the higher utilization rates that we will realize will help us to reduce our raw coal stockpiles.
And lower our unit washing call.
We have also now broken ground for the expansion of our existing flight press facility at the L. Three plant.
This will give our current operations more flexibility when disposing of the ultra find rock generated from the preparation plant.
As well as provide us with the additional capacity required should we undertake vessel preparation plant upgrade that currently under consideration.
Switching to our development project that Berlin mine.
The mine plans still progressing as we work our way towards the Pocahontas number for us.
We anticipate completing mine to slow bottom.
On or before year end and our budgeting roughly eight months for slow development with production in Oklahoma as foreseen to begin immediately thereafter mid year 2020.
With the program of horizontal drilling that we've already completed coupled with vertical core holes that we drilled from the surface.
We are as certain as the coal industry can get that there are no further anomalies in front of us and remain confident of our ability to reach the pocahontas foreseen with substantially thicker coal averaging 55 inches.
I would now let's turn the floor over to Jeremy to provide a more detailed comments on our financial results as well as provide some macro perspectives on the market.
Thank you Chris in terms of second quarter financial highlights Randy hit a number of the key points, but I want to dig into the details a bit more second quarter 2019, EBITDA of $19.1 million was the best in company history, 28% above the previous high of $14.9 million in the second quarter of 2018 second quarter 2019 revenue of $65.8 million was also a quarterly record and compared Favourably to revenue of $55.3 million in the same period, one year ago.
Record revenue came on the back of the best quarter of realized pricing in the company's history, specifically price per ton on company produced coal was $116 in Q2, which compared to $91 in Q2 of 2018.
Q2, 29, net income was $10.6 million, which compared to 10.2 million in Q2 of 2018 second quarter not 2019 earnings per share of 26 cents was another quarterly record and compared to earnings per share of 25 cents one year ago.
I'd point out that while the Companys effective tax rate was 17% in both the first quarter and second quarter of 2019 actual cash taxes payable for all of 2019 are expected to be less than $200000.
Moving to capital expenditures second quarter, 2019, Capex was $11.5 million, which compared favorably to second quarter 2018, Capex of $14.7 million. We are on track for 29, Kane overall capex spend in the $35 million to $40 million range likely coming in towards the upper end, which includes capitalized losses for the remainder of the year at our Fairwind Inox complex.
As noted in our earnings release, we are reiterating all key production sales and cost guidance for 2019, specifically, we expect company production of 1.8 to 2.2 million tons. This year with roughly $1.6 million to $1.9 million of that coming from our flagship Elk Creek complex.
We continue to expect to sell between 2.0 and 2.4 million tons of overall coal this year.
With 96% of those sales being metallurgical coal.
Furthermore, we continue to expect the cash cost per ton at Elk Creek of 63 to $67. This year.
First half cost per ton sold $65 to Bell Creek put us nicely in that range.
Now as Randy noted in his prepared remarks, Revocoat was built to withstand market turbulence I'd like to expand upon this a bit. We believe there are a number of distinct areas that set ramco apart from its peers and I will go through five of them now.
Number one cash costs.
Simply put you cannot fake geology.
We have among the highest clean ton per foot metrics in the industry.
As a result, we believe our cash cost of $65 per ton at Elk Creek in the first half of 2019 make us the lowest cost met coal producer among our publicly traded peer group.
Number two.
Balance sheet flexibility.
As we as we show on slide 11, our debt to EBITDA matrix are among the best in the industry.
Based on first half 2019 results our debt to EBITDA ratio was just 0.2 times.
I'd remind everyone that as of June Thirtyth, our net debt stands at under $10 million, given our lack of meaningful interest expense cash taxes and other below the line cash items when stress testing, how ramco may or may not hold up in a downturn EBITDA minus maintenance Capex should get you almost all the way there with our maintenance capex coming in around six to $7 per ton or so we are confident that we are built to withstand a prolonged downturn should one arise.
Number three.
Liabilities.
At just $13 million Ramcos legacy liabilities are 98% below our direct peer group average and by far the lowest cost. Among this group. This is one of the major advantages to build and Graham echoed the way we built it either right way developing geologically advantaged greenfields mines number for management ownership.
As we as we show on Slide 10, our management team currently owns about 12% of the company none of our peers are materially above 1% simply put we are aligned with our shareholders.
Number five lack of thermal coal as I noted earlier.
Just 4% of our coal this year is expected to be sold into the thermal coal markets. Among our direct peers. We're just one or two publicly traded companies to produce at least 95% of our tons as met coal.
And of those two.
We are the only one which is a large domestic met coal supplier.
I'd now like to turn to some of our current and forward views on the macro environment.
As Randy noted metallurgical coal spot prices have fallen roughly 30% year to date with prices hovering just below the $160 per ton Mark. However, despite the fall in spot prices. The forward curve is trading at similar levels to one year ago.
