Warrior Met Coal Inc

NYSE:HCC

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal Fourth Quarter and Full Year 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Before we begin, I've 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 SEC filings.

I've 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 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 to the Investors section on its website at www.warriormetcoal.com.

Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer of Warrior Met Coal; and Mr. Dale Boyles, Chief Financial Officer.

Mr. Scheller, you may begin your remarks.

[Walter Scheller, Chief Executive Officer]

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our fourth quarter and full year 2017 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask any questions you may have.

First, let me address our fourth quarter results, and then I'll summarize various achievements for the full year of 2017. The company's fourth quarter results were even better-than-expected, exceeding our full year guidance in our key sales and production metrics.

Production volume for the fourth quarter was 1.6 million short tons, which was 52% higher than the same quarter in 2016. Our success was grounded in the timely and successful back-to-back completion of moving all 3 of our operating longwalls with less impact on sales and production volumes than expected. That said, the work was not easy and we overcame a number of challenges along the way.

I think it's worth a moment to understand those challenges. Moving one longwall operation is challenging by itself as mining conditions are most difficult at the end of a panel. That's because equipment is nearing rebuilt and mining conditions can be more challenging, decreasing the rate of production in clean tons per foot.

Moving 3 longwalls back to back could have been overwhelming for our employees and underground equipment fleet, which could have reduced production volumes much more. However, our success was a result of good planning, preparation, communication and outstanding work by our employees.

We completed all 3 longwall moves without serious injury, which again demonstrates that safety is more than a buzzword at Warrior. It's just the way we do things.

I want to recognize the efforts of everyone involved in the longwall moves for the expert attention they've paid to safety, the long hours worked and the goals we achieved together.

I also want to point out that having 3 longwall moves in a quarter is quite unusual, and is primarily a result of timing and other factors in the mine plans. In particular, 2 of the longwalls were restarted in late 2016.

The timing of these moves will normally be spread out more going forward, because the new panels are of different lengths and the rates of advance are somewhat different according to the geology at each mine.

The highly successful completion of these longwall moves in the fourth quarter has strengthened our operational base as we launch into 2018 and strive for production levels near our nameplate capacity.

In addition, our core inventory rose from 137,000 short tons at the end of the third quarter to 341,000 short tons at the end of the fourth quarter, and that has allowed us to take advantage of the strong market pricing environment in early 2018.

Overall, market conditions were still very favorable to the company in the fourth quarter. We believe that tightness in seaborne met coal supply continued due to robust met coal demand on the strength of global steel production as well as supply issues in Australia and supply-side reforms in China that were not enough to ease the tightness in the market.

In the case of Australian suppliers, we saw lower shipments due to high vessel queues from terminal outages, terminal maintenance and bad weather delay in rail shipments to the ports. These bottlenecks caused major delays of exports out of Australia and impacted global met coal pricing.

Australian producers are still trying to recoup losses following Cyclone Debbie early last year, resulting in pressure on rail networks that caused lengthy rail queues and delays. A host of logistical issues and supply and demand factors hampered the flow of met coal from Australia, including 30-day maintenance shutdowns at some ports.

It is our understanding from industry sources that accelerating U.S. met coal exports have been offset by several things: The constrained Australian exports, I just mentioned; lower Chinese met coal production and lower Chinese coke and steel exports which support higher Met Coal consumption outside of China.

Chinese met coal imports demand had remained strong, despite restrictions on imports that were less severe than originally anticipated due to resilient steel margins. Taking environmental shutdowns, which have increased demand for high-quality met coal, were also a factor.

There's an industry view that imports of met coal into China will continue to grow because of the new Chinese coastal steel plants which have large blast furnaces, will need more high CSR coking coal to ensure good enough coke quality. Moreover, there's a trend to higher sulfur contents with respect to domestic coking coal, and so there's a demand for low sulfur and ash coking coals.

Also contributing to tightness in supply during 2017 were reforms in China, leading to a reduction of a legal induction furnace capacity which had resulted in low-quality steel production. All that said, we've now experienced dramatic price volatility over the past 18 months, which can be attributed to a wide range of factors.

However, we also believe this is partially the result of significant industry wide underinvestment in both existing and new supply which has exposed the fragility of the relatively-concentrated supply chain. Notably, there's not been a material increase in the capital investment in met coal. And while the future is difficult to predict, we're prepared for continued volatility, which plays to our strengths.

Our unique variable cost structure is very well positioned to take advantage of this environment and generate robust cash flows for shareholders. Warrior continued to capitalize on its strengths in the fourth quarter by selling a high-quality product in a strong price environment with a low and variable cost structure, all of which have contributed to the strong free cash flow conversion, net income of $97 million and adjusted EBITDA of $86 million.

