Warrior Met Coal Inc

NYSE:HCC

Earnings Call Analysis

Warrior Met Coal's Resilient Q2 2024 Performance Amid Market Challenges

Warrior Met Coal achieved strong Q2 2024 results despite weaker global demand, reporting a net income of $71 million, down from $82 million in Q2 2023. Sales volume grew by 18%, offsetting an 11% decrease in average selling prices. The company reaffirmed its 2024 guidance, anticipating improving demand in India and Southeast Asia. Significant progress at the Blue Creek project includes $84 million in Q2 investments, with production expected in the second half of 2024. Warrior plans to produce 4.8 million short tons annually post-2026, enhancing its cost positioning and cash flow.

Strong Performance Despite Weaker Market

Warrior reported resilient results for Q2 2024, achieving net income of $71 million, or $1.35 per diluted share, down from $82 million or $1.58 in Q2 2023. Non-GAAP adjusted income also decreased to $1.35 per diluted share, highlighting the impact of lower average net selling prices, which dropped by 11% to $186 per short ton. Despite these challenges, the company's revenues rose to $397 million, a $17 million increase year-over-year, driven by an 18% rise in sales volume.

Operational Efficiency and Capital Investments

The company generated $147 million from operations, enabling $122 million in capital expenditures, particularly focused on the Blue Creek project. The firm intends to invest nearly $1 billion over five years without increasing debt levels, reflecting a commitment to financial health and shareholder returns. Free cash flow remained positive at $25 million, ensuring that cash generated is effectively reinvested to bolster future growth.

Progress on Blue Creek Development

Warrior is making significant strides on the Blue Creek development, having spent $84 million in Q2 2024 and a total of $153 million to date. The company aims for longwall operations to begin in the second quarter of 2026, with a projected annual incremental production of 4.8 million short tons of premium High Vol A steelmaking coal, anticipated to command premium pricing. The commencement of continuous miner operations is slated for Q3 2024.

Market Conditions and Price Realizations

The steelmaking coal market has experienced softer demand, influenced by high Chinese exports and declining global steel prices. The primary index for Australian coal ended the second quarter at $212 per ton, marked by a significant decrease from highs earlier in the year. Conversely, Warrior realized a strong pricing capture of 90%, slightly up from 84% in the prior quarter, indicating solid product mix management and geographical sales strategy.

Anticipated Demand Recovery

Looking ahead, Warrior's management remains cautiously optimistic about demand recovery in the second half of the year, especially in regions like India and Southeast Asia, while acknowledging weaker prospects in Europe and South America. Production cuts in China are expected to tighten supply, presenting potential opportunities for Warrior to optimize inventory and revenue generation strategies.

Cost Management and Financial Stability

Cash cost of sales rose to 67% of mining revenues, compared to 62% in Q2 2023, with efforts focused on maintaining a sustainable cost structure. Warrior's adjustment in capital spending and strategic management of operational costs aim to ensure profitability amidst fluctuating market conditions. The current total liquidity sits at $816 million, ensuring ample resources for ongoing projects and potential market fluctuations.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. My name is Drew, and I will be your conference call operator today. At this time, I would like to welcome everyone to the Warrior Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded and will be available for replay on the company's website.

I would like to turn the conference over to D'Andre Wright, Vice President of External Affairs and Communications. Please go ahead.

[D'Andre Wright, executive]

Good afternoon, and welcome, everyone, to Warrior's Second Quarter 2024 Earnings Conference Call. Before we begin, let me remind you that certain statements made during this call include statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. Those uncertainties, which are described in more detail in the company's annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different from those expected in our forward-looking statements.

We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For more information regarding forward-looking statements, please refer to the company's press releases and SEC filings.

We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our 2024 second quarter press release furnished to the SEC on Form 8-K, which is also posted on our website.

Additionally, we filed our 10-Q for the second quarter ended June 30, 2024, with the SEC this afternoon. You can find additional information regarding the company on our website at www.warriormetcoal.com which also includes the second quarter supplemental slide deck that was posted this afternoon.

On the call with me today are Mr. Walt Scheller, Chief Executive Officer; and Mr. Dale Boyles, Chief Financial Officer. After our formal remarks, we will be happy to take any questions.

With that, I'll now turn the call over to Walt. Walt?

