Earnings Call Transcript - AMR Q4 2020

Operator, Operator

Good day. And welcome to the Alpha Metallurgical Resources Fourth Quarter 2020 Earnings 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, Senior Vice President of Corporate Communications. Please go ahead.

Emily O'Quinn, Senior Vice President of Corporate Communications

Thanks, Tom, 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

Thanks, Emily. Good morning to everyone on the call and thank you for joining us today. Part of the typical year and the reporting process for the fourth quarter results is also to consider the prior year as a whole. The challenges and opportunities that presented, how the leadership team responded and what might be learned from the past 12 months to help us improve the path ahead. 2020 was anything but normal, and unfortunately, was a year marked by disruption, uncertainty, and in many cases, extremely difficult circumstances due to the global pandemic. Both our industry and our company experienced tremendous adversity. Despite the headwinds, we weathered the uncertainty and ended the year with a strong sales book, a new record low in cost performance and a clear foundation for leading the business forward. In fact, 2020 ended up being an extremely productive and transformational year for Alpha. We set some big goals for ourselves at the end of 2019, and I’m proud to say, we accomplished nearly all of them, even during a global pandemic. This is truly a situation where we put our heads down, did the work to deliver on our stated goals. Before we dive into the details of the fourth quarter, I want to touch on some of the accomplishments of the last year to put these achievements in perspective. I also want to point out that we have a new investor presentation on our website and we invite investors to view our new presentation as it contains additional details, which include a number of the points that I’m going to be discussing this morning. As you heard me say many times before, we are working to become a pure-play metallurgical producer. In the middle of last year, we completed our exit from the Powder River Basin, idled the Kielty Thermal Mine and the adjacent Delbarton Preparation Plant. In December, we divested our largest thermal property, the Cumberland Mine, thereby reducing our bonding collateral requirements in eliminating most thermal production from our portfolio. As a result of these moves away from thermal production, we execute a rebranding effort to better reflect our strategic vision for the future, while also returning to our Alpha roots in our brand’s rich heritage. We’re now proudly hosting our first earnings call under our new name of Alpha Metallurgical Resources.

Jason Whitehead, CFO

Thank you, David, and good morning, everyone. As you’ve already heard this morning, 2020 was a busy year for us and we’ve accomplished a lot over the last several quarters. Despite enduring a global pandemic and challenges within our markets, our employees were able to stay focused and achieve safety and regulatory compliance rates that are lower than the national average, all this while maintaining 99.9% compliance with water quality standards. Each year, the West Virginia Office of Miners’ Health Safety and Training along with West Virginia Coal Association award Mountaineer Guardian Awards operations as co-excellence and safety and compliance performance. For 2020, we’re pleased to share that six Alpha operations were recipients of that award. On the environmental side, our Republic team won two awards jointly given by the West Virginia DEP and West Virginia Coal Association, and I’m just like to point out very proud of the outstanding work that’s been recognized, that shown by these awards and I congratulate everyone at our operations for what they’ve done to contribute to this. Referencing our 99.9% compliance with water quality standards, I’m pleased to report to you that we’ve successfully met the commitments within our EPA consent decree, which was officially terminated at the end of January. You may recall, on prior earnings calls that we received a partial termination back in February of 2020 and now thanks to the continued diligent work of our operations and environmental crews, we fully satisfied those commitments. We continue to focus on operating safely and responsibly each day and build on that daily performance into another successful year. As David mentioned, we’re going to provide an update on our portfolio optimization efforts. Over the last 18 months, we’ve taken nearly $50 million worth of costs out of our operation structure and we’ve redeployed capital to projects with lower cost profiles. We’re now at a point where the bulk of our capital expenditures for our new low-cost metallurgical mines have been spent and those investments are providing important optionality for us as we plan for the future. In addition to serving as replacement mines for higher-cost mines that we have and will continue to take offline, there’s room for growth in each of these projects.

Andy Eidson, COO

Thanks, Jason. By any measure, 2020 was a uniquely challenging year. But as David mentioned, it was also very productive year for Alpha, as we accomplished many worthy goals, reducing operating SG&A and overhead costs, divesting the Cumberland properties as part of our strategic shift away from thermal production, achieving high standards of safety and environmental performance, and enhancing our Board composition. Going back to lead this past December, we closed the transaction to divest Cumberland and related assets, and in addition transferring ownership of the mine, coal reserves, permits and infrastructure. The closing of this transaction also released Alpha from all reclamation obligations associated with those Pennsylvania entities. That number is estimated to be around $169 million on an undiscounted basis.