The key drivers behind the performance continues to be our highly flexible mine plan, a highly variable cost structure in areas like labor, loyalties and logistics, and a clean balance sheet. This allows us to provide for an agile operational response to movements in the Australian premium low-vol hard coking coal index price and take advantage of market conditions opportunistically.

Our sales volume for the fourth quarter was 1.4 million short tons, 42% higher than last year's fourth quarter. We continued to see strong customer demand for our premium high-quality hard coking coal across our primary global markets. For the full year 2017, our geographic customer mix of sales was 63% Europe, 23% South America and 14% in Asia.

Our gross price realization for the fourth quarter was 101% of the quarterly Australian premium low-vol hard coking coal index price, reflecting the premiums we achieved on our low-vol and mid-vol coals in a rising price environment throughout the fourth quarter. We set a high standard of achievement on price realizations because of our premium quality products.

Comparing this low-vol index price to the company's blended average gross price for both low-vol and mid-vol coal. Our gross price realization for the entire year was 96%, which is weighed down by the first quarter of the year where the benchmark price was set at the end of Q4 2016, when spot prices began trading almost $100 per ton lower at the beginning of the quarter.

We continued to make progress in the ramp-up of mining operations toward the nameplate capacity of our assets, which is approximately 8 million short tons of met coal. We added one continuous miner section during the fourth quarter, and expect to ramp up its production in 2018.

We continued our investment into the operations in the fourth quarter by spending cash of $30 million for sustaining and discretionary capital expenditures. For the year, we spent cash of $93 million on capital expenditures, well above our average annual sustaining capital requirement of $65 million.

This incremental spending on new and rebuilt equipment and the start of construction on a new portal for Mine 7 solidifies our base operations and will significantly enhance our strength, efficiency and reliability.

Overall, 2017 has really been an outstanding year for Warrior, as reflected in our strong operational and financial performance. As a newly-created company in 2016, Warrior set new company record highs in 2017 in both sales and production volumes as we ramped up the overall operations with people and capital. Let me highlight those achievements.

First, we completed a successful initial public offering of common stock and listing on the New York Stock Exchange under the ticker symbol HCC. It's hard to believe in less than 60 days, we will celebrate our 1-year anniversary as a public company. We are extremely pleased that we created and delivered significant returns to our shareholders in both dividends of nearly $800 million and a share price appreciation.

We adopted a formal capital allocation policy with the initiation of a regular quarterly dividend of $0.05 per share. We completed the initiative to maximize the value of the company's deferred tax asset, primarily the $2 billion of NOLs, by obtaining a favorable IRS private letter ruling on the unlimited use of those NOLs.

On top of those cash savings - cash tax savings, we will receive back from the IRS approximately $39 million of refundable AMT credits in 2019 through 2022 as a result of tax reform enacted in December of 2017, which also reduced the corporate tax rate from 35% to 21%. And lastly, the successful completion of 3 back-to-back longwall moves during the fourth quarter that I described earlier.

The milestones of successes we achieved in 2017 provide a strong operational and financial base heading into 2018 as we look to continue increasing our production and sales volumes.

We expect to generate strong cash flows in 2018 and investigate in our business some capital spending that is above our normal sustaining levels. When appropriate, and in accordance with our capital allocation policy, we also intend to return excess cash to shareholders above our quarterly dividend.

We believe that we can achieve those objectives with the company's clean balance sheet, minimal legacy liabilities and with a highly tax-advantageous position.

I'll now ask Dale to address our fourth quarter and full year financial results in greater detail.

[Dale Boyles, Chief Financial Officer]

Thanks, Walt. Warrior's results for the fourth quarter were better-than-expected, as Walt noted earlier, which allowed the company to exceed its full year guidance on key sales and production metrics.

The operational successes in sales and production, combined with a favorable met coal pricing environment, drove strong financial performance during the fourth quarter and for the full year of 2017.

For the fourth quarter of 2017, net income was $97 million or $1.83 per diluted share compared to net income of $34 million or $0.65 per diluted share in the fourth quarter of 2016.

Adjusted EBITDA was $86 million in the fourth quarter as compared to adjusted EBITDA of $51 million in the fourth quarter of 2016. For the full year of 2017, adjusted EBITDA totaled $518 million.

The company's adjusted EBITDA margins, which we calculate as adjusted EBITDA divided by total revenues, and which we believe are some of the highest in the industry, were 36% and 44% for the fourth quarter and full year of 2017, respectively.

Total revenues for the fourth quarter of 2017 were $240 million, which included met coal sales of 1.4 million short tons at an average net selling price of $169 per short ton. Total revenues in the quarter exceeded the fourth quarter of 2016 by $87 million on a 42% increase in sales volumes and a 10% increase in average net realized selling prices.

