Alpha Metallurgical Resources Inc

NYSE:AMR

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the Alpha Metallurgical Resources’ Second Quarter 2021 Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Emily O'Quinn, SVP, Corporate Communications. Please go ahead.

[Emily O'Quinn, Senior Vice President-Corporate Communications]

Thank you, Matt and good morning everyone. Before we get started, let me remind you that during our prepared remarks and the Q&A period, 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 2021 earnings release 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 Alpha's Chair and Chief Executive Officer, David Stetson; and President and Chief Financial Officer, Andy Eidson. Also participating on the call are Jason Whitehead, our Chief Operating Officer; and Dan Horn, Executive Vice President of Sales. With that, I'll turn the call over to David.

[David Stetson, Chair and Chief Executive Officer]

Thank you, Emily. And good morning to everyone on the call. Today we are pleased to announce another solid quarter of financial performance. The team, and I look forward to discussing those results along with mid-year analysis of 2021, how we see the back half shaping up and what we're doing to set ourselves up for an excellent start to 2022.

Before we do that, I want to briefly reflect on the significant progress made during the last couple of years and connect those accomplishments to our current circumstances and our vision for the future. Approximately two years ago, Alpha senior management team came together as a cohesive unit, established a broad vision and strategy for the future success of the company. The expansive volume of good work that has been done in relatively short period of time is remarkable. We divested non-core assets and set ourselves on a nearly complete pathway to becoming a pure-play metallurgical producer.

Slabcamp, our last remaining thermal mine, is expected to close roughly one year from now, at which point we'll have no remaining thermal operations. We have strategically fine-tuned our metallurgical portfolio with an eye toward longevity and diversity of products, carefully deploying capital to transition away from higher cost mines. This work, coupled with implementation of Jason's vision for a more streamlined enterprise, has also yield a more advantageous cost structure that allows us to weather downturns in the market and capture upside when the markets rebound. Above all, our team has stayed focused and disciplined in building the strong foundation for our future growth and success. Now, we see this work beginning to pay off.

In terms of the current markets, the Australian PLV index hit a low for the year in January, approximately $102 with gradually increases throughout the second quarter. This left the Australian linked portion of our portfolio lagging and negatively impacting our overall average cost utilization in the second quarter. However, that index has increased by roughly 115% in just six months to recent levels in the $219 range. With this rebound in Australian indices and a general positive market environment across the globe, we expect our second half realizations reflect these much stronger levels.

We're increasing our production guidance for the year as we anticipate mining, roughly an extra one million tons of coal, then the mid point of our prior range. Looking ahead, we've already settled some 22 North American business and expect discussions to begin on earnest in the coming weeks.

With demand projections remaining strong for the immediate future, we expect to be able to build our cash balance and aggressively pay down debt. In keeping with my previously stated interest in de-levering, we accelerated the timeline for completing one of our legacy payment obligations with the West Virginia LCC note. This occurred subsequent to the quarter close and Andy will cover this decision in more detail. From a high level perspective, I see this as another step in solidifying the organization financially, and as further evidence of the executive team's focus on strengthening our balance sheet.

Along those lines, our cash management strategy will continue to hinge on the prudent use of funds, help build and maximize value in our organization. In his remarks Jason will tell you more about our decision to add a fourth section at Road Fork 52, and why we believe this is advantageous use of our capital that will serve us well and offer expected paybacks in well under six months.

In summary, in addition reporting another strong quarter performance, I think, the state of the business is solid and well-prepared to capitalize in the current market strength and high demand for met coal that is projected to extend well into the future.

Now for some additional details in operation, I’ll turn the call over to Jason Whitehead.

[Jason Whitehead, Chief Operating Officer]

Thanks, David, and good morning, everyone. As you know, we've made great strides in the last year to streamline and optimize our operations, shifting production to lower cost mines. As David said, this work has already off with a much improved cost structure.

Our teams delivered again this quarter with met cost of coal sales coming in at $69.94, a ton, roughly $2 than the prior quarter. Some of the inflationary and supply demand pressure, I mentioned on our last call, has continued that we're keeping our previously announced 2021 cost guidance, as we still believe we'll end the year within the range of $68 to $74 a ton in the Met segment.