[Walter Scheller, executive]

Thanks, D'Andre. Hello, everyone, and thank you for taking the time to join us today to discuss our second quarter 2024 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions.

We delivered very strong results for the second quarter, driven by our continued success in maximizing the benefits of our high-quality assets and our operational capabilities. Our highly successful operational performance led to double-digit increases in both sales and production volumes despite weaker global demand, which led to strong financial performance of adjusted EBITDA and free cash flow.

We generated $147 million of cash from operations, which was used to fund $122 million of CapEx and mine development during the second quarter, resulting in free cash flow of $25 million. In addition, we continue to make excellent progress on Blue Creek, meeting several key milestones as we advance the development of this world-class asset. This exceptional performance and the development of Blue Creek continue to drive value for our stockholders regardless of market factors.

From a market perspective, the second quarter played out largely as we had expected, with softer demand and stronger supply from all regions, resulting in a weaker steelmaking coal price environment. We were hoping to see signs of improving demand towards the end of the quarter, which did not materialize.

In addition, we were surprised by the spot volume availability from Australia in May and June. Customers recognize these favorable supply conditions and were patient in their [ buying ] approach. Other factors contributing to the weaker demand included Chinese steel exports at multiyear highs and global steel prices declining for most of the second quarter, reflecting the softer steel demand across all regions. As a result, steelmaking coal prices extended the sharp decline that started in March. We saw 2 attempted price spikes during the second quarter that were short-lived as the market fundamentals were not supportive.

We were again extremely pleased by the performance of our rail partner during the second quarter as we were able to navigate the temporary loss of the barging system due to the failure of the Demopolis lock without any impact to our customers and with minimal impact to our costs. This lock was repaired and reopened towards the end of May, allowing us to return to moving our products on the river. Unfortunately, that reopening was short-lived as the river system had to be closed again in late June due to the failure of the Holt Lock unrelated to the Demopolis lock.

Right now, we do not have an official repair plan from the local [ core of ] engineers. However, we're planning as if the repairs will take as long as the Demopolis lock repairs of about 4, 5 months. We expect to be able to manage the current Holt lock failure without interruption to our customers, just as we did in the previous lock failure.

The steep correction in pricing experienced in March continued into the beginning of the second quarter, where we saw all indices establish recent lows around early April. Our primary index, the PLV FOB Australia ended the second quarter at $212 per short ton, which was $95 lower than its first quarter high of $307 per short ton. Likewise, the PLV CFR China Index experienced a $76 decline during the same period, closing the second quarter at a price of $224 per short ton.

Similar declines were observed with second tier indices, which were also lower relative to the PLV index, averaging between 86% and, 90% for the second quarter. High Vol A prices ended the second quarter at $192 per short ton and averaged $197 per short ton for the second quarter. We achieved a consolidated gross price realization of 90% in the second quarter, which was a function of product mix, geography and freight rates.

According to the World Steel Association monthly report, global pig iron production decreased by approximately 2.6% for the first 6 months of 2024 as compared to the prior year period. Pig iron production in China, which is the world's largest production region, fell by 3.6% for the same period, whereas the rest of the world's production experienced a more modest decline of 0.3% for the first half of the year.

India remains a bright spot with a growth rate of 2.7% and is expected to continue growing with new blast furnace capacity coming online later this year. Several other reasons also experienced positive growth for the period, such as select European countries and Brazil. However, their gains were largely offset by declining production from Japan and South Korea.

Now let me turn to our second quarter results. Our second quarter sales volume of 2.1 million short tons was 18% higher than the comparable quarter last year. The overall increase was primarily driven by both mines operating at higher capacity levels this year compared to last year, stable contractual demand from our traditional markets and solid Asian spot demand.

Our sales by geography in the second quarter break down as follows: 39% into Europe; 38% into Asia; and 23% into South America. The majority of the sales into Asia in the second quarter were to customers in Japan, China and India. As we've previously noted, demand from the Asian steel producers has been growing over the last year, resulting in higher sales to that geography, while sales from our traditional markets for Europe and South America have been lower primarily due to weak spot markets.

Our spot volume was 30% in the second quarter of 2024, which was primarily sold into the Asian markets. This rate was lower than the [ 37% ] in the first quarter of the year. For the full year, we expect our gross spot volume to approximately 25% to 30% of total sales volume.

Production volume in the second quarter was 2.2 million short tons compared to 1.9 million short tons in the same quarter 2023, representing a 13% increase. This is the highest quarterly production output over the last 3 years. [ Coal ] mines operated at higher capacity levels in the second quarter of this year compared to the same quarter last year. Our coal inventory increased slightly to 895,000 short tons from 892,000 short tons at the end of the first quarter.

During the second quarter, we spent $122 million on CapEx and mine development. CapEx spending was $111 million, which included $84 million on the Blue Creek project. Mine development spending on Blue Creek project was $11 million during the second quarter 2024. As we begin developing the first longwall panel at Blue Creek in the third quarter, our mine development costs will continue to grow in the second half of the year and until the longwall starts production, which we expect to occur in 2026.

Next, I'd like to provide you with a progress report on our Blue Creek growth project, [ giving ] updates on our remarkable development progress in the second quarter and what comes next. We've now completed major components for seam access on schedule, which include the production slope, service shaft, ventilation shaft and fans. The next major step is completing the installation of the service cage and the slope belt. Given our significant progress to date, we are able to begin development of the initial longwall panel with the first continuous monitor unit expected in the third quarter.

On the surface infrastructure components, we completed the construction of the bathhouse, warehouse and critical electrical substations and made noteworthy progress on the construction of the preparation plant. On the coal transportation components, good progress was made on the construction of the run-of-mine and clean coal belt structures. Steady progress continued during the quarter on the rail and barge load outs as well.

All of these components remain on schedule. In addition, we are focused on increasing our head count at Blue Creek by approximately 100 people by the end of the year and are on track to meet that goal.

We are extremely excited that the longwall panel development is scheduled to begin on the originally expected time line, and we are on track to produce approximately 200,000 short tons of High Vol A steelmaking coal in the second half of 2024. The development tons produced from the second half of this year through the first half of 2025 are expected to be sold in the second half of 2025 after the preparation plant comes online.

On the financial side, Warrior invested $84 million during the second quarter of 2024 on the development of Blue Creek, which brings the year-to-date spending to $153 million. The company expects to invest approximately $325 million to $375 million in 2024 on the continued development of the Blue Creek reserves, inclusive of the $153 million already invested. [ For ] the entire project to date to the end of the second quarter we have invested a grand total of $519 million.

We remain focused on tight capital spending discipline to ensure the project will be completed within our reset baseline cost estimate and on the original schedule, including the longwall startup in the second quarter 2026.

Blue Creek represents one of the last remaining untapped premium, high-quality, High Vol A coal reserves in the U.S., which we anticipate will achieve premium prices. Warrior expects incremental annualized production of 4.8 million short tons of premium High Vol A steelmaking coal after the start-up of the longwall, which the company expects will enhance and strengthen its already strong global cost curve positioning and deliver incremental profit and cash flows.

I'll now ask Dale to address our second quarter results in greater detail.

[Dale Boyles, executive]

Thanks, Walt. Despite the weaker global demand for steelmaking coal in the second quarter, we continued to deliver strong operational and financial performance by leveraging our high-quality assets and strong operational competencies. Strong financial performance allows us to invest in the future of our company and drive incremental value for our stockholders.

We are investing nearly $1 billion over 5 years in our company's future from the cash generated from our existing operations without taking on any additional financial leverage. In fact, we have deleveraged the company since the beginning of the development of Blue Creek and paid out incremental special dividends to our stockholders. That makes a strong statement about the high quality of our existing assets, our people and our focus on generating value for our stockholders. The opportunity at Blue Creek, combined with our operational efficiency and strong existing assets means that Warrior has a very bright future ahead.

Now let's look at the specific financial results for the second quarter. For the second quarter of 2024, the company recorded net income on a GAAP basis of $71 million or $1.35 per diluted share compared to net income of $82 million or $1.58 per diluted share in the same quarter of 2023.

Non-GAAP adjusted net income for the second quarter, excluding the non-recurring business interruption expenses, was $1.35 per diluted share. This compares to adjusted net income of $1.64 per diluted share in the same quarter of 2023. These decreases quarter-over-quarter were primarily driven by the 11% lower average net selling price and lower results from our gas business, partially offset by 18% higher sales volumes.