Our fourth quarter gross price realization was 101% of the quarterly Australian premium low-vol hard coking coal index price of $174 per short ton on our fourth quarter shipments. Our gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of the quarterly Australian premium low-vol hard coking coal index price.

Remember, the Australian premium low-vol hard coking coal index price is the average of the Platts, TSI and Argus indices on a one-month lag basis. The 101% realization is impressive when you consider that the hard coking coal index price is for a low-vol coal, and our gross price is a blended price of our low- and mid-vol coal sales.

This result demonstrates the high-quality characteristics of our premium low- and mid-vol products. Our gross price realization for the full year of 2017 was approximately 96% of the Australian premium low-vol hard coking coal average index price of $191 per short ton.

Demurrage and other charges reduced our gross price realization to a net average selling price of $169 per short ton in the fourth quarter and $172 per short ton for the full year.

Mining cost of sales was $137 million or 60% of mining revenues in the fourth quarter compared to $89 million in the fourth quarter of 2016, driven primarily by the significantly higher sales volumes from the ramp-up of operations in 2017.

Cash cost of sales per short ton, FOB Port, was $101 in the fourth quarter compared to $84 in the same period of 2016, with the increases in the per ton values being primarily attributed to the price-sensitive components of wages, transportation and royalty costs on higher sales volumes and higher net selling prices.

Also, the cost per ton was higher because of the lower production in the quarter from the 3 longwall moves. All 3 of our longwall operations will move to their next panels and ran most of the fourth quarter along with our 9 continuous miner units.

In 2016, 2 longwall operations ran in the entire fourth quarter, and the second longwall in Mine 7 was restarted in October 2016 and ran only a portion of the fourth quarter. We had 7 continuous miner units operating during the fourth quarter of 2016.

SG&A expenses were about $13 million or 6% of total revenues in the fourth quarter, and $3 million higher than the same period of 2016, primarily reflecting the incremental expenses of being a publicly-traded company in 2017.

These expenses included incremental independent auditor expenses, legal expenses, D&O insurance expenses and stock compensation expenses. SG&A expenses were higher in the fourth quarter of 2017 compared to the third quarter, due primarily to $3 million of stock compensation expenses related to the vesting of previously-issued equity grants to employees. SG&A expenses totaled $36 million for the full year of 2017.

Depreciation and depletion expenses for the fourth quarter of 2017 were $18 million or 7.5% of total revenues compared to $9 million in 2016. Full year 2017 depreciation and depletion expenses were $75 million compared to $47 million in 2016. The increase in the fourth quarter and full year 2017 over 2016 was primarily attributable to the ramp-up of sales and production at the mine.

There were no transaction or other expenses in the fourth quarter. These expenses totaled $13 million for the full year of 2017 and consisted primarily of nonrecurring professional fees relating to the initial public offering in April.

The fees and expenses associated with the senior secured notes offering in the fourth quarter of 2017 represented net of the notes on the balance sheet and will be amortized to the P&L over the next 7 years.

Interest expense was $5 million in the fourth quarter and included interest on our equipment promissory note and senior secured notes, plus amortization of our debt issuance costs associated with our ABL facility and senior secured notes.

For the full year of 2017, interest expense totaled $7 million. Beginning in 2018, interest expense will increase over 2017 because of the issuance of the company's senior secured notes in November, which I'll discuss more specifically later in our 2018 guidance.

As for income taxes, one of the key long-term assets and strengths of the company is our net operating losses or NOL carryforwards, which we believe will effectively reduce our federal and state income tax liability to 0 until the NOLs are utilized or expired.

This will drive significant free cash flow conversion over the next several years. The value and cash conversion, and especially with the NOLs used this year, resulted in an estimated cash tax savings of approximately $123 million or $2.33 per diluted share in this year alone.

Those savings allowed the company to make significant investments in the business and partially fund special dividends this year. For example, these savings allowed the company to invest $35 million more than our average sustaining capital expenditures for 2017.

We began the year with approximately $2 billion of federal and state NOLs and $39 million of AMT credits that were limited to certain amounts that can be used on an annual basis to reduce our taxable income. At that time, we believed there was an opportunity to accelerate the value of the NOLs by seeking a private letter ruling from the Internal Revenue Service.

In late September, we reported that the RAF issued a POR that favorably impacted our analysis of our ability to use the NOLs for federal income tax purposes. As a result of the POR, we now believe that our NOLs will now be subject to the annual limit of Section 382 and will significantly reduce the amount of federal and state income tax liabilities until the NOLs are fully utilized or expired.

