Earnings Call Transcript - HCC Q4 2023

Operator, Operator

Good afternoon, and welcome to the Warrior Fourth Quarter and Full Year 2023 Financial Results Conference Call. All lines are currently muted to reduce background noise. After the presentations, there will be a question-and-answer session. This call is being recorded and will be available for replay on the company's website. Before we start, please note that today's discussion may include forward-looking statements, and actual outcomes may significantly vary from what is mentioned. For more details on forward-looking statements, please check the company's press releases and SEC filings. The company has provided reconciliations of the non-GAAP financial measures discussed today in the tables that accompany the earnings press release available in the Investors section of the company's website at www.warriormetcoal.com. Additionally, a brief supplemental slide presentation has been posted on the Investors section of the website. Presenting the company's results today are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. I will now turn the conference over to Mr. Scheller. Please go ahead.

Walter Scheller, CEO

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our fourth quarter and full year 2023 results. After my remarks, Dale will review our results in additional detail, then you will have the opportunity to ask questions. Our fourth quarter results reflect the culmination of a highly productive year for Warrior, where we made meaningful progress on our strategic priorities to build significant sustainable stockholder value, and we were very pleased to end the year on a strong note. We met or exceeded both sales and production volume targets for the year, recording a 34% increase in sales volumes and a 21% increase in production volumes. These are run rates not seen since 2020. We also achieved record high annual production at Mine 4 of 2.5 million short tons. Our cash generation from operating activities was exceptionally strong, allowing us to fund record high amounts of capital expenditures and mine development. We further strengthened our balance sheet with the early retirement of debt. As a quick aside, there is one fourth quarter metric, total sales volume that could have been better by 129,000 short tons if our last two customers' vessels made it to the terminal on time as scheduled. These contracted shipment delays lowered our adjusted EBITDA by approximately $23 million for the fourth quarter. We know that some investors put a significant amount of emphasis on the MSHA production data equaling sales volumes, which can lead to expectation differences. So it's important to understand the impact of timing differences here and our strategic focus. Our purchase spot volumes are working quite well. As we indicated on our third quarter earnings call, we took a more strategic approach to selling spot volumes in the fourth quarter. Our goal is to leverage our high-quality brands, maximizing our cash margins and build inventories for optimal logistical operations as we prepare for 2024. As a result, we increased our margin per short ton by 63% from $70 in the third quarter to $114 in the fourth quarter. In addition, we anticipate that this strategic approach of leveraging our high-quality steelmaking coal to maximize our cash margins will benefit us in 2024, as we expect our spot volume to be lower with higher contracted volumes. I'll share more about our 2024 outlook a little later. First, let's discuss the steel and steelmaking coal markets during the fourth quarter. As expected, steel output from China continued to slow down during the quarter, but net exports from the country remain higher than usual. The additional volumes from China found their way into different geographies, impacting the domestic markets of some customers and putting pressure on steel prices. Demand from India was strong, and customers in India continued to indicate an interest in developing relationships with U.S.-based producers like Warrior. Although overall demand was stable from our contracted customers, we continue to see very little spot activity in our traditional markets compared to India, