Earnings Call Transcript - AMR Q1 2021

Operator, Operator

Good morning and welcome to the Alpha Metallurgical Resources First Quarter 2021 Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Emily O'Quinn. Please go ahead.

Emily O'Quinn, Not provided

Thank you Jason and good morning everyone. Before we get started, let me remind you that during our prepared remarks and the Q&A period, our comments relating to expected business and financial performance contain forward-looking statements and actual results may differ materially from those discussed.

David Stetson, CEO

Good morning to everyone on the call and thank you for joining us today. I'm looking forward to discussing our first quarter results today and hearing from Jason, Andy and Dan about details the quarter in each of their respective areas. I want to start by commending the team on another productive quarter that drove continued progress on our long-term goals and initiatives. From a financial and sales perspective, the first quarter was solid with adjusted EBITDA of $29 million and net cost of coal sales coming in roughly at the mid-point of guidance. Our sales volumes were excellent for the quarter and our overall realizations increased in comparison to Q4 2020. Had it not been for the market effects of prolonged tensions between Australia and China, those realizations would have likely been higher. For example, if you set aside our tons that were sold into the quarter against the unusually low Australian indices, our average realization on the remaining was $91 per ton. While it is unclear how long Australian coal will be unwelcome in China, we are seeking opportunities to proactively manage around the downward pressure of the Australian indices and position ourselves well for the remainder of the year. Operationally, a lot of work occurred behind the scenes in Q1 to transition crews and equipment from operations that were mining out to our newer mines that have been ramping up. Although we announced it on our last call, Alpha received word in the first quarter that our obligations under the EPA consent decree had been fulfilled marking another positive milestone for us. A few weeks ago, our Republic Energy subsidiary received another permit approval to expand mining reserves in Raleigh County, West Virginia. Jason will go into more details about our plans for this project, which is part of our Workman Creek surface mine, and the permit name is Turkey Foot. While we don't have a firm date for this project on the books yet, permit approvals are important early steps, and we are excited about the many benefits of this project, both for our company and the local communities near the project site.

Jason Whitehead, CFO

Thanks David and good morning everyone. Before I go into the details of our first quarter performance, I want to provide some additional information about the Turkey Foot permit and our Wharton Creek operation. As David mentioned, we're pleased to receive approval for the Republic Energy Article Three and NPDS permit for Turkey Foot, which will ultimately expand our existing mining reserve base and provide future sustainability to the Walkman Creek complex.

Andy Eidson, CRO

Thanks Jason. It was another strong quarter for Alpha in terms of cost performance that improved materially from the fourth quarter of last year. That said, strong sales volume, improved pricing and some evolving customer terms resulted in a significant increase in receivables during the quarter, leading to a net decrease in cash balances. For Q1, our adjusted EBITDA was $28.9 million compared to $7.4 million in the fourth quarter of 2020. The stronger volumes and increased met coal realizations in our met segment shipment volume increased 14% to 3.7 million tons with average realization improving nine percent over the fourth quarter, resulting in that segment revenue increase of 24% to $300 million. We also saw strong improvement in our quarter-over-quarter met segment margins, which increased 72% to $10.28 per ton.

Dan Horn, COO

Thanks, Andy. And good morning, everyone. As David mentioned earlier, our first quarter shipments were very strong and we were able to improve our overall realizations against the fourth quarter of 2020, despite the negative effects of the Australian indices and the step-down in domestic contract prices. I want to commend the sales team on a job well done for the quarter, as whole companies are experiencing distinctly different market dynamics right now. For example, over the last couple of weeks pricing a ton of low-vol against the U.S. East Coast embassies compared to the Australian indices would show as much as a $60 swing between the two. The uniqueness of the circumstances surrounding China and Australia has had a ripple effect throughout the entire industry. We are looking at ways to optimize our export mix to capitalize on Atlantic pricing, which is currently much more attractive. As always, we remain committed to fulfilling our contractual obligations, but we've also taken advantage of opportunities to make several sales into China this year, being mindful of the significant challenges certain countries are experiencing with high COVID-19 case numbers. On the positive side, global and U.S. steel crude steel production continues to trend upward, with World Steel Association statistics in March showing growth of 15.8% in year-over-year global steel output. Unsurprisingly, China led with 19.1% and 17.5% growth respectively. The current conditions highlight the importance of diversity in our customer bases and coal qualities. We enjoy some additional optionality and the ability to adjust when necessary, which is exactly what we will continue to do.

Operator, Operator

Okay. We will now begin the question and answer session. To ask any questions, please go ahead.

Nathan Martin, Analyst

Hey, good morning guys. Congrats on the quarter. Dan, you just gave us some great comments, but I wanted to first dig into the export side just a little bit more. I think obviously India, one of your major export customers, is dealing with a pretty bad wave of COVID right now. Can you guys give us an update from what you're hearing from your customers in that market and the potential disruption there?

Dan Horn, COO

We haven't heard anything specific yet. I did see something this morning about a force majeure at one of the ports. We're watching it closely and staying in touch with our customers over there. Nothing to report at the moment.

Nathan Martin, Analyst

Got it. Thanks Dan. And then if we shift over to China, there was another big $10 jump in CFR, China prices this morning, and you guys mentioned you've moved some coal into that market. Can you give us an idea of how much coal maybe you could ship to China this year, assuming that the ban on Australian coal imports continues?