The Tax Cuts and Jobs Act of 2017 will impact us favorably as well. While the provisions become effective January 1, 2018, companies are required to recognize the effect of the tax law changes in their financial statements in December 2017, and the company did so.

The most significant positive medium-term impact to Warrior are the expected refunds of AMT credits of approximately $39 million and the elimination of the corporate AMT tax regime. Other less significant positive impacts of the new tax law was a reduction in corporate tax rates to 21% from 35%, 100% expensing of certain capital expenditures, offset by negative impacts of the elimination of the Section 199 manufacturing deduction, net interest expense deduction limited to 30% of adjusted net income, and limitations in certain deductions for certain executive compensation.

To this end, we recognize an income tax benefit of $36 million in the fourth quarter of 2017, the total tax benefit of approximately $39 million to the full year. The benefit is primarily a result of the expected refund or income tax receivable of existing available AMT credits of approximately $39 million, net of the 6.6% sequestration, which the company expects to receive in 2019 through 2022 after the tax returns were filed for each of those years.

We expect our cash taxes in 2017 to be approximately $3 million, relating to the AMT tax regime. This amount is expected to be refunded, along with the other AMT credits, in future years.

As of December 31, 2017, federal NOLs were approximately $1.6 billion and the associated deferred tax assets were adjusted downward to the new 21% federal tax rate, offset by a change in the valuation allowance for deferred tax assets.

Turning to cash flow. During the fourth quarter, we generated $62 million of free cash flow, which is a result of cash flows provided by operating activities of $92 million, thus cash used for capital expenditures of $30 million compared to only $9 million of free cash flow in the fourth quarter of 2016.

Full year 2017 free cash flow was $342 million, resulting from cash flows from operating activities of $435 million, plus $93 million of cash used for capital expenditures.

The company had a significant capital investment program underway in 2017 to upgrade all key production equipment. In order to further improve efficiency and reliability of the mining operations, we spent approximately $62 million in sustaining capital and $26 million in catch up capital which have been deferred in prior years due to lower met coal price environments.

We spent another $19 million in other discretionary capital, which includes the start of construction of a new portal at Mine 7, to be complete in 2018. Total cash capital expenditure were $30 million in the fourth quarter and $93 million for the full year of 2017. These cash capital expenditure amounts exclude non-cash capital accruals and capital leases of approximately $15 million for the full year.

Cash flows used in financing activities were $261 million in the fourth quarter of 2017, requesting the net proceeds of $350 million senior secured notes offering and the payment of a special dividend of approximately $600 million in November.

The full year 2017 cash flows used in financing activities were $458 million, include the net proceeds from the notes offering, the newly instituted regular quarterly dividend of $0.05 per share and special dividends, all totaling $14.92 per share.

Our net working capital, excluding the income tax receivable, decreased by $7 million from the third quarter of 2017 and increased $61 million for the full year of 2017 over 2016.

This full year increase is primarily attributable to the restart of 2 longwall operations and the company's ramp-up of production and sales volumes resulting in higher accounts and other receivables, slightly higher inventories and higher prepaid expenses, partially offset by higher accounts payable and accrued expenses.

The increase in income tax receivable is attributable to the recognition of $39 million of AMT credits, that are expected to be refunded to the company as a result of the Tax Cuts and Jobs Act enacted in December 2017.

Hold inventory increased from 137,000 short tons at the end of the third quarter to 341,000 short tons at the end of the fourth quarter of 2017. The increase in inventories were mostly due to successfully completing 3 longwall moves in a quarter, with less impact on production than we expected.

Our 2017-ending inventory was 129,000 short tons higher than the end of 2016, which was 212,000 short tons. Our total available liquidity as of December 31, 2017, was $135 million, consisting of cash and cash equivalents of $35 million and $100 million available under our ABL facility. We currently do not have any outstanding borrowings under the ABL facility.

As previously disclosed in November 2, 2017, the company completed a private offering of $350 million of 8% senior secured notes, due 2024. The net proceeds of the offering of approximately $340 million plus cash on hand of approximately $260 million were used to pay a special dividend of approximately $600 million or $11.21 per share to all shareholders during the fourth quarter.

Now turning to our outlook and guidance for 2018 which we outlined in our press release. In light of the company's successful 2017 performance, the NOL carryforwards and expected market conditions in 2018, Warrior is establishing its guidance for the full year 2018 as follows: coal sales of 6.6 million to 7.2 million short tons; coal production of 6.6 million to 7.2 million short tons; cash cost of sales as of before of $89 and $95 per short ton; capital expenditures of $100 million to $120 million; SG&A expenses of $30 million to $33 million; interest expense of $31 million to $32 million and a cash tax rate of 0%.

