Warrior Met Coal Inc

NYSE:HCC

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon. My name is Melanie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Warrior Met Coal Third Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. This call is being recorded and will be available for replay on the company's website.

Before we begin, I have been asked to note that today's discussion may contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press release and the SEC filings.

I have also been asked to note that the company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the Investors section of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation at the Investors section at its website at www.warriormetcoal.com.

Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks.

[Walter Scheller]

Thanks, operator. Hello, everyone. And thank you for taking the time to join us today to discuss our third quarter 2022 results. After my remarks, Dale will review our results in additional detail and then you'll have the opportunity to ask questions.

I'm happy to share our performance from another very strong quarter, delivering results above expectations despite market headwinds. We again demonstrated our ability to leverage our efficient business model to make strong customer demand for our premium met coal and take advantage of strong met coal pricing to deliver those results.

The most notable ongoing headwind constraining our performance relates to shipment delays, which is not a new challenge, but which became particularly problematic during the third quarter due to a variety of factors. Combination of disappointing rail performance, outages from major equipment maintenance work at the Port of Mobile that was eight weeks behind schedule, and substantial vessel congestion led to higher coal inventory levels, missed sales, and higher demurrage costs. While the port maintenance outages should be behind us, we expect to continue to experience port congestion challenges in the upcoming quarters.

Also, we remain concerned about a potential labor stoppage from the National Railroad contract negotiations. Fortunately, we've recently started to see improvements in reducing these delays due to an increase in rail crew availability and the commissioning of the new tandem car dump at the Port of Mobile.

We also expect to see gradual, but slow, improvement as our rail carrier continues to better calibrate their cycle times and as the port continues to address ongoing performance issues and high traffic volume.

As we'll hear in a minute, if we could ship more, we could sell more. Given our strong customer base, low cost business model and liquidity position, we continue to leverage our strong production capabilities to build our inventory, which was to 858,000 short tons at the end of the third quarter. As shipment issues are resolved, we're well positioned to take advantage of continued demand for our high quality products.

Turning to pricing and the demand from met coal, we experienced less volatility in the third quarter than previous quarters. Nonetheless, as expected, we continue to observe a general softening of steel demand across certain geographies. In particular, Europe steel industry initiated numerous production closures of electric arc furnaces due to high electricity prices, as well as production cuts across blast furnace capacity. We continue to see lower steel demand, high inflation and economic uncertainty in the region, all of which impacts our customer demand.

European ban on the import of Russian coals took effect on August 10, which we expect will result in customers looking to other geographies for met coal supply. In addition, crossover coals provided some pricing support as demand for thermal coals were strong for most of the third quarter.

In Asia, Chinese steel production saw modest improvements for the first two months of the quarter, but it's still underperforming compared to the first nine months of 2021 as China's property sector remains depressed and its strict COVID policies continue to restrain economic activity.

Our primary index, PLV FOB Australia, which had been undergoing a correction since late May, started the quarter at $274 per short ton before finding a floor at $171 per short time in early August. In this low point in the quarter, the index was able to partially claw back some of the pricing erosion, ending the third quarter at $246 per short ton.

The CFR China index experienced a greater decline as a result of lower demand, ending the third quarter at $279 per short ton, which represented a decrease of $78 per short ton from its July 1 value of $357 per short ton.

The World Steel Association recently reported the global pig iron production decreased by 4.4% in the first nine months of 2022. China recorded a decrease in production of 2.5% for that period, while the rest of the world's pig iron production decreased by 8.1%. China's lower steel production is due to recent shutdowns related to their stringent COVID restrictions and lower demand, especially in the property sector.

Discussions with our customers continue to indicate that steel demand for the oil and gas, aerospace and shipbuilding sectors is strong. All other sectors, including automobiles, have weakened and are expected to remain weak due to the overall challenging economic environment.

Even with this backdrop, we performed quite well, increasing our third quarter sales volume compared to the third quarter last year. And as I said, we could have sold even more volume during the quarter if not for the shipment delays.

The largest impact to our third quarter results by a wide margin was the poor performance of our rail transportation provider that delayed getting our product to the port in a timely manner.

In addition, with the high demand for seaborne thermal coal, we saw higher volumes of thermal coal move through the port, creating some additional congestion and impacting loading dates and times.