Lucas Pipes, Analyst

Hey. Good morning, everyone, and thanks so much for all the detail. This is very helpful and also congratulations on managing really this incredibly uncertain time very well. My first question is on the market. We’ve had a few of your peers report results thus far, and frankly, there’s been a bit of a mixed message as to the strength of the met coal market today. And I wondered if you can provide a little bit more color as to what you’re seeing, you expect to be able to sell all your product this year on the met coal side? And then on pricing, obviously, we can look at the SAS assessments from Platts, etc. But what would be really great to kind of hear, are there discounts versus those assessments and then on a netback basis, where would pricing be coming in, in today’s environment? Thank you very much.

Dan Horn, Chief Marketing Officer

Hi, Lucas. This is Dan Horn. There's a lot to discuss, so let me begin. The demand for our products is very strong, both in North America and internationally. Steel plants have shown notable recovery from last year's economic lows. The demand for coke and coking coal is quite robust. The mixed message you mentioned relates to the disconnect between the Australian low-volatility indices and the U.S. East Coast indices. We're addressing that situation in India where we ship coal based on those indices. Simultaneously, the U.S. indices have remained quite strong. Regarding demand, we anticipate achieving our targets. In fact, we're maximizing our shipments and turning down some business opportunities because we can't pursue every chance currently available to us.

Lucas Pipes, Analyst

Okay. Very, very helpful. And any color you’d be able to provide kind of on a blended basis what we could expect in today’s environment for your unpriced tons?

Dan Horn, Chief Marketing Officer

I will just say that…

Lucas Pipes, Analyst

Met coal ton…

Dan Horn, Chief Marketing Officer

Yeah. I’ll just say that, in this strong environment, we’re not seeing much discounting at all if that to the indices. In a weaker market you tend to see discounts to the index, but here of late, we’re selling out or in some cases slightly above the index, generally speaking.

Lucas Pipes, Analyst

Very helpful. Really appreciate that color, Dan. My second question, maybe more for Andy, but when I kind of look at your balance sheet, there is an unrestricted cash balance there, that’s quite sizable and how should investors think about that? And maybe if you could take that to kind of comment on liquidity more broadly and what other ways there may be to enhance liquidity outside, of course, the recovering market and generating cash? Thank you.

Andy Eidson, COO

Sure. Hi, Lucas. It’s Andy. The unrestricted cash balance on our balance sheet is primarily being held to support surety. This includes cash collateral for various surety arrangements, and it also pertains to our ABL, along with the $123 million in letters of credit you asked about related to unrestricted or restricted cash.

Lucas Pipes, Analyst

I was asking about unrestricted, sorry.

Andy Eidson, COO

Unrestricted. I’m sorry. I’m sorry.

Lucas Pipes, Analyst

I think I said unrestricted and then restricted. Sorry about that.

Andy Eidson, COO

I will continue with the discussion on restricted cash. The combination of restricted cash and the ABL letters of credit accounts for surety collateral for workers' compensation and secured borrowing. In some cases, we also have collateral for regular property insurance. However, most of the restricted cash is tied to surety collateral, which means this cash will be inaccessible until the end of the mine's operational life, the conclusion of reclamation, and the complete release from various regulatory bodies. This cash will not be available for quite some time. The same applies to workers' compensation and black lung insurance; these are essentially collateral arrangements related to the end of life. Regarding other liquidity sources, our debt agreements provide limited flexibility. Nonetheless, we have a $50 million capacity that allows us to raise additional debt if necessary. After navigating through difficulties in the fourth quarter, our ABL is currently showing an upward trend, with approximately $50 million available as of now, following the return of $22 million in cash last week. We are heading in a positive direction, although it remains challenging. The effects of low pricing in the fourth quarter have impacted our working capital, a situation I'm sure many of our peers are also facing. The ongoing issues with low-volatility pricing in Australia and its impact on our substantial sales to India continue to put pressure on us. While we always seek more liquidity, I believe we are managing the situation reasonably well, and it is encouraging to see our ABL improving and providing us with greater liquidity than in recent quarters.

Lucas Pipes, Analyst

Very helpful color. Andy, team, everyone, really appreciate the update and continued best of luck. Thank you.

David Stetson, CEO

Thanks, Lucas.

Jason Whitehead, CFO

Thanks, Lucas.

Nathan Martin, Analyst

Hey, guys. Good morning and congrats on another great cost quarter.

David Stetson, CEO

Hi, Nathan.

Nathan Martin, Analyst

Yeah. Thanks. Two quick questions kind of related to the mix within your Met business. First, I guess, from a sales standpoint. Any idea what percentage of tons you guys might expect to come from the domestic market this year and if you have seen any of those domestic steel producers back in the market looking for additional tons? And if so, can you give us maybe an idea of what pricing might look like there?