A number of factors may affect our outlook, including the Australian premium low-vol hard coking coal index pricing, given the volatility of commodity prices and a number of planned longwall moves and the timing of those moves between quarters.

The planned longwall moves for 2018 are 1 move in Q3 and 1 move in Q4, both of which are subject to change in timing as we progress through the existing longwall panels over the next few months.

As I noted earlier, the company made significant capital expenditure investments in the business in 2017, and we expect to continue that approach in 2018 subject to market conditions among the other factors as I have noted earlier.

We expect that our 2018 capital spending to range from $100 million to $120 million, consisting a capital spending of approximately $70 million to $83 million, including regulatory and gas requirements, and discretionary capital spending of $30 million to $37 million.

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

[Walter Scheller, Chief Executive Officer]

Thanks, Dale. Before we move on to Q&A, I'd like to address our guidance targets for 2018 and how we are looking at the marketplace at the moment.

Considering our successes in 2017 of increasing both sales and production volumes, the company is well positioned after 3 longwall moves in Q4 to take advantage of strong customer demand and current hard prices for our premium product offering. We expect to continue making progress to our nameplate capacity of 8 million short tons by ramping up those volumes in 2018.

Our current plans have us only moving 2 longwalls in 2018, which will depend on our progress during the year. However, as I've said on previous calls, we run the business as if the next pricing downturn and geological issues are just around the corner, with conservative target and flexible operations to adjust to the market environment as it changes throughout the year.

Our current expectations of a robust high-quality price environment in 2018, combined with our tax advantage situation and loan leverage should allow the company to once again make significant investments in capital spending above our normal sustaining levels.

These additional investments will further strengthen and position the company to increase our production and sales volumes, increase efficiencies and lower our cost.

In our current guidance for 2018, we expect to spend approximately $30 million to $37 million on discretionary projects. These include finishing the construction of a new portal of mine 7 that was started in 2017, a down payment on a new set of longwall shield and other projects to improve efficiencies, lower our costs and increase production.

Due to the long lead times on developing these projects in 2018, we expect to realize the majority of the benefits of this spending in 2019 and beyond.

Our business continues to see strong customer demand from our premium high-quality coking coal in our natural markets, where steel production and economic growth are the contributing factors.

We expect a near-term global pricing for 2018 to be largely dependent upon a combination of many factors such as more supply disruptions in Australia, higher global steel demand from economic growth, lower Chinese steel exports and Chinese supply-side policies been implemented during the winter season.

While most of the rail system issues, hardcore queues and port maintenance issue disruptions out of Australia have recently improved, there are a few smaller infrastructure issues impacting the tightness of supply with a potential for more outages and bad weather during this cyclone season.

China's 2+26 policy appears to have had a lower-than-expected impact on met coal demand and sought enforcement on steel and coal production limits, keeping demand relatively high.

It remains to be seen if China will change its enforcement approach to the established limits and what impact this will have on global met coal pricing. The actual impact of each of these factors on the low-vol hard coking coal price is difficult to predict.

However, our approaches to capitalize on strong customer demand in the current hot prices for our premium high-quality met coal.

In closing, we're pleased with our results for the fourth quarter and the full year 2017, and believe the company is in a position of strength heading into 2018.

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

[Operator]

[Operator Instructions] Our first question today comes from Jeremy Sussman from Clarksons. Please go ahead with your question.

[Jeremy Sussman, Clarksons]

Hi. Thanks very much for taking question.

[Walter Scheller, Chief Executive Officer]

Good afternoon.

[Dale Boyles, Chief Financial Officer]

Hey, Jeremy.

[Jeremy Sussman, Clarksons]

Good afternoon. Just, I guess, first is Walt. Is the plan to still kind of get to 8 million tons of sales volumes? And if so, kind of what blips to pass to get there?

[Walter Scheller, Chief Executive Officer]

Yes. That's still - our plan is to get to that run rate of 8 million tons a year. And as I said in my comments, we're being conservative. We're making sure that we're not getting too out far out over our skis.

We said we would hit a run rate of 8 million this year, and that's still our plan. We need to add another section this year. That'll be added mid-year, and we'll just continue to aggressively push toward that 8 million.

[Jeremy Sussman, Clarksons]

Okay. Now that makes sense. And maybe if I just switch to the balance sheet for a second. Is there a sort of a range of cash that you're comfortable carrying? I mean, obviously, I'm looking for minimal levels, but at the same time is there a number that's just kind of too much to be sitting on the balance sheet? How should we think about how you guys are looking at this?

[Dale Boyles, Chief Financial Officer]

Jeremy, this is Dale. We look at kind of total liquidity, combination of cash and the ABL availability, at least a minimum of $100 million combined. We're not paying any cash taxes. It gives us a lot of flexibility. And with our cost structure being so low and very flexible with the pricing, we don't need to stockpile large amounts of cash from the balance sheet.