Our sales volume in the third quarter was 1.5 million short tons compared to 1.1 million short tons in the same quarter last year.

Our sales by geography in the third quarter were 62% into Europe, 17% into South America, and 21% into Asia. European sales continue to be strong despite the economic headwinds facing the region, including the softening of steel production. Our European customers continue to operate their coke batteries to produce gas and heat for local communities, as well as lower their overall energy costs despite lower steel production.

Production volume in the third quarter this year was 1.6 million short tons compared to 1.1 million short tons in the same quarter of last year. The tons produced in the third quarter resulted from running both longwalls and five continuous miner units at Mine 7 and three continuous miner units and the longwall at Mine 4. Our lead days on the longwalls continue to remain long and solid.

The mines ran well and were very efficient in the third quarter despite some downtime for skip maintenance that we previously discussed on our last earnings call. We finished the quarter running the mines with a combination of salaried and hourly employees, representing approximately 50% of the normal workforce, while producing more than 80% of the normal production volume. These statistics represent another strong quarter for employee productivity compared to historical periods.

Over the past year, the mines have trended higher in clean tons produced per man hour worked due to well capitalized mining operations, revised work schedules, and a more productive hourly workforce. This increase in productivity has helped offset some of the inflation we've been experiencing. We appreciate the significant efforts by our employees to drive higher production levels while continuing to maintain a safe working environment.

During the third quarter, we spent $56 million on CapEx in mine development. CapEx spending was $41 million, which included $12 million on the Blue Creek project. Mine development spending was $15 million during the quarter. Year-to-date, we have spent $120 million on CapEx, of which $21 million was for the Blue Creek project. We expect to spend between $75 million and $80 million on sustaining capital for the existing mines for the full year. In addition, we expect to spend between $110 million and $120 million on special projects for Blue Creek, new longwall shields, and the 4 North Portal. Based on these full-year targeted spending amounts and year-to-date spending, we expect the fourth quarter will be the highest CapEx spending quarter this year.

We continue to see rising inflation and long lead times impacting our business for an indefinite period of time. In addition to the higher costs, the lead times on supplies, equipment purchases, both new and rebuilt, continue to be 18 to 24 months in duration. Despite partial mitigation of these issues with our improved productivity at the mine, we're experiencing a 25% to 35% increase in cost of operating supplies and materials, repairs and major equipment rebuilds. Those price increases led to a $4 for short tons negative impact on our third quarter results.

As US inflation in September remained near a four decade high of 8.2%, the Federal Reserve continued is faster pace of interest rate increases in its efforts to bring that number down.

As we look ahead, we made strong progress this quarter on the development of Blue Creek, which represents a transformational opportunity for Warrior. More specifically, we continue developing the site and constructing the slope and service shaft. As we continue to move through the preliminary stages of development on schedule, both activity at Blue Creek and the spending required for that activity will increase over the remainder of this year. We remain extremely excited about the potential to create significant stockholder value through this project.

We continue to balance investment in Blue Creek with returning cash to stockholders, allowing them to benefit from our strong free cash flow generation in the near term and long term. During the third quarter, we were pleased to be able to pay another special dividend of $0.80 per share, the second special dividend this year.

I will now ask Dale to address our third quarter results in greater detail.

[Dale Boyles, Chief Financial Officer]

Thanks, Walter. For the third quarter of 2022, the company recorded net income on a GAAP basis of $98 million or $1.90 per diluted share compared to net income of $38 million or $0.74 per diluted share in the same quarter last year.

Non-GAAP adjusted net income for the third quarter excluding the non-recurring business interruption expenses and idle mine expenses was $2.10 per diluted share compared to an adjusted net income of $0.97 per diluted share in the same quarter last year.

We achieved adjusted EBITDA of $172 million in the third quarter this year compared to $105 million in the same quarter last year. The quarterly increase was primarily driven by a 32% increase in average net selling prices and a 42% increase in sales volumes, partially offset by higher variable transportation and royalty cost and the impact of inflation on labor, materials, supplies and major equipment rebuilds.

Our adjusted EBITDA margin was 44% in the third quarter this year compared to 52% in the same quarter last year.

Total revenues were $390 million in the third quarter compared to $202 million in the same quarter last year. This 93% increase was primarily due to the 32% increase in average net selling prices and 42% higher sales volume.