Also today, we announced an increase in our production guidance, bumping our overall ton about a million times at the mid point for the year, reflecting excellent productivity by our miner and our ability to ramp up production quickly, when the market demands. Andy will provide more detail on that later.

Coal supply is expected to remain tight for the near term, we believe we are well positioned for any desired production adjustments to match that increased demand, whether seaborne or domestic. Our existing group of operations offers one of the most diversified portfolios of any coal company, that we're always looking for ways to incrementally add value. We continually analyze potential bolt-on or development projects like our most recent Lynn Branch and Road Fork 52 projects, where we can spend a modest amount of capital in a way that offers swift return with long-term value.

To that end we're in the process of adding a fourth super section at Road Fork 52. It will provide the ability to mine additional Low Volatile coal from an operation that has exceeded productivity expectations since its inception. This section should be up and running by year end and we're looking forward to putting some additional Alpha times into a tight market.

We’re raising CapEx guidance for the year by $8 million at the mid point in conjunction with this addition. But the projected payback on this investment is expected to come in less than six months and at day spot prices, perhaps even in a quarter’s time, this makes great sense to us, especially given the current market environment and even with it increase, we expect CapEx for the year to come in under a $100 million.

We don't have any other mine development announcements to make today, but there are a few other projects our teams are currently evaluating and they all have similar CapEx profiles to what I just described for Road Fork. Modest spin with a fast return expected on the investment.

I will plan to provide more information on future calls as appropriate, but the takeaway here is that Alpha is ready and able to increase production either by augmenting our existing portfolio or investing in cost-effective development projects.

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

[Andy Eidson, President and Chief Financial Officer]

Thanks Jason. As we reported in our release this morning, our second quarter adjusted EBITDA was $39.9 million, up nearly 40% from our first quarter figure. Q2 volumes for sales were roughly flat with the prior quarter, but one area we want to specifically highlight is our Met segment realizations. On our last call, there was a lot of discussion about the tensions between China and Australia and the various market impact stemming from that situation, especially the lag on processing time to the Australian indices. While the Aussie and Atlantic indices have found more of an equilibrium in the past few weeks, past eight weeks actually, the lag on pricing persisted well into the second quarter and continued to impact our realizations.

To illustrate the magnitude, we introduced a new table in our earnings release to provide additional granularity on our realizations from met shipments in the quarter, based on the various market pricing mechanisms.

To that table's point, we realized $101.80 per ton on our export business for the quarter that was based on the Atlantic index and other pricing mechanisms. By contrast our export business linked to the Australian indices yielded realizations of $67.77 due to the index weakness that persisted well into the quarter. Now that the spread between the indices is tied into a more normalized level and effectively at parity. We don't really expect to see much of a variance between the regions going forward.

For the Met segment as a whole, our realizations came in at $83.38 per ton, up slightly from first quarter, while realizations dropped slightly within the all other category to $60.45 per ton.

As Jason mentioned earlier, our Q2 Met cost of coal sales performance was excellent, and despite continued inflationary pressures. It improved by nearly $2 as compared to Q1, down to $69.94. Costs also improved in the all other category with cost of coal sales down in Q2 from first quarter to $42.77.

SG&A, excluding non-cash stock comp and non-recurring items, increased from $12.7 million to $13.7 million in the second quarter. And we are increasing our full year SG&A guidance largely due to increased corporate insurance costs, as well as the adjustment of accruals related to our incentive compensation plan that reflects an improved outlook for the back half of the year. As such with these recent adjustments, we now expect SG&A for 2021 to be in a range of $48 million to $52 million, up from the prior $44 million to $49 million range.

Our CapEx for second quarter came in at $17.6 million in Q2. And as Jason mentioned, we are increasing our CapEx guidance for the full year from our previous range of $75 million to $95 million to more narrow window of $88 million to $98 million. And of course, this increase as a result of the additional section at the Road Fork 52 as Jason discussed, which we obviously believe is a beneficial use of capital. And well worth the modest increase in projected spend for the year and the timing honestly couldn't be better for that spend.

Turning to the balance sheet and cash flows. We ended the quarter with roughly 20% more in total liquidity as compared to the end of the first quarter. We ended the quarter with $72 million in unrestricted cash and $60 million in availability on our ABL for total liquidity of $132 million. Cash used in operating activities for the quarter was $6 million.

At the end of the quarter, our ABL had $129 million of letters of credit outstanding and no borrowings. As we've already explained in connection with earlier comments, our updated guidance reflects our expectations for how Alpha will round out the year. We've increased total shipments guidance for 2021 from the prior range mid point of 15.5 million tons up to our new range mid point of 16.6 million tons. This is now comprised of an expected midpoint of 13.5 million tons of pure met, and the mid point of 1.6 million tons of incidental thermal production within the Met segment. Our prior guidance for the all other category remains unchanged.

Against the midpoint of guidance around 21% of our Met segment or just over 2.8 million tons is currently unpriced and could be expected to benefit from the improved market environment we're seeing. So that 21% unpriced in the Met segment around 18% is committed. The thermal by-product portion of the Met segment is effectively fully committed unpriced at an average price of $52.68. And we remain fully committed unprice for 2021 in our all other category at an average price of $59.66.

As Jason mentioned, our 2021 Met cost guidance remains unchanged as does the all other category with range midpoint costs of $71.47 per ton respectively. As I mentioned on prior call, you still expect to receive the NOL carryback tax refund of around $70 million sometimes in the back half of this year. Additionally, subsequent to the end of the second quarter, Alpha made a $21 million payment to eliminate the West Virginia portion of the Lexington Coal Company note one year ahead of schedule. We also negotiated the return of $14 million in related surety collateral, meaning the early payment also allowed us to extinguish this liability at a lower net cash outflows than we previously expected and had disclosed.

Finally, a comment on cash allocation strategy as we move forward into strong markets with an anticipation of initial free cash flow. We've been pretty clear over the past several quarters about our attention to build cash balances and aggressively pay down debt. But I want to reiterate those two items as our highest financial priorities. Our focus is on strengthening the balance sheet, deleveraging the enterprise, both of which we believe will maximize shareholder value over both the short and the long terms.

So with that, I'll turn the call over to Dan Horn for market analysis and sales outlook.

[Dan Horn, Executive Vice President-Sales]

Thanks, Andy, and good morning. In my remarks, I will share a few additional observations about the year so far, what we have to look forward to in the back half and the way we're starting to think about 2022. The second quarter was another solid period for our sales team. While you've already heard some commentary on the significant shift in the Australian indices in recent weeks, there are a couple of additional areas that I want to highlight in this regard.

Although our contracts tied to Aussie indices work as lucrative in the first half of the year, as they would have been on another pricing mechanism. I am proud to say that we continue to fulfill our contract obligations to our customers. We have longstanding and in some cases, decades long relationships with customers around the globe and in markets where metallurgical coal demand is expected to continue climbing for many years to come.

We've also see some opportunities created by the Chinese ban on Australian coal. While China has not historically been a destination for office products, we found great acceptance of our high quality coals and vulnerable Chinese steel mills. Therefore, we have build on these initial shipments into the country early this year. And several of our recent vessels were actually larger than shipment sold earlier in the spring. Including business recently agreed upon, but not yet shipped, Alpha has sold approximately 1 million tons of coal into China this year with a significant possibility of more to come.

It's impossible to predict how long this window of opportunity will last. But we continue to evaluate this new market for us and sell additional tons if it makes sense. While the FOB and CFR indices are currently at high levels, it's also important to note that these so-called headline prices are often substantially different than the net backs at the mine report especially considering that the freight costs to get a product across the world are not insignificant. Even still, this has been very good business for us and I applaud my team for their flexibility and willingness to think creatively to help off to mitigate some of the negative impacts of the Chinese-Australian trade tensions with new advantageous business.

As you've heard already, we planned to produce more coal this year than we previously guided. And we're pleased to have some additional comments to offer to our customers, especially given the strong demand environment for metallurgical coal and the tightness of current supply.

Economic indicators continue to signal positive conditions for the near term with the most recently reported U.S. steel mill capacity utilization 85%. Globally, the world steel association crude steel production statistics year-over-year growth of 11.6% in June. India showed growth at 21.4%. While China increase 1.5% over the period long ago – one – period year ago. Regionally, North American and European crude steel production increased 45.2% and 34.7% respectively against the year ago period. All of these are signs of strengthened out of those key markets.

Starting specifically the next year, as David mentioned, we settled a couple pieces of North American business for 2022 and continued discussions with others. While we obviously will not be providing further details while negotiations are ongoing. We can say that this business was concluded at market prices well above our 2021 settlements. We're also strategically evaluating product mix and continuing to most advantageous destinations for these products in 2022. While we have historically placed roughly a third of our business into the domestic market in any given year, we might decide to adjust that percentage depending on how the export demand shapes up.

Regardless, we look forward to having plenty of our high quality coal to sell and based on what we're seeing on our current conversations, we believe that 2022 should be a good year for Alpha.

This concludes our prepared remarks for the quarter. Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] Our first question will come from Nathan Martin with The Benchmark Company. Please go ahead.

[Nathan Martin, The Benchmark Company]

Hey guys. Good morning. And then thanks for taking my questions.

[David Stetson, Chair and Chief Executive Officer]

Good morning, Nate.

[Nathan Martin, The Benchmark Company]

I really appreciate the extra color this quarter on the Met side with the breakdown of ton shipped at different price realizations. So it will kind of start there. How should we think about that split moving in the back half of the year, and was it fair to assume domestic kind of stays pretty ratable? And then on the export side, obviously as you guys pointed out in Australia like tons kind of hurts you in the second quarter with this depressed pricing. But since then, the index is more than doubled. When you're talking in the past about moving some business away from that index with contracts for a while, you guys have about 21% of your Met production on price as you just pointed out. So Dan, you've covered a little bit of this in the prepared remarks just now, but maybe you could give us a little more color on, which markets you're targeting or have shown interest anything within there? Thank you.

[Dan Horn, Executive Vice President-Sales]

Sure. Well, I guess broadly speaking, we're targeting all of them. We expect to continue to ship into India and other markets at high levels. But as I mentioned, China's interesting target right now that the indices kind of rebalancing themselves. We'll just have to work among the best opportunities there. We're still selling additional spots on into Europe, South America as well, and some additional domestic Met. So it truly isn't all of the above situation right now. But we'll look for where the realizations are the best.

[Nathan Martin, The Benchmark Company]

Got it. Thanks, Dan. So yes, I mean, I just it's a – the – more of the Chinese’s benchmark pricing. It's not quite the same, they are closer to parity, I guess, to the Aussie index. But, just kind of looking at the full year, Met shipment guidance increased, can you guys maybe talk about where those tons are coming from, or maybe even the cadence expect in the third and fourth quarters, obviously you announced the plan to add that four section at Road Fork 52, sounds like that should be online by the end of the year. And what kind of incremental tons are you expecting there? I don't think we highlighted that at all. And then, should that help lower overall Met segment costs as well and is it correct? Maybe assume that production kind of is additives to next year as well?

[Jason Whitehead, Chief Operating Officer]

Hey, Nate. This is Jason. I think, a good portion of our increase in guidance has just come from productivity from the current operations being slightly above what was expected. With respect to Road Fork 52 in the four section, it will be up and running by the end of the year. And it'll be more or less at a full run rate by first of the year nominally speaking, I think it would add about 400,000 tons of – 400,000 incremental tons across the portfolio.

[Nathan Martin, The Benchmark Company]

And that's global, correct? Jason, so I just, I would kind of help your mix a little bit.

[Jason Whitehead, Chief Operating Officer]

It is global and I think you asked a question about, how it would contribute to cost and Road Fork is basically at the mid point of our guidance. So it's incrementally, it should be helpful, but I don't think you'll materially see it in overall numbers.