We also don't have the pension and the note - post-retirement benefit liabilities to pay. So that gives us tremendous flexibility to keep the cash on the balance sheet as low as possible.

[Jeremy Sussman, Clarksons]

Okay. Appreciate it. And good luck. Thanks, guys.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Lucas Pipes from B. Riley FBR. Please go ahead with your question.

[Lucas Pipes, B. Riley FBR]

Hey. Good afternoon, everybody. I wanted to ask a few questions on the pricing realization side. And the first one would be, Dale, could you remind us how you calculate your percent realization versus the benchmark? It sounded like you use a basket of different indexes, and some of your peers in the industry, they use some, I think, it's just a Platts index for 3 months rolling and they would typically disclose that number in the first week of the month ending the quarters of - in Q4, that would've been around December 5 or so.

So just apples-to-apples, I would appreciate your color on that. And then also going forward, we can - I can assign a correct discount to your utilization. Thank you.

[Dale Boyles, Chief Financial Officer]

Yes, what we're using is the quarterly benchmark - what used to be the quarterly benchmark is the quarterly index. And I calculate that not just on Platts. If you fall in cycle, you'll see that, that's positive quarterly. And that is the average of the 3 indices - not 1 of the Platts benefit. So that is what we are using when we disclose that.

Our gross price realization is a blend, because that benchmark or index price for the industry is on low-vol coal. And obviously, we sell low- and mid-vol, so if we're doing a 101% or make - achieve 101% realization, obviously, we're selling some of our coal at premiums above the indices at those times. So our gross price is really just where our gross sales are, less over the volumes.

And then, obviously, you have to merge and things like that, that net down in the end. So we're just comparing our gross price to that benchmark which is published every quarter. So that's all it is.

[Walter Scheller, Chief Executive Officer]

Lucas, the other thing I - this is Walt. The other thing I would've mentioned there is, to make sure we remember that we are comparing to the benchmark, the Australian low-vol hard coking coal, not the East Coast low-vol coking coal price that Platts publishes. And there's a significant difference between those 2. The Australian price is always, I don't know, you could say $15 or $20 higher.

[Lucas Pipes, B. Riley FBR]

Got it. Got it. Yes, I think where my confusion comes from is that Teck resources they put out, the press release early December, stating what they believed the benchmark price to be and that's what I've typically been using as kind of the benchmark. But I'll take a look at all of that and I appreciate the color. Just along the same lines.

Obviously, you are selling a premium product in the market. You just mentioned how it compares to the Australian product more so than anything sold off of the East Coast. How is - how are the pricing realizations tracking right now? The market has been pretty volatile.

Do you have a sense of how your product has been faring? And also, when it comes to quality, there are differences in the coal scene. How is the quality right now at both Mine No. 7 and Mine No. 4?

[Walter Scheller, Chief Executive Officer]

The quality of both 7 and 4 is very strong, and it has been for the last year. The quality at 7 has always been right there, comparable with the best coals in the world, the Sarajis and Peak Downs, and Mine 7 is right up there with them. Mine 4, again, I want to remind everybody, that about a 1.5 years ago, we moved it to another area of the mine, where we'll mine for the next 6 years or so.

And in that area, it's - the quality is much better. It's down around a 24 vol, and it's really more comparable to the low-vol hard coking coal out of Australia than it is any other index.

So it may sell at a slight discount, but not a huge discount to that. When we look at how we're doing, some of our customers base the pricing off that index that Dale talked about, with the one-month lag.

Some of our customers utilize anywhere from 10 days before the average index to the 10 days before loading or maybe 10 days before and 10 days after, it just varies kind of customer by customer.

But we feel very - as you can see with our fourth quarter results at 101%. We think we're doing pretty well. And again, that's a 101% with one of the two products been at a slight discount. So we're - we think we're doing pretty well.

[Lucas Pipes, B. Riley FBR]

That's great. Well, I am looking forward to seeing you both next week and good luck. Thank you.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Dale Boyles, Chief Financial Officer]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from Matthew Fields from Bank of America Merrill Lynch. Please go ahead with your question.

[Matthew Fields, Bank of America Merrill Lynch]

Hey, everyone. I just wanted to ask more sort of high-level questions about the market, if that's all right. Here just sort of reading about, more recently, a rail operator in Australia, Aurizon, sort of due to dispute there, maybe scaring the market into a little bit of a shortage, I think, only 2 million tons, but sort of supporting prices nonetheless. Have you been hearing any fear of that from some of your customers in the export market?