In addition, other revenues were positively impacted in the third quarter this year by a $6 or 145% increase in natural gas prices compared to the prior-year third quarter. The prior-year third quarter other revenues were also lower due to a $6 million loss on natural gas hedges that were in place at that time.

The Platts Premium Low Vol FOB Australian index price, on average, was $13 per short tons lower in the third quarter of this year compared to the same quarter last year. The index price averaged $227 per short ton to the third quarter. Demurrage and other charges reduced our gross price realization to an average net selling price of $248 per short ton in the third quarter this year compared to $189 per short ton in the same quarter last year.

Demurrage and other charges were approximately $13 million higher in the third quarter this year versus last year, primarily due to higher pricing and the shipment delays that Walt discussed a few minutes ago.

Cash cost of sales was $202 million or 54% of mining revenues in the third quarter compared to $91 million or 46% of mining revenues in the same quarter last year. The increase of $111 million was primarily due to $73 million of higher variable costs associated with price sensitive wages, transportation and royalty cost, including the impact of inflation, higher maintenance costs, and other spending, and a $38 million dollar impact of 42% higher sales volume.

Inflation accounted for $7 million of the higher cost or $4 per short ton resulting from higher cost for belt structure, roof bolts, cable, magnetite, rock dust and other materials, plus labor and parts and repairs and major equipment rebuild.

Despite the higher variable costs and inflation, cash margins were $113 per short ton in the third quarter compared to $103 per short ton in the same period last year, demonstrating the leverage to higher met coal prices driving both profitability and free cash flow.

Cash cost of sales per short ton FOB port was approximately $135 in the third quarter compared to $86 in the same quarter last year. Transportation and royalty costs accounted for $31 of the $49 per ton increase. The remaining increase of $18 was due to an increase in production costs attributed to rising inflation of $4 per short ton, Mine 7 skip repairs of $4 per ton, Mine 4 production cost previously treated as idle cost of $4 per ton and higher other spending of $4 per short ton. As we continue to ramp up Mine 4 production during the quarter, more costs were treated as production costs versus being treated as idle costs in the prior year comparable quarter.

Variable transportation and royalty costs were 47% of the cash cost of sales per short tons of $135 in the third quarter this year compared to only 39% in the same quarter last year, driven primarily by higher met coal pricing and sales volume. As a reminder, our transportation rates are reset at the beginning of each quarter based upon the average met coal prices of the preceding quarter. Therefore, we expect our fourth quarter transportation cost to be lower than the third quarter.

SG&A expenses were about $11 million or 2.7% of total revenues in the third quarter of this year and were higher than the same quarter last year due to higher employee-related expenses, primarily higher stock compensation expense, and higher professional fees.

During the third quarter, we incurred incremental non-recurring business interruption expenses of $7 million that were directly related to the ongoing labor strike. These non-recurring expenses were primarily for incremental safety and security, legal and labor negotiations and other expenses.

Idle mine expenses were $5 million in the third quarter and represent expenses incurred with the operations at both mines, running at reduced capacities, such as electricity, insurance, maintenance, labor and taxes. These expenses decrease quarter-over-quarter primarily due to the partial restart of Mine 4 operations this year versus the prior-year comparable quarter when it was fully idled.

Turning to cash flow. During the third quarter of this year, we generate $191 million of free cash flow, which resulted from cash flows provided by operating activities of $247 million less cash used for capital expenditures and mine development cost of $56 million. This resulted in free cash flow conversion of 112% this quarter versus last year's third quarter of 50%.

Free cash flow in the third quarter of this year was positively impacted by a $95 million decrease in net working capital from the second quarter of this year. The decrease in net working capital was primarily due to a decrease in accounts receivable due to lower met coal pricing and the timing of sales, slightly offset by higher inventories due to strong production and the shipment delays previously discussed.

Our total available liquidity at the end of the third quarter was a record $869 million, representing an increase $101 million or 13% of the second quarter of 2022 and consisted of cash and cash equivalents of $746 million and $123 million available under our ABL facility. At this point, we are well positioned to continue the development of, and fund, our Blue Creek project in the face of any challenging macroeconomic headwinds in the near future.

Now turning to our outlook and guidance for 2022. We have update our guidance as we near the completion of this year and have a clearer picture of overall volumes. While we have seen gradual improvements in the shipping delays, we believe those issues will continue to impact us the remainder of this year.