[Nathan Martin, The Benchmark Company]

Got it. That's helpful. And then again, another great cost quarter, in fact, I guess the other thermal categories that back to back $43 plus or minus quarters, which was below your full year guidance. So, kudos to Jason and the team. You're obviously you guys maintain that full year guidance on both Met and other thermal costs. Is there – as we looked at the second half, is there anything there you guys see that could cause these numbers to different materially one way or the other 3Q or 4Q, and there may be high royalties and prices they were the other day, but any longwall moves you mentioned the pricing a little bit labor costs, et cetera, any color there?

[Jason Whitehead, Chief Operating Officer]

Yes. We're all room and pillar operations. So no longwall moves for us. But I think, more or less the supply demand pressure that we're seeing has mostly been offset with improved productivity. So therefore, I think, we're able to maintain our guidance that we gave at the start of the year.

[Nathan Martin, The Benchmark Company]

That's fair. Jason, I apologize for the longwall question. So I guess just maybe final questions for Andy. Congrats on paying off the LCC liability early, as we think about some of the other legacy liabilities, I'll pose there any thoughts. Appreciate it.

[Andy Eidson, President and Chief Financial Officer]

Yes. Thanks Nate. We're constantly evaluating the balance sheet just to try to pick off some items where it makes sense. Now we're kind of getting to the point where the –all of the bankruptcy related items and the other peripheral below the line items are wrapping up at the end of next year. And so, we're close enough now where there's probably not too much more to be done in that regard. And that's why we're focusing so heavily on potentially preparing for some pretty aggressive debt reduction because it seems to be the best – the best bang for our buck as far as really achieving and capturing some shareholder value. So I think that's probably the last big lick of non-debt related liabilities that we'll be able to attack for now. But again, if an opportunity pops up, we're constantly looking at the balance sheet for other pockets that we may be able to take out.

[Nathan Martin, The Benchmark Company]

Great. Thanks for that Andy. And I'll leave it there guys. Dan, as always appreciate your thoughts and best luck in the second half.

[Dan Horn, Executive Vice President-Sales]

Thanks, Nate.

[Andy Eidson, President and Chief Financial Officer]

Appreciate you Nate.

[Operator]

[Operator Instructions] Our next question will come up from Lucas Pipes with B. Riley Securities. Please go ahead.

[Lucas Pipes, B. Riley Securities]

Hey, good morning everyone. I'll take another crack at Nate's first question. I also really appreciated the Met segment sales table. And you have these three categories export other pricing, domestic export Australian index. And I assume domestic, well, that's not going to change much kind of Q3 versus Q2 or Q4 versus Q2, just given the nature of it. But can you provide some thoughts as how export other pricing mechanisms, export Australian index, what those numbers might look like Q3, Q4? I’d really appreciate your thoughts. Thank you.

[Andy Eidson, President and Chief Financial Officer]

Well, Lucas you can do the math and do the percentage increase in the indices there. They're up quite a bit quarter-over-quarter there, but just to get, I guess, a sense the Aussie indices pricing number that you saw there in the current month, if you put the math to it, you'd probably come up with a number that looks like $70 a ton higher than that right now, the indices are way up. So, it's a big increase.

[Lucas Pipes, B. Riley Securities]

Terrific. So, kind of 140 per short ton at the mine gate, Q3 is a reasonable number for...

[David Stetson, Chair and Chief Executive Officer]

I'm looking at the indices today. It's a guess. And there's a freight component involved in there that does this moving quite a bit these days as well. But yes, that's a good guess.

[Lucas Pipes, B. Riley Securities]

Got it. And the export other pricing, would those be kind of high value into Europe? How would those have moved quarter-over-quarter or versus [indiscernible], whatever?

[David Stetson, Chair and Chief Executive Officer]

Kind of across the board on that Lucas we're moving all grades, high-vol, mid-vol, low-vol into all the markets, whether it's China, Europe, you’ve mentioned Europe, Europe we are definitely shipping additional tons there too. So again, I'm not trying to evade it, but it's just all of the above.