Specifically as we show in slide 13.
This time last year. The 2021 curve was at $161 per ton and is currently at $160 $160 per ton down exactly one dollar a ton year over year.
Furthermore, the forward curve is any modest contango state.
Global Capex in the met coal space remains historically low.
We estimate that met coal capex as a whole the 70% below peak levels last year as the high cost of capital for many producers and SG pressures continue.
With three large us met coal bankruptcies occurring in the last couple of months, we'd expect further high cost supply to get rationalized now turning to the demand side Chinese steel production rose, 10% in the first half of 2019.
While you have hot rolled coil prices are down about 30% year over year. We are encouraged by the fact that they are up roughly 15% off the recent lows. After three domestic price hikes have been announced by the steelmakers. We'd also note. The U.S steel capacity utilization has averaged about 80% for the last 12 months for the first time since the 2007 2008 timeframe.
Lastly.
We think a large part of the met coal spot price decline. This year has been driven by the uncertainty of Chinese import restrictions as a result as shown on slide 16, the ARPA of international met coal into China is now the second highest it has been at any point over the past four years and over $30 per ton.
If history is a guide we look for that gap to shrink once there is a bit more certainty in the market, which could have a positive impact on overall net pricing.
Now before I turn it over for questions I remind investors that at its core Ramco is a low cost producer with very little debt or legacy liabilities and as Randy noted we have designed our operations to be resilient in turbulent times and of course take advantage of strong markets in good times. This now concludes managements prepared remarks at this time I'd like to open up the line for any questions. You may have on our second quarter 2019 results for outlook operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Prevent any background noise, we ask that you. Please state your line on mute. What's your question has been stated again that is star then one if you would like to ask a question.
Our first question comes from the line of Mark Levin with Seaport Global Your line is now open.
Great. Thanks, and congratulations on a terrific quarter or some of the best in best in company history. So congratulations to all of you.
My question relates more.
Around contracting strategy in 2020, not obviously not looking for guidance and I realize you guys are right in the middle of negotiations, but clearly most of the tons. The overwhelming majority of your tons were placed into the domestic market in 2019.
Maybe you can frame for us.
What do you mean.
How you're approaching 2020, a year ago HRC prices were in a bit of a different spot and I think met coal prices were up as well.
You would you should we expect the mix of export versus domestic to change materially in 2008 versus 19.
Mark I'll go ahead and address that.
It really is too early to tell exactly what our mix will be the good thing is we're working from just acute solid domestic position, we have the ability to back down and of course, our future growth prospects really are focused on the international market. So we're going to be prepared to shift depending on what happens.
With with our pricing negotiations I suspect that you would probably not see us dip below 60% domestic but we're prepared to at least go to that point.
The good thing is I mean, when we look at.
When we look at the competition that we look at their cost. So we looked at our costs and we look at to.
A little bit of weakness.
We know that that some of the some of the highest quality coals are in some of the coal mines that aren't necessarily in the best shape. So we still believe that we'll have a very solid domestic.
Contracting season, I'd much rather be at our position that most of our other competitors because we're protecting our position. So we look to try to protect all of it to be honest with you and our growth ultimately go to the export market.
No thats, great Thats really good color I appreciate it and then with regard to the growth projects that you talked about in the past it sounds like.
With regard to the prep plant capacity addition that that that is likely to happen. It sounds like the board meeting is in September .
How much of that additional 500000 tons would hit.
In 20, winning it sounds like there's a 10 to 12 month duration for the project.
Should we expect any incremental tons from from from that project in 2020 or is that more more or less in 2021 event.
Yes to sort of address the overall growth.
Project that we're talking about right now Mark I think on the prep plant I think that that's a project that we view with a with a high level of confidence.
That that will provide us an uplift in any market I think is as far as your specific question relating to tons. We would expect if we got started this year, we would probably bump about another 100 150 of incremental tons into 20.
From where we would be if we didn't do the upgrade.
And as I said as far as the the Java in mind I think.
Right now.
Per your question to Mike about.
The market overall.
If this year is somewhat similar to last year I suspect sometime.
Certainly by the middle part of this quarter, maybe even.
Level in late September we ought to have pretty good visibility on what the domestic market situation looks like.
And I think you know as far as putting in a new mine.
Like Joe Bone, which is a multi year project.
I think as we sit here in late August mid August .
We're going to take a fairly pragmatic view.
We're certainly going to grow today, but we're not going to grow tonnes at the expense of.
Being rather conservative about our approach so.
No that all that all makes sense and then my last question just has to do with Capex and 20 and going forward I think Jeremy did a great job mentioning how you guys could drive this down to maintenance capex levels and sort of more stress test scenario, which has some very good to hear but when you're thinking about 2020, if we just kind of assume the curve sort of stays where it is or in this general general range is there a way to think about how capex and 20 would look relative to 2019, assuming you go forward with the with Inox Creek Prep plant expansion.