However, we believe that we will be able to meet our production and sales volumes included in the outlook section of our earnings release.

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

[Walter Scheller]

Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments on our outlook for the fourth quarter and full year of 2022. As we mentioned earlier, our inventory levels peaked again at the end of the third quarter, which was a result of strong production and continuing shipment delays.

We've been pleased to see the gradual improvements in the shipping delays over the last few weeks and expect those to continue throughout the fourth quarter. Of course, this is highly dependent upon the National Railroad contract negotiations and absent any potential strike or other disruptions that could occur.

We expect to make gradual improvements in drawing down our inventory levels as a result of the improvements in rail transportation and port performance in the fourth quarter.

Looking ahead, we cannot identify a likely catalyst to strengthen the fragile demand for steel across Europe, the United States and several other developed countries. Therefore, we expect production cuts to remain a likely reality for the time being.

In addition, we expect that recession fears, stubborn inflationary pressures, and a prolonged impact of the Russian-Ukrainian war to continue to weigh on our customer markets.

We do see the possibility of an improvement in Chinese steel production in the fourth quarter, given the centralized efforts to stimulate the property sector. Should this materialize, we believe it will benefit the import of Mongolian and Russian coals the most.

We also believe that we may continue to see met coal pricing supported by strong thermal demand, as well as the vulnerable met coal supply chain, which was recently demonstrated by production issues and weather concerns from the major producing regions.

We're pleased that despite all of these headwinds, our customers have confirmed their volumes for the remainder of this year. With excellent liquidity and significant inventory, we remain focused on what we can control, finishing the year with continued strong financial results and moving ahead with our positioning as unique and resilient, pure play met coal provider for all economic environments.

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

[Operator]

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

[Lucas Pipes, B. Riley Securities]

Good job on the quarter. My first question is on the inventory situation. And I wondered if you could maybe elaborate a little bit on what it will take to move those inventories back into a normal range of things. If I remember right, that was about 400,000 tons, but correct me if that needs to be updated. And again, so what might be necessary to get those inventories down into lower levels? And then I have a few more follow-up questions on the pricing side.

[Walter Scheller]

Lucas, with the rail transportation, the rail was probably shipping at about 50% of what we would consider to be normal. So we had upped the amount we were sending by barge. But what we've seen in recent weeks is rail improving very well beyond that type of a level.

The other things that caused the inventory was the fact the – part of the inventory issues was the fact that, down at the port, one of the two car dumps – in fact, the most efficient car dump that dumps two cars at a time was taken completely out of service for a period of months, which led to lower capacities, lower throughput capacities at the port. And that is up and running, running very well. Their cycle times are fantastic. And the rail is moving better again now. So I would anticipate that, even though it's not going to disappear overnight, I think there'll be a gradual improvement of that in terms of the capacity improving and we'll have our inventory levels in line, probably, hopefully, by year-end. But again, that's all dependent on what happens with that rail, potential rail contract negotiation.

[Lucas Pipes, B. Riley Securities]

I do want to follow-up on the pricing side. So first, great strength in seaborne met coal markets. Again, if you could maybe elaborate on some of the drivers there, especially since some of the summer lows I think were around $190 per ton. So nice comeback there. If you could comment on what you see as the key drivers.

And then there are some seeming arbitrage opportunities in the market. China CFR, I think, is $330 per ton or so. And there was a report that Blue Creek cargo was sent to China at that price, but obviously there are higher netback – higher transportation costs involved there. So if you have any view on to what extent that the Chinese market presents maybe an opportunity as well. Would appreciate your thoughts on the pricing dynamics.

[Walter Scheller]

I think what's going to really happen, if the Chinese demand improves, I think that's going to primarily go to – Mongolia is performing better and Russian calls are now flowing. A lot of those coals are flowing into China. So I think the majority of it will go in that direction for maybe some opportunity.

But again, if you just look even at that opportunity, I believe the logical place for that coal to come from is Australia. That's a natural market. Or even the West Coast of the US.

But from our perspective, that little bit of increase or pickup will help. I think the drivers of pricing have been, first of all, thermal. I think thermal, the fact that thermal skyrocketed in pricing gives a natural base to where met coals can go because most – not all, but a lot of met coals can be transferred over as crossover coals into the thermal market. And I think there's just overall supply constraints for the coal industry. And I think you've had the recent issues over in Australia with storms and other things that are just keeping supply really constrained. So I think those are the things that are the primary drivers for what's supporting the price.