We reported adjusted EBITDA of $116 million in the second quarter of 2024 compared to $130 million in the same quarter of last year. Our adjusted EBITDA margin was 29% from the second quarter of 2024 compared to 34% in the same quarter of last year. Our adjusted EBITDA margin per ton was $55 for the second quarter of this year. As I previously mentioned, these decreases quarter-over-quarter were primarily driven by the 11% lower average net selling price and lower results from our gas business, which were partially offset by 18% higher sale volumes.

Total revenues were $397 million in the second quarter compared to $380 million in the second quarter of 2023. This overall increase of $17 million was primarily due to the 18% increase in sales volume, offset by the 11% decrease in average net selling prices and higher demurrage and other charges. Demurrage and other charges were $4 million higher compared to 2023 second quarter.

Demurrage and other charges resulted in an average net selling price of $186 per short ton in the second quarter of 2024 compared to $209 per short ton in the same quarter of last year. Other revenues, mainly from our gas businesses were lower in the second quarter of 2024 compared to the same quarter of last year, primarily due to a 10% decrease in natural gas volumes between the periods.

Cash cost of sales in the second quarter of 2024 was $260 million or 67% of mining revenues compared to $229 million or 62% of mining revenues in the second quarter of 2023. Of the $31 million increase in cash cost of sales, $41 million of the increase was driven primarily by the 18% increase in sales volumes and the higher employee wages and incentives associated with a higher headcount. This increase was offset partially by the decrease in cash cost of sales of $10 million attributed to lower variable cost of transportation and royalties associated with lower steelmaking coal prices.

Cash cost of sales per short ton, FOB [ port ], was approximately $124 in the second quarter of this year compared to $129 in the second quarter of 2023. Our cash cost of production was 61% of our total cash cost per short ton compared to 59% last year. On a per ton basis, cost of production were flat in the second quarter compared to the prior year quarter. This reflects the higher headcount [ and ] [ associated ] employee-related wages and incentives that were offset by the higher production volumes.

Overall transportation and royalty costs were 39% of our cash cost of sales per short ton in the second quarter of this year on lower average net selling prices compared to 41% in the same quarter last year. Transportation costs were about $3 per short ton lower due to lower average net selling prices and their impact on variable transportation costs. This was net of the $1 per short ton impact of the higher rail mix due to the Demopolis lock failure.

Likewise, royalty costs were lower by about $2 per short ton on lower average net selling prices. As a result of these changes in our cash cost, our cash margin per short ton was $62 in the second quarter compared to $80 in the same quarter last year.

SG&A expenses were about $15 million or 3.9% of total revenues in the second quarter of 2024, and were slightly higher than 2023 second quarter of 3.5%, primarily due to an increase in employee-related compensation expenses. The interest income earned on our cash investments was lower in the second quarter this year, primarily due to lower average cash balances.

Our interest expense was lower primarily due to the early retirement of debt in August of 2023, and the capitalization of interest to the construction of Blue Creek. Our low effective tax rate continues to reflect an income tax benefit for depletion expense and foreign-derived intangible income.

Turning to cash flow. During the second quarter of 2024, free cash flow was $25 million. This was the result of cash flows generated by operating activities of $147 million, [ less ] cash used for capital expenditures and mine development of $122 million.

Free cash flow was $48 million higher than the second quarter of 2023, primarily due to higher operating cash flows and lower Blue Creek CapEx spending. Free cash flow in the second quarter of 2024 was positively impacted by a $29 million decrease in net working capital from the end of the first quarter, primarily due to lower accounts receivable on timing of sales and lower steelmaking coal prices.

Our total available liquidity at the end of the second quarter of 2024 was $816 million and consisted of cash and cash equivalents of $709 million and $107 million available under our ABL facility.

Now let's turn to our outlook and guidance for the full year 2024. After another strong quarter of operational and financial performance despite weak demand in the global markets, we have reaffirmed our outlook and guidance for the full year as outlined in our earnings release. We did a non-material adjustment to interest expense by lowering the full year expected amount.

I will now turn it back to Walt for his final comments.

[Walter Scheller, executive]

Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments. We're expecting demand to increase as the second half of the year progresses, although we still do not have firm signals and are therefore cautious. We will continue to be patient when possible and seek opportunities that maximize price realizations even if we need to temporarily manage higher than normal inventory levels.