Dan Horn, Chief Marketing Officer

Sure, Nathan. This is Dan. When we examine our domestic seaborne split, it amounts to approximately one-third for the domestic market, which is about 4 million tons, while the remaining 8 to 9 million tons go seaboard. To answer your question about domestic buyers in the market, yes, we have observed some activity from them. These tons are mainly spot tons, and they would be priced according to the indices. If we revert to a high volatility price around 110, that would be a rough estimate for selling those tons.

Nathan Martin, Analyst

Got it. Thanks, Dan. On the export side, I know India is an important customer for you, but with China's ongoing ban on Australian coals, have you seen any changes in your typical customer base as global trade flows have shifted?

Dan Horn, Chief Marketing Officer

Yeah, just when you think you've seen everything, something like this happens. We actually moved a cargo into China that we loaded last week, so we are participating in that. If there are opportunities, we will take advantage of them. However, we will definitely follow the price; our current strategy is to continue shipping to our core customers in the Atlantic Basin and India. These are the customers that supported us all last year, and we maintained that relationship. Nonetheless, we will look for new opportunities if they arise, and they did in the past two months.

Nathan Martin, Analyst

Got it. Thanks Dan. Cargo to China. What quality I’m seeing, obviously, that would be priced off if our China index, correct?

Dan Horn, Chief Marketing Officer

Yes. And it was a mix of a few different products actually.

Nathan Martin, Analyst

Got it. Got it. And then kind of just shifting, when you guys look at production, mix on the Met side, obviously, we’ve had some shifts around if you guys have moved towards more productive mines and we’ve got Road Fork 52, Lynn Branch, Black Eagle ramping up. How should we think about your quality mix this year and even going forward?

David Stetson, CEO

Yeah. Nathan, this is David Stetson. We put out an investor deck this morning. On page 14 of that you’ll see our view of where our quality mix is going forward.

Nathan Martin, Analyst

Yeah.

David Stetson, CEO

Which is primarily at the…

Nathan Martin, Analyst

I saw in that, David. Yeah.

David Stetson, CEO

Yeah. So it’s high-vol A is 39, B and mid-vol both be right to 25 and then low-vol around 13.

Nathan Martin, Analyst

Okay. Got it. Yeah. I saw that in there, it was 2020. I was just wondering if that was going to change much due to the fact that you guys are bringing on those three mines?

Dan Horn, Chief Marketing Officer

I think, Nathan, as we ramp up Road Fork 52, I’m not continue to put more low-vol into the market this year.

Nathan Martin, Analyst

Perfect.

Andy Eidson, COO

That’s for sure.

Nathan Martin, Analyst

Yeah. Got it. Thank you, guys. And just…

Andy Eidson, COO

Sorry, Nathan.

Nathan Martin, Analyst

Yeah.

Andy Eidson, COO

This is Andy. I want to add one more point. We have included some information in the investor presentation that illustrates a 10-year production forecast. When you look at that alongside the quality mix and what Dan mentioned, it becomes clear that we are well-positioned for the next decade in terms of production without needing to invest in growth capital to sustain the 12 million to 13 million ton run rate of met coal. So, all the elements are aligning to support David's strategy, and we are pleased with our progress.

Nathan Martin, Analyst

Got it. Thanks. Thanks for that color, Andy. Appreciate it. And then, I guess, just one more, and Andy, you kind of went through the puts and takes of the $25 million you guys had to post, I think just to recap, I mean, the 3.4 million, you paid back that much towards your borrowing, the $22 million satellites, you just said you’ve already got back last week. I just wanted to get your final thoughts on future bonding requirements maybe for your business or the industry. And maybe even you could give us an update on your totals kind of closed the Cumberland sale? Thanks.

Andy Eidson, COO

The bonding market remains challenging for coal in general, particularly for thermal coal. The overall fluctuations in the market impact everything due to the broader coal market dynamics. As the metallurgical markets experienced a downturn, surety providers became more cautious and sought additional collateral. With the current positive trends, it appears that things are improving. Despite the difficult comparisons, we have maintained strong relationships with our surety providers, which puts us in a good position. We are also looking to pursue smaller transactions to address potential reclamation items that could provide us with more bonding capacity. We have a few individual opportunities in the pipeline, though they aren't significant enough to substantially impact our overall situation. After the Cumberland transaction, our undiscounted bond exposure and asset retirement obligation exposure is now approximately $210 million, a decrease from about $370 million year-over-year.

Nathan Martin, Analyst

Perfect. All right. Well, thank you guys for all the information and the time and take care.

David Stetson, CEO

Thanks, Nathan.

Andy Eidson, COO

Thank you, Nathan.

Operator, Operator

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

David Stetson, CEO

I just want to thank everyone for getting on the call today. I encourage our stockholders and others to review our investor presentation that we put on our website this morning. So thank you all very much and have a wonderful day.

Operator, Operator

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