[Lucas Pipes, B. Riley Securities]

I do want to ask one other question. On your cash position, $746 million, what amount of cash do you need to run the business as coal prices, knock on wood, stay elevated and you have needs from your capital structure with some depth there? And then also the funding of a Blue Creek. What amount of cash do you want to have on the balance sheet? And then, obviously, investors are looking to capital return. So, trying to find the number just to back into there. So thank you very much for your perspective on this.

[Dale Boyles, Chief Financial Officer]

We're not targeting this particular cash balance number. We're looking at kind of capital allocation as we move forward from here in light of the market conditions. While pricing has stayed high, demand has been weakening, as we said in our prepared remarks. So, right now, we're in the middle of putting together our budget for next year. And when you think about the context of Blue Creek, we can be looking at capital spending in excess of $400 million to $450 million, just in capital and mine development. So we want to put that together and see where we are. But we certainly want to keep enough cash on the balance sheet that we're going to protect ourselves meet all of our other obligations, as well as fund Blue Creek.

So, being at this high level, we're just early into the spending of Blue Creek, about $20 million. Obviously, we've been seeing inflation in the business, so you might be some inflation there and some prices as we look out next year. So those things, we're just trying to take into context right now with the budget, as well as what's happening in the market. And as we move forward, like I said, we don't target a particular number, other than just making sure we have enough to fund all those needs.

And to the extent we feel like there is excess cash, we're going to continue to return that to shareholders, like we've done a couple of times already this year through extra special dividends. So we're not turning those off. To the extent pricing remains high, we'll evaluate that on a periodic basis and maybe declare some additional special dividends.

[Lucas Pipes, B. Riley Securities]

And that's in one month and three month T bills. So I should probably start to model the 4% interest rate on that cash.

[Operator]

[Operator Instructions]. Your next question comes from Nathan Martin with The Benchmark Company.

[Nathan Martin, The Benchmark Company]

Congrats on the quarter. Maybe I'll start with revised full-year shipment guidance, tightening that up a little bit. What do you guys think gets you to near the bottom or maybe the top end there? If my math is correct, I think at the high end, you'd have to shift over 2 million tons in the fourth quarter. Obviously, you've had that buildup in inventories that you just alluded to and, hopefully, you can work that down. First, is that right? And do you think that's doable even given the logistics issues you guys and everyone else has been plagued with so far this year?

[Dale Boyles, Chief Financial Officer]

This is Dale. As Walt said, look, it really depends on the shipment delays and how rail transportation improves and whether or not there is any disruption. I don't think there's a high likelihood of an actual rail strike. But you never know what kind of disruptions you might have around those negotiations. So it's all going to dependent upon that and how much we can get out. Obviously, we have enough inventory to get to that number. So that is kind of on the high end. Think the low end, we'd need to ship about 1.6, which is pretty close to what we've done each of the last two quarters. So it's achievable, it's really dependent on things that are outside of our control.

[Nathan Martin, The Benchmark Company]

I'm just curious, what would you guys say was the impact in the quarter from a logistics delays, from a shipment standpoint?

[Walter Scheller]

Probably a few vessels, two or three vessels, at least, I'd say. A couple of hundred thousand tons.

[Nathan Martin, The Benchmark Company]

A lot of moving pieces on costs during the quarter. Dale, you did a good job kind of laying all that out. And inflation was another $4 a ton headwind again this quarter. Just curious, do you guys expect kind of that level of headwind to persist during the fourth quarter and maybe even going forward? Are you seeing any signs of that abating? Really just trying to get a feeling of what costs might be sticking, kind of going forward into 2023? And maybe where do you see that cost return number heading?

[Dale Boyles, Chief Financial Officer]

I think we're going to continue to see inflation impacting us, as we said in our prepared remarks. It's not only the cost, but it's the lead times as well that's getting pushed out 18, 24 months, something's even further out than that. But right now, we're moving around at about a $4 per ton impact on a quarterly basis. I wouldn't expect that to change much.