Well the prep plant just to be clear Mark is at Bell Creek.
I'm, sorry, I'll break I my apologies, yes, correct.
Sure Jeremy you want to say, yes, I mean, Mark let me touch on that yes. So I think we gave you the maintenance capex levels and sort of six to $7 per ton and as Randy noted in his prepared remarks you'd be looking at about 2.3 million tons next year. If we don't go ahead with anything and you just got the numbers of what the the plant what would.
Would allow us to add.
Look I think above and beyond that we want to get through the board meeting get through budgeting and whatnot, but I think those are good numbers to kind of start with and then.
Once we've got more firm plans on that were ready to announce on growth will kind of go through those those levels with you guys.
All right great. Thanks very much.
Thanks Mark.
Thank you. Our next question comes from the line of Scott Scherr with Clarkson.
Your line is now open.
Good morning, everyone congratulations on a record quarter.
Thank you Scott.
Hi, you mentioned that there are some assets that may become attractive at a certain price points can you just walk us through your thinking around your capital allocation priorities going forward, what's your preference between the existing development opportunities asset acquisitions and returns to shareholders.
Well I'll, let I'll, let Mike go on some of the specifics obviously all of our projects, we anticipate being something that will be very accretive to shareholders. So we're not going to pull the pull the trigger on anything that doesn't.
Look like it meets a fairly high level of return.
As far as the distinction between.
Sort of organic projects, which are sort of.
One is that we control versus sort of third party projects that we would acquire I think our bias has always been towards organic projects.
That are essentially.
Either within our areas of control of our existing mining complexes are certainly sort of very simple add on or bolt on opportunities surrounding those complexes and with that said, Mike maybe you want to have a more color.
I think our our priorities continue to be probably cost savings type things that could be in the form of acquisitions that could enable us to run the mines that we put in better.
We continue to have a huge bias on putting our own coal mines and you could hear throughout my comments.
We just we just think we do a really good job foot coal mines and doing it the right way and what's been proven to be true is some of the better reserves that are available are greenfield projects that that that havent been active that are in spots sort of in between where existing infrastructures that and in the in geology wins and so we're going to bet on we're going to ban on geology, and then we'll figure out all the infrastructure stuff later, because ultimately those are the tough projects, but those are the long lived projects that have advantages. So I guess you could call us a bit of the contrary with talented people, who say hey, because they have a tendency to buy existing production.
We just go the other direction so.
I think the strategy is proving out pretty well at this point and also say Scott as we move forward and get sort of a more mature book with a little bit larger production, we will be in a position to dedicate obviously, our free cash flow towards these types of activities as opposed to trying to a use it or use our cash flow rather too to pay debt or legacy liabilities. So that gives us a certain leg up.
I will stop I will also add I know Randy usually notices that we continue to keep dividends on the table. We look at them. We we at this point and have a great deal of really quick return type capital investments in front of us even at a slightly declining market and that being said.
We are again substantial owners at the shares and we're not against dividends either.
Okay, Great Thats. It thats very helpful. Thank you for that switching gears, a little bit more of a market question can you talk a little bit more about what you're seeing in the.
The domestic market do you expect us pricing to continue to follow the decline in RG seaborne or is it really kind of diverging into two different markets.
So I think for I'll I'll make the first comment Scott before Mike gets into it which is that we're not going to touch anything relating to pricing in the domestic negotiation. So in terms of trying to give guidance as to whether you think it's up down sideways.
We're certainly not going to make a comment on that.
Discussion, it's really a bad time to talk about it because theres just stuff ongoing really even as we're sitting here with that being said, we are very close to the marketplace in which we operate and we see even recent earnings releases with high cash costs et cetera and.
One would one would think that a lot of people would not have much ability to alter their.
To alter what they're willing to sell coal for based on a lot of what we're seeing and weve actually physically been in coal mines and.
Frankly, we wouldn't operate hardly any of them, which shut them down and fix them, which would be a tough thing to do.
So Scott I thought I was going to be Lukas as were going to ask the question like you did last year, but whatever our prices and where our customers for this coming year.
But you jumped the shark.
Yes, I thought I thought we had to switch it up a little bit this year as good that's good.
All right. Thank you very much guys. Good luck go forward.
Thanks, guys.
Thank you, ladies and gentlemen, as a reminder, if you would like to ask a question. Please press Star then one on your Touchtone telephone.
Our next question comes from the line of Lucas pipes with B. Riley FBR. Your line is now open.
Hi, Good morning, everyone. This is mackie asking a question for Lucas today.
Just a quick one for me today since most of my questions have already been asked.
But L. Three cost per ton came at the high end of its 2019 guidance range into Q, what exactly drove this and do you see cash cost improvement in the back half of 2019.