We do not expect any meaningful domain improvements in our traditional markets of Europe and South America, but are expecting to see demand improve in certain geographies like India and Southeast Asia. As for China, we anticipate steelmaking coal production cuts will be implemented in the second half of the year as the recent stimulus efforts have failed to improve demand.

We believe the steelmaking coal supply will be slightly tighter in the second half of the year due to a combination of supply disruptions, like mine fires, formal line maintenance and longwall moves in Australia. We are well positioned operationally and from an inventory level standpoint to capitalize on increasing market demand in the second half of the year.

While we're well prepared to address a variety of market conditions, we're also extremely excited and laser-focused on the disciplined development of our world-class Blue Creek reserves. We are on track for the first development [ tons ] from continuous miner units in the third quarter of 2024, with the longwall scheduled to start up in the second quarter of 2026.

With that, we'd like to open the call for questions. Operator?

[Operator]

[Operator Instructions] The first question comes from Lucas Pipes with B. Riley Securities.

[Lucas Pipes, analyst]

Well, Dale, congrats on the progress at Blue Creek. And I wanted to ask about your key milestones for the project between now and the end of the year? And then I also wanted to ask who will have the honor to mine the first ton of coal with the continuous miner unit in Q3?

[Walter Scheller, executive]

Key milestones will be getting that first continuous miner unit up and running, which will happen pretty quickly here. It will happen in the third quarter. And then the other key milestone will be getting that second continuous miner unit running before the end of the year after we've cleared enough space with the first continuous miner unit.

And we've talked about the completion of the slope and the slope belt is being installed now. We'll have the service cage up and running pretty quickly here in the third quarter. So the key moments are getting -- be getting those first 2 continuous miner units running. And I have no doubt that our mine manager over there will insist that he be the one to make the first [ cut ] with the continuous miner.

[Lucas Pipes, analyst]

In terms of your annual guidance, when I look at the midpoint, it implies about 3.5 million tons of production in the second half versus first half at 4.2 million tons. So quite a bit of a pullback. And I wonder, is there anything that you see -- and I appreciate that's at the midpoint, but is there anything that you see operationally that would call for that reduction? Or is that a degree of conservatism either operationally or because of where the market is?

[Walter Scheller, executive]

We always like to under-promise and over-deliver. But frankly, we've got 3 longwall moves that will occur. And while we have shields and those should be 0 day moves, we still have slowed down towards the end of the panel in order to complete the meshing process and get that [ phase ] bolted up before we move over to start the new longwall [ phase ]. So that will be on all 3 of those longwall moves. And then we also have -- we always expect that around the holidays between absenteeism and just trying to get people a little extra time off, we expect a reduction in our production levels.

[Lucas Pipes, analyst]

Then the cost guidance related to that conservatism as well, you had a nice improvement there quarter-over-quarter?

[Dale Boyles, executive]

Yes. Lucas, this is Dale. I mean if you look at our year-to-date, we're right on track of where we said we would be in our range. So when you look at where prices are and versus what our guidance is built on, we're pretty much in line with all that. So all that seems to be actually unfolding as we said. So we feel good about where we are.

[Operator]

The next question comes from Nathan Martin with The Benchmark Company.

[Nathan Martin, analyst]

Maybe start on the pricing side. Walt, [ sounded ] like you said, capture rate up to about 90% this quarter, which is better than, I believe it was 84% in the first quarter. So I'm guessing likely aided a bit by the quarter-over-quarter decline in net prices. But you guys still feel confident that Warrior can hit kind of that 85% to 90% [indiscernible] that Dale mentioned previously, [indiscernible] benchmark for the full year? Or should we assume maybe given the higher High Vol A production that we're seeing from Mine 4, which I think is running at pretty near record levels at least through the first half and still that wider than historical spread between High Vol A and the benchmark, that maybe ends up being a little bit lower than that range? It would be great to get your thoughts.

[Walter Scheller, executive]

Well, actually, we've seen the spread close back up a little bit, which is very positive. And I think your first comment about the decline in price, pushing that -- those [ relativities ] up higher, that's very accurate. And I think what we'll see is if we see continued decline in prices, unfortunately, I think you'd continue to see that percentage go up or stay up. However, I do feel confident that -- I'm hoping the price will go back up, and I'd rather see the spread and our percentage go down a little bit because we have a rising coal price. But we're still pretty confident in that 85% to 90% range.