As far as going into next year, it all depends on what happens with the Fed's actions. Right now, we are not hearing any reductions or cutbacks. We are looking at – as we continue to kind of work around these long lead times, we are trying to buy some things in advance and stick them in inventory. But I don't see abating anytime soon. So we might be well into next year before we see some abatement of this inflation. It's going to take some time for the Fed's action to kind of work through the overall global economy, I think.

[Nathan Martin, The Benchmark Company]

Dale, could you remind me kind of what portion of your costs are variable? And let's just say assuming we do see a little bit of a deceleration in the net price in 2023 versus these elevated levels we've seen in 2022. Just curious how that could possibly factor or possibly lower your cost per ton next year?

[Dale Boyles, Chief Financial Officer]

We don't really look at a fixed and a variable component. We look at transportation and royalties are the biggest variable there. And at the end of this quarter, they were 47% of the cash cost per ton versus last year, they were only 39%. The cost of production remains pretty flat on a dollar basis in most quarters over the long run. There'll be some quarters that are higher than others, just depending on the amount of maintenance and things like that that gets done, but certainly transportation and royalties.

So, as you look into the fourth quarter, as I said earlier, our fourth quarter will be – our transportation rates will be lower than the third quarter because of where met coal pricing is. So you may have some increase – just depending on where prices are, you may have some increase in royalties depending on ultimate price for the fourth quarter, but you could see our cost per ton decrease 10% to 12% in the fourth quarter.

[Nathan Martin, The Benchmark Company]

There's just one more, if I may. Just would be great to maybe get a little more color on the labor situation. I know, Walt, you made a couple comments there. Are you guys still having some success on the hiring front? I know labor remains extremely tight not just been in this industry, but throughout – as of today, based on kind of where you see labor, logistics and some of your comments on the market, do you have any broad thoughts around where production and shipments could look like next year?

[Walter Scheller]

We are having success in hiring. It's just the issue now is, throughout the US, especially in mining, there's not a lot of experienced labor unemployed. So we're having to bring in unexperienced labor. It takes time to train them up, get them to where they can operate equipment safely. And so, yes, we're having success hiring, but it's taking a little bit more time than we'd like for all the training that has to go on.

In terms of where we see next year going, we're still in the budgeting process. So we're working on that. But our expectation is we continue to build on where we are today. So we definitely look for things to continue to improve.

[Operator]

Your next question is a follow-up from Lucas Pipes with B. Riley Securities.

[Lucas Pipes, B. Riley Securities]

On this deceleration of demand that you mentioned a few times today, does that cause you to shift sales into maybe Warrior non-traditional markets, be it thermal, be it, for example, sales to China, things like that? Would appreciate, to what extent, there's a commercial adjustment from Warrior.

[Walter Scheller]

Interestingly, when you look at the third quarter and what we're projecting for the fourth quarter, the percentage of our product moving into Europe has remained really strong. In fact, it's probably up a little bit. So our customers in Europe continue, through to the end of the year, and I don't know of anything changing next year, continue to want their committed tons and continue to take those tons.

So while we see things slowing down, I really think most of these customers who operate their own coke plants are going to continue to operate those coke plants. They'll buy less merchant coke, but they'll continue to operate. So I think our demand in Europe, I wouldn't be surprised to see it remain pretty stable.

Now you see us flip flop in Asia and South America. We can go as high as 24%, 25% in South America, and then in the next quarter be at the same level going into Asia. I would look for those numbers to continue.

And we will and do look at if there's opportunities to move a cargo of coal. If we have excess coal that can move as a thermal at a higher price, we'll consider that. But right now, we're pretty satisfied with where our order book is.

[Lucas Pipes, B. Riley Securities]

What amount of tons are committed for 2023?

[Walter Scheller]

I don't have that number. I can tell you that typically, our contracted tons have been running at about 80% or so. And spot tons have been running at about 20% or so. I don't look for that to change. But I don't have that actual number in front of me.

[Operator]

Your next question comes from Alex Hacking with Citi.

[Alex Hacking, Citi Investment Research]

I have a couple of questions, if it's okay. Firstly, the realized price was quite strong compared to what we were modeling. Is that just an issue associated with the timing of your specific shipments?

And then, the second question, given your current operating footprint, should we assume that mine production next year will be similar levels to what we've seen this year? Or would it potentially be higher?