[Walter Scheller, Chief Executive Officer]

I don't know if we've been hearing any real fear yet out of our customers, but what we've heard is the potential impact of that is a bit greater if at all. And I don't know how this will turn out. If it's them saying that they were going to pull back on their maintenance, this would pull back on the throughput and this could actually result in - I think, the number that I saw was closer to 20 million ton number if it remained at the level of impact they were right now discussing. But who knows, how that will turn out. But right now, I think, it is causing some concern. But we haven't heard too much of that in the marketplace yet.

[Matthew Fields, Bank of America Merrill Lynch]

All right. And then, sort of just bigger picture. We're sitting here close to $230-ish for benchmark coal and someone asked Teck this morning on their call about opening back up the Quintette mine. What do you think is the potential for people reopening idled assets or you personally maybe to start to think about developing more resources on the Blue Creek scene?

[Walter Scheller, Chief Executive Officer]

Well, I think the level of volatility in the market will continue to keep some people a little bit cautious, even though we've had prices that have been robust over the last year.

Remember, we had a price where it dipped as low as $132 per ton in June. And a lot of those operations that are - they're kind of kicking the tires on them now on operations that have very high cost structures, and also in relatively remote areas that require a lot of relocating of employees and doing different things like that.

So that's a big decision to make unless you have a real, robust long-term price expectation. For us, looking into the things that we're doing this year to ramp us up to the 8 million, those are all incremental changes that we - that are low cost, and that we can achieve just by continuing to doing our business the way we do it.

As we look at our other project, Blue Creek Energy, which will be a great project when the time's right, but we're reviewing that, but I don't think that's something that we're going to be pushing too hard in the immediate future.

[Matthew Fields, Bank of America Merrill Lynch]

So nothing for 2018, but that's sort of remains on the horizon given the market?

[Walter Scheller, Chief Executive Officer]

Yes. We're going to focus on these two operations and get them up to that 8 million and see what we can squeeze out of them and do everything we can to maximize their value.

[Matthew Fields, Bank of America Merrill Lynch]

All right. Thanks very much.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from David Gagliano from BMO Capital Markets. Please go ahead with your question.

[David Gagliano, BMO Capital Markets]

Thanks for taking my questions. Just on the cash cost guidance for 2018. I may have missed in the prepared remarks, but the range of $89 to $95 a ton. Two questions, what's the definition of the low and the high? And what's the price assumption? I know there's some price-sensitive cost there. What price are you assuming for that range - from that?

[Dale Boyles, Chief Financial Officer]

Well, I mean, I think, we can - everybody is going to have their own assumptions, David, about price. So we kind of leave it to everybody to figure out their own pricing, given the sensitivities we've disclosed in the past. And that range of $6 just depends on where we meet the production in the sales range. But that's kind of the low and the high end there.

We did achieve a little bit better this year with $91, but we didn't get all the people added that we need to add for this additional continuous miner that we're going to add in '18.

There'll be a little additional cost because of that. And then, obviously, depending on the price assumption, that could vary the transportation, royalties, especially, with a higher price.

[David Gagliano, BMO Capital Markets]

Okay. Dale, I guess what I'm asking is, is this ever - is this cost range reflective of the current price environment and/or if prices were to, for whatever reason, decline meaningfully with those costs. Does guidance come down meaningfully, because of the pricing sensitive costs?

[Walter Scheller, Chief Executive Officer]

Sure, absolutely. It would come down, yes. If pricing continues or really does take a drop from where we are. You know, it did move down from the $260, low $260s to where it is today, about $224. And obviously, we haven't planned in that guidance anywhere near that number, because we just don't believe it's sustainable for the full year.

[David Gagliano, BMO Capital Markets]

Sorry. I've one last question just on that. So the $89 and $95 assumes a price that's lower than current or in-line with current, basically?

[Dale Boyles, Chief Financial Officer]

No. It's much lower than current, yes. Much lower than current.

[David Gagliano, BMO Capital Markets]

Okay. All right. Thanks very much.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Piyush Sood from Morgan Stanley. Please go ahead with your question.

[Piyush Sood, Morgan Stanley]

Good afternoon, guys. I also have a question on coal quality. So Platts recently revised coal quality from both number 4 and number 7. I think CSRs went out for both mines, but some changes to the volatile content. So how does that affect your realizations? Thanks.

[Walter Scheller, Chief Executive Officer]

I think the - Platts is still looking at the relatively [indiscernible] loose products. And I think the - both of them are right where they have been. And our - if you look - if you put a grid together, with all of the highest-quality coals in the world, they're both right.

They continue to be right in the sweet spot they have been in the past. The CSR for 7 is very, very strong, and again, it's right up there with the Peak Downs and Sarajis. And so you know, what we've seen is, we expect no degradation in the - in any pricing. We expect it to remain very strong.