Dan Horn, COO

Yeah, well, I think Nate, what I would say is we intend to ship tons into those markets. It's not only India; it's anywhere we see prices indexed to the Australian indices. So as those contracts roll off, we will look to make additional shipments to China. We have shipped three vessels to China so far this year. I don't have a specific number to give you, but I can see shipping that many more in the near future.

Nathan Martin, Analyst

Okay. That's a good point then if you do have some tons available as your contracts are rolling off, you could take advantage of that?

Dan Horn, COO

Yes. As I said, we maintain a lot of optionality in our book at all times and we can react quickly to move different calls. We have some new mines coming into production, plus we have additional low-vol from our Coupler operation that’s in demand these days. So we have some options to manage.

Nathan Martin, Analyst

That's great. And then speaking of the transportation side of things, can you comment on how rail services have been? I know that, you know, it's been challenging, and your service has not quite been as good as desired, maybe affecting rates and keeping your coal competitive?

Dan Horn, COO

Yeah, it's been challenging at times. The rail service for some of our domestic customers has faced delays. They are running their coke plants hard and are not receiving as much service as they would like. We've had some challenges getting the coal exported, but by and large, we're hitting our shipments. I would have to say we've seen an improvement in service.

David Stetson, CEO

Nate, this is David Stetson. We've met with both Norfolk Southern and CSX over the last month and I’m feeling cautiously optimistic that some of the service disruptions seen in the past are going to be corrected. I know CSX has made a huge effort to bring on more crews and more staffing, which should allow for an increase in their capacity from a service perspective. We're cautiously optimistic that both CSX and Norfolk Southern are moving in the right direction.

Nathan Martin, Analyst

That's great. Great to hear David. Lastly, with regards to the cost side, another fantastic quarter for you guys. Congratulations! I was surprised at how low the other thermal result came in at $43 given the full-year guidance. Is there anything one-time in that quarter that lowered those costs or is that a time that they did their full-year costs to kind of drive towards that number?

Andy Eidson, CRO

Hey Nate, it's Andy. I don't think there was anything one-time in that sense. We're maintaining guidance on that. It just depends on, as with all things underground, where the geology is. We just had a good quarter and would love to see that replicate itself throughout the rest of the year, but at this point, we’ll just hold guidance where it is. The operations team across the board has just continued to deliver excellent performance.

Lucas Pipes, Analyst

Hey, good morning, everyone. Good job on the quarter. I wanted to first hone in on the pricing side as well. And when I think about your guidance for the year, I see a price target at $85-$65 per ton, and then Q1, you sold met coal at $82 per ton. Can you help us understand the guidance between the higher committed tons and what the spot market is doing? Where should we think about Q2 and Q3?

Andy Eidson, CRO

In terms of that, yeah. As usual, you asked a question that I really don't even want to attempt to answer because we're dealing with such a multivariate analysis going on right now. As Dan mentioned, we’ve got a lot of things influencing how we're thinking about participating in the markets over the next couple of quarters. However, Q2 probably isn’t that much different in terms of customer mix as compared to Q1. You can take those thoughts and apply them to how the markets have moved. Unfortunately, while the index is trending in one direction, the East Coast is performing better. It could lead to a similar outcome. Again, I'll stop rambling and avoid giving you a forecast since we don’t have much visibility into it just yet.

Lucas Pipes, Analyst

Okay. I appreciate that. I'll ask one follow-up on the 36% that are unpriced on the met coal side. What percent would we model off U.S. East Coast assessments versus the lower Australian assessments?

Andy Eidson, CRO

Historically, about 20-30% of our export met tons have been priced off of the Australian PLV index. I don't know that we can just spread that evenly across every breakdown, whether committed or uncommitted, and unfortunately, I don't have that number in front of me, but I would guess that percentage likely does apply.

Lucas Pipes, Analyst

Got it. For the remaining 75%, we should predominantly use a high volume high will be index?

Andy Eidson, CRO

Yeah, all things being equal, that’s probably how it will play out. Yet if we encounter any force majeure issues or anything like that, we may have to shift our tonnage around. As things stand right now, that’s how we anticipate it.

Lucas Pipes, Analyst

Thank you very much for that. That’s helpful. And then a follow-up on the cost side. Good job in Q1. In your release, you mentioned inflationary pressures, particularly in diesel. When I think back, this guidance was initially issued in November, so terrific job maintaining through all the pressure. When you think about your cost position today, where do you see the pressure points and upside risks to your cost expectations?

Andy Eidson, CRO

We've seen the first wave of increases in raw materials costs. Inflationary pressures are real, and we'll deal with that moving forward. I do think we budgeted some raw material increases into our initial guidance, so some of that is playing out as expected. However, there are definitely labor pressures across the country that could be a point of exposure. Most importantly, diesel fuel has had the most significant impact we've seen, probably around a dollar and a half per ton, along with smaller surcharges for certain items that are comparatively minimal.

Lucas Pipes, Analyst

All right. That’s very helpful. Best of luck to the entire team. I really appreciate all the details.

Andy Eidson, CRO

Thanks, Lucas. I appreciate it. Before I turn it over to David to wrap up, I wanted to make one correction. In my earlier comments, I misspoke on our CapEx guidance. The range is actually $75 million to $95 million rather than $80 million to $100 million. So the midpoint is a little bit lower than I initially stated.

David Stetson, CEO

Well, thanks. I appreciate everybody jumping on the call today. We appreciate everyone's support of Alpha and wish everyone a wonderful day and a wonderful week. Thank you.

Operator, Operator

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