Great. Thank you.
Hi, This is Chris So Elk Creek did come in at the high end, but it was driven largely by two things 50% of the increase was based on sales related increases with higher royalties based on higher revenue and the other 50% was on the.
Cash costs at our Eagle mine, which resolved by the end of the quarter never turned to first quarter levels.
So that was geology diesel and basically higher higher coal prices drove it we have we have several things I outlined where we.
I have some cost savings going forward. So I think we will see see us pull back into the safely into the ranges. We finished the year, but we're comfortable with the 63 to $67 range at this point.
We'll leave it at that.
Got it. Thank you that's very helpful and.
One more I guess I'll sneak in here.
Based on your current Capex guidance, you have roughly 15 to 20 million remaining on the 2019 budget could you remind me exactly where that capital is being allocated to any of you if you'd expect it to be evenly spread between threeq and fourq. Thank you.
So yes, all right. So yes in terms of in terms of the second half.
Capex most of the growth cap capital is being allocated to timberland as as.
Randy and Chris both talked a bit about in in the prepared remarks.
Theres, a little bit of capital being spent the DLT Creek plant as well not necessarily the upgrade per se, but just.
Sort of general.
General items.
And then your normal maintenance Capex, so we're comfortable with where first half capex came in and.
Can you should kind of look to similar levels. As you noted in the second half give or take.
Got it that's very helpful.
Congrats on the record quarter and best of luck moving forward.
Thank you.
Thank you.
We have no further questions in the queue at this time I would now like to turn the call back to Randy Atkins.
Okay. Thank you very much.
We did have a questionnaire join the queue.
It looks like it's coming from the line of Mason starts with Wilshire Phoenix.
Your line Hi, gentlemen.
Hi, gentlemen, thank you very much good morning.
Two two questions that haven't been addressed on the call.
The first one I was interested to see the transportation costs came in less than I was expecting this quarter. I was wondering if you could go through if is there a mix and it's interesting also just because you had a slightly a bit more shipped internationally. So I was wanting to see if there was something going on at the variance between Q2 in Q1.
Okay.
Yes, I think.
From from our perspective.
When we think about transportation there.
It's.
Typically of course, where we're shipping the majority of our coal domestically and we know basically we sell that call Fob mine youve seen a pretty large shift from us.
Really focusing in on the domestic business based on the pricing that we received from a from a fluctuation in transportation cost standpoint in things going into the quarter things that we pay for the for the freight on we've actually seen it seen a moderating.
Slightly moderating cost as the.
The second quarter advances and into the third quarter, albeit I would I would definitely say not necessarily a sea change in any any sort of activity and I would just say slightly downwards. So.
I.
As as we see where the domestic numbers come out and as we look at the international pricing and how it advances through the through the end of the year I will say historically.
If if international pricing remains in the range that is or slightly lower.
We should see a pullback in transportation and or even loading cost to some extent so that would be a just a general comment but.
And I would just I would just remind you. If you are looking at the transportation cost sort of towards the end to end of the.
The release and the reconciliation of non-GAAP .
non-GAAP measures.
Our all of our domestic.
Sales are Fob mine so the transportation is borne by the.
By the by the steel mills, so if we're exporting coal you will see it.
We'll see it on that front.
And given that the large portion of our book is domestic versus export.
One extra cargo on the export front here or there in a particular quarter will cause that number to two to fluctuate.
Got it understood. Okay and then the second question I had was sort of more of an overall market as you alluded to with the recent.
Bankruptcy filings of some of your competitors and that you think some of those mines might not be able to come back into operation. If you had to give a ballpark, but what kind of potential impact do you think you could see in terms of a decline in the overall supply in the marketplace going forward if you're right.
Yes, I think.
I think as we as we sort of sit here and look at look at production I mean, I think there is a very good chance that it.
Could be.
A million or 2 million tons that basically go off the.
Off the radar and when you look out really tight things are then you look at the spectrum of really high quality calls.
I think that in quite a few of them are in those higher cost.
Coal mines and.
So a million or two times coming off that market could have a big impact on pricing and availability of the best quality coals.
And the other thing I would add is just the recent the recent decline in pricing there have been a lot of growth projects that have been pondered.
And you just sort of wonder out loud.
As are some of these companies want to put a half a billion dollars in for a new mine in this environment and.
You know, we don't know the answer right now, but certainly I think you know the decline in price would cause a number of folks too.
Think about pulling back at least on some of the bigger projects. So I view that as a positive as well.
Gotcha. Thanks, Alright, Thank you very much and good luck in the second half this year.
Thanks.
Right.
Okay. If there's no further questions. Once again, we appreciate everybody being on the line and we'll look forward to catching up with everybody I guess it would be in November . So thanks, again and have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a great day.