[Operator]

Our next question comes from Mark Levin from Seaport Global. Please go ahead with your question.

[Mark Levin, Seaport Global]

Hey, gentlemen. I think most of my questions have been answered, but I'll throw this one at you. Although I think I know the answer, I'll ask anyway. Would you look at asset acquisition opportunities with some of your excess cash flow? I know there are still some net assets that are - and even some high quality ones that are down in kind of the Alabama region, the Alabama area.

Is that something you would consider? Or are you 100% laser-focused on getting Mine 4 and Mine 7 up to that 8 million ton capacity - nameplate capacity level?

[Walter Scheller, Chief Executive Officer]

We are 100% focused on getting Mine 4, Mine 7 up to that nameplate capacity. But with that said, if an opportunity presented itself that we thought would be a really good opportunity, would fit well within our portfolio, and we have 2 of the best coal mines in the world right here. And if we thought that there was an asset that would fit in that portfolio and do well immediately, we would truly consider and truly look at it.

[Mark Levin, Seaport Global]

Okay. That makes sense. And then, one more specific question. About maybe how to think about rail rates in 2017 kind of where they were based on pricing? And then maybe what's embedded in your guidance for 2018?

[Walter Scheller, Chief Executive Officer]

Yeah, we're very careful not to give any additional - too much information about the railroad. But I think we've said in the past that there's a band, there's a floor and a ceiling. And in the last year, we were operating pretty much around that ceiling all of time.

There were a few times below, but most of the time at that ceiling. And where the market is right now is up towards the top end of that - in that area as well. So we expect rail rates - I mean, frankly, we hope rail rates stay about where they are, because that means pricing's really strong.

[Mark Levin, Seaport Global]

Right, right. That makes perfect sense. Okay, well, I appreciate your time. Thanks, guys and talk to you next quarter.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Operator]

Our next question is a follow-up from Lucas Pipes from B. Riley FBR. Please go ahead with your follow up.

[Lucas Pipes, B. Riley FBR]

Hey, good afternoon again. Thanks for taking my follow up question. I just wanted to hone in a little bit on the cadence of production in 2018. Obviously, with you targeting to ramp toward 8 million in the back half of the year would imply slightly lower production here in the beginning of the year.

And I wondered if you can maybe give just a little bit more color around what we should expect first half versus second half, and when exactly we might be getting to that 8 million ton run rate?

[Walter Scheller, Chief Executive Officer]

That's - if I - if that's what you took from what I've said, that's not really what I've said. We moved all 3 longwalls in the fourth quarter. So we started off the year as early in each of these panels, especially, we rebuilt equipment, and we have very high expectations.

My point in that was that we are - we added 1 continuous miner unit in the fourth quarter, which, again, from a training standpoint and getting that up to where it needs to be from a productivity standpoint, takes a little bit of time. So we expect them to be fully productive as the year goes on. We'll add 1 more unit during the year this year. So that's 2 continuous miner units.

And if you annualize the production out of those units, it's over 100,000 tons per unit, and I think, we've said 120-ish in the past per unit. So that brings up a couple of 100,000 tons a year when you annualize those numbers. But in the second half of the year, what we have to remember is, we have the 2 longwall moves.

We got one in Q3 and one in Q4, and we've talked before about the impact of those moves and the fact that, that slows things down a bit just before the move, just after the move and during the move.

So we have very strong expectations. I can't tell you exactly what quarter or how many quarters will be at that run rate, but our expectation is to - to how to be showing people that we can do it.

[Lucas Pipes, B. Riley FBR]

Great, great. That's good color. Thank you. And thanks again.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Operator]

Our next question is also a follow-up from Jeremy Sussman from Clarksons. Please go ahead with your follow up.

[Jeremy Sussman, Clarksons]

Hi. Thanks very much. Just wanted to follow up and trying to get a sense of how much of your book is committed? How much of your volume is committed this year? And how much is sort of open for spot? Obviously, I know you priced on a quarterly basis.

[Dale Boyles, Chief Financial Officer]

Jeremy, I'd say the - we're probably at 90 plus percent that's committed, unpriced to the committed tons, and the other 10%, we're a little more opportunistic with.

[Jeremy Sussman, Clarksons]

Perfect. Thanks very much.

[Walter Scheller, Chief Executive Officer]

Thank you.

[Operator]

And ladies and gentlemen, at this time, I'm showing no further questions. I'd like to turn the conference call back over to Mr. Scheller for any closing comments.

[Walter Scheller, Chief Executive Officer]

Thank you. 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 concludes today's conference. We thank you all for participating. You may now disconnect your lines.