[Nathan Martin, analyst]

Maybe just related to then kind of the cadence of shipments for the remainder of the year. I know you guys mentioned 3 longwall moves, 2 in Q3, 1 in Q4, if I remember correctly. Walt, you mentioned a slight build in inventories quarter-over-quarter. When would you expect maybe some of those inventories to be drawn down, whether it be third quarter, fourth quarter? Any specific thoughts or drivers around shipments between the quarters in the last half of the year?

[Walter Scheller, executive]

Well, I think the first thing we have to remember here is, as we've said, we're going to mine a couple of hundred, thousand tons out of Blue Creek, which is going to be incremental inventory. So if we just maintain our inventory levels flat for [ 4 ] and [ 7 ], we actually increased inventory by 200,000 tons.

In terms of working that inventory down, as I said, we're going to be very patient. We are not going to jump in the market just to dump tons. We don't need to do that. So we're going to be [indiscernible]. And if we see market opportunities that, in our opinion, justify going ahead and moving additional coal, we'll do that, but we're not in -- we don't feel pressured to do so.

[Dale Boyles, executive]

Yes. Nate, this is Dale. I'll just add to that. If you look at last year, if you remember third quarter, we really pushed a lot of volume out to introduce our products into Asia. And then we pulled back in the fourth quarter and we only shipped about [ 1.5 million ] last year. So we try to take advantage of the market situations when we can. And if we think the latter half of the year, prices are going to increase, then we're going to be a little more patient with our approach. So yes, Q3 could be a little lower, and Q4 could be a little higher. It just really depends on what the market and customer demand is, so that we maximize price.

[Nathan Martin, analyst]

And then maybe just one last question on Blue Creek. It's one I get from investors fairly often. Looking to the slide deck, obviously, some of these numbers are a little stale at this point, but specifically focused on the cash costs and the possibilities around the Blue Creek product?, I know you guys have said that it should eventually to help lower the overall cash cost -- average cash cost for Warrior. Your slide deck is still showing around $70 or so. But maybe can we just get some thoughts on where that number could look like once you guys update some of these economics, especially given some of the inflationary pressures that we've already applied to the CapEx budget?

[Dale Boyles, executive]

Yes, good question, Nate. Look, we do expect to be updating all those project economics. As we said, the scope changed last year, really had no effect on -- because we had the improvement in transportation costs and everything, so no net impact on the overall economics. I actually think they're going to be better with a higher [ met ] coal pricing assumption.

So sometime next year we'll get that information back out, but that's $70 all in before. We've been talking about the inflation in supplies and everything being 30%, 35%. So if you tack that on, you're starting to get to where we think it will probably be. I don't know if that's the exact number, but that's a pretty good idea of where we're probably headed right now.

[Operator]

[Operator Instructions] The next question comes from Katja Jancic with BMO Capital Markets.

[Katja Jancic, analyst]

I think in the prepared remarks, you -- Walt, you mentioned that the spot exposure in '24 is going to be between 25% to 30%. Is that a bit higher than what was previously expected? I thought initially the expectation was around 25%.

[Walter Scheller, executive]

I think we had said 25% to 30% all along. And -- but the issue is the -- there's been really no materialization of spot activity in Europe or South America at all. So it's just having to continue to move the coal into Asia and a lot of that's happening in the spot market.

[Katja Jancic, analyst]

Is it in the near term? Because as you mentioned right now, the spot activity is a little softer, that the spot volume could be -- or the spot exposure could be lower during, let's say, the third quarter?

[Walter Scheller, executive]

Yes, it could be. Again, we were at 37% in Q1, down to 30% in Q2, and we're still saying 25% to 30%. So it has to go down in order for us to hit our range, it has to be below 30% in the third or fourth quarter to drag our number down where we believe it will end up.

[Katja Jancic, analyst]

And one more, if I may. Longer term, once Blue Creek starts ramping up, does that exposure change?

[Walter Scheller, executive]

I think that exposure increases in the first couple of years of Blue Creek. You're putting another 4.8 million short tons into the market and getting that coal established and finding homes for it. So I think the percentage of spot will increase for that term for the next few years.

[Operator]

At this time, there are no further questions. I will now turn the call back over to Mr. Scheller for any comments.

[Walter Scheller, executive]

That concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest in Warrior.

[Operator]

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