[Lucas Pipes, B. Riley Securities]

And you touched on the convergence of the Aussie index to some of the others. So, if I were to conclude from the earlier question on the Aussie pricing that this export other pricing mechanisms is also around 140, would you say, [indiscernible] do the math again, or would you say that's about the right ballpark?

[David Stetson, Chair and Chief Executive Officer]

I think you got to go – well, you're probably close, probably a little higher on the other. I mean, the Aussie indices are still, as Andy pointed out, there's a lagging factor there, we're not completely climbed out of that lagging period yet on those. So I don't have a number to give you, but I think that the other non- Aussie linked pricing is going to be a bit stronger,

[Lucas Pipes, B. Riley Securities]

Bit stronger. Terrific, very helpful. Really appreciate that. And since we are on such a roll on the pricing side, I figured I'd keep going domestic contract season seems like it's right around the corner now. What your read of the market there? I would in any color you can share, thank you.

[David Stetson, Chair and Chief Executive Officer]

So to point out we've done a couple of settlements here, I'm not going to go into any detail at all on those where the major negotiating period is coming up here in the coming weeks. But I guess if you want a little extra call, what I will say from our conversations, is that with the steel industry running very well and the coke plants and blast furnace is trying to run as hard as they can, they are and will be looking for the higher quality coking coals this year. So, I think a lot of the attention will be on the, what I call the higher rank coals, meaning low-vol, medium-vol, also on the lower sulfur coals, going forward. So that's been our experience here in our early discussions.

[Lucas Pipes, B. Riley Securities]

And then on the pricing side there has been a fairly narrow range over the last few years in terms of domestic pricing, would you say this is a year where pricing could breakout to the upside given what's going on in the international markets. Thank you for your thoughts on that.

[David Stetson, Chair and Chief Executive Officer]

I mean, as I point out so far, what we've seen is pricing for 2022, much, much higher than 2021. I'm not going to get any more granular than that. And within a band I don't know that there's domestic grades are all over the – they're not all over the map, last year, they were probably within a $10 or $15 band, I suppose that's possible. I don't know any reason why it wouldn't be similar going forward in 2022, as far as the range.

[Lucas Pipes, B. Riley Securities]

Got it. And with that band, you mean a spread between the high vol A and high vol B, for example,

[David Stetson, Chair and Chief Executive Officer]

Well, yes, again, it's a little early to comment, put a lot of thought into that. In our portfolio we have some very good – very high quality also for high vol Bs that I'm not even willing to say that that's the spread on A versus B, to be honest with you, truly depends on the product grade.

[Lucas Pipes, B. Riley Securities]

Got it. Got it. Super helpful. Really appreciate your thoughts on this. Last question from me congratulations on the cost performance especially during this inflationary environment and to the team you commented on the inflationary pressures anything that gives you particular cause for concern, is it steel for roof bolts, is it fuel, is it labor? Which one gives you the most headache? Thank you very much for your perspective.

[Jason Whitehead, Chief Operating Officer]

Hey, this is Jason. I would say yes. That's all of the above everything that you mentioned there, and they seem to be coming up really proportionately with one another. But again, as I said before, I think, the productivity from the guys in the field and they're really running well enough to where it's pretty well offsetting that, and we're able to maintain the guidance that we previously gave.

[Lucas Pipes, B. Riley Securities]

Terrific. Well, thank you very much. Really appreciate it. And best of luck.

[David Stetson, Chair and Chief Executive Officer]

Thanks Lucas.

[Jason Whitehead, Chief Operating Officer]

Thanks.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to David Stetson, CEO for any closing remarks.

[David Stetson, Chair and Chief Executive Officer]

Thank you. In closing, I want to thank everyone for joining the call this morning, and we reiterate our excitement about the coming year. Our team will continue to build on some foundational changes we've made in recent quarters, and we think we're very well positioned for the future success. We look forward to checking back with you at the end of next quarter, and everyone have a wonderful and great day. Thank you all so much.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.