[Dale Boyles, Chief Financial Officer]

Well, I'll start with the realized prices. Most of that is the lag effect. If you remember, most of our contracts are [indiscernible] priced on a, let's call it, an average of 40 days' lag. So, the average of the index price 40 days prior to loading the vessel. So a lot of that came from the higher prices earlier on. And so, that's kind of the real answer there on that particular realized pricing.

Production, right now, we're working on our budgets, as I said earlier. If we're going to do in the range that we're talking about this year of somewhere around 6 million tons, up to 6.3 million tons, we could see somewhere in that range depending on the labor, whether or not we can get additional labor in and get it trained. And with the labor shortages, it's going to be hard to predict that and at what point we may able to get those levels up to – back to normal at some point down the road.

[Operator]

Your next question comes from Mark Zand with Wexford.

[Mark Zand, Wexford Capital]

Can you go over what the remaining amount is to be spent on Blue Creek to get it up and going? And what's sort of the cadences? I know you'd mentioned $400 million to $450 million. And I thought I understood you say that was for next year. But please correct me or fill it in.

[Walter Scheller]

So we're early in. If you're not familiar with the timing of that project, I would suggest to look at the presentation or website for Blue Creek. That's a five-year build, $700 million project. That said, we've only spent $21 million so far this year. Next year will be a 200 plus million dollar year. As we finalize our budget, we'll have a better idea at the end of our fourth quarter.

And then, the third year will be in a similar range. So the two highest spending years are coming up. And so, of that $450 million, next year, you could be $200 million to $250 million just for Blue Creek. We do have the remaining amounts for the shields that we put deposits on this year. That's about $60 million. And then we need to finish the 4 North portal. So when you consider all those things, we're in that range of somewhere between $400 million and $450 million next year.

[Mark Zand, Wexford Capital]

And what's the mine life for Mine 4 and Mine 7?

[Walter Scheller]

When you look at the reserves and then you take into consideration any resources, Mine 7, I believe, is around little more than 20 years, Mine 4 somewhere around 30 years.

[Mark Zand, Wexford Capital]

Just explain to me what the rationale is for Blue Creek, given that your nameplate capacity is, I don't know, 8 million tons at Mine 7 and Mine 4. And obviously, you've got a long mine life.

[Walter Scheller]

We're looking to grow the company, adding Blue Creek or grow the company 60%. And when we look at any potential M&A opportunity, you've got to look at Blue Creek in comparison to that. And when you look at the information that we've provided in our presentation on our website, you'll see that that project has an IRR of 30% or better and it's a high quality product that will get a premium price. And when we compare that to other mines that potentially we might think about acquiring, they just don't stack up to Blue Creek. So, that's the focus right now, is building out Blue Creek.

[Mark Zand, Wexford Capital]

Just going back to a question that Lucas asked, it looks like your inventory tonnage is about a million tons or more, is that accurate?

[Dale Boyles, Chief Financial Officer]

No, 358,000 tons.

[Mark Zand, Wexford Capital]

And just one final one. Who is the railroad that you use that's been causing these problems?

[Walter Scheller]

CSX is our primary rail provider.

[Mark Zand, Wexford Capital]

So it's not like somebody that's local.

[Operator]

Your next question comes from Patrick Fitzgerald with Baird.

[Patrick Fitzgerald, Robert W. Baird]

Could you go over your obligation with respect to paying down the bonds before you pay out any additional special dividends if there are any restrictions?

[Dale Boyles, Chief Financial Officer]

Well, there's certainly a lot of restrictions within the bond for different types of payments, but we have sufficient capacity to pay out restricted payments or dividends currently. And the bonds are a three-year no call. So, we cannot call the bonds for the first three years. But, however, we can take advantage of some opportunities when – and we did in the quarter when people offer in the open market to repurchase of those bonds. We repurchased a few bonds at a discount and took advantage of that discount and put some savings on the books here for the future. But there's a lot of nitty gritty details about the restrictions around the bonds. But primarily, it's the three year no call right now.

[Patrick Fitzgerald, Robert W. Baird]

Do you know what the RP basket is currently?

[Dale Boyles, Chief Financial Officer]

Yeah, sure. We track all that all the time and it's not some of the details we get into discussing.

[Operator]

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

[Walter Scheller]

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

[Operator]

Thank you. And that does conclude our conference for today. Thank you all for participating. You may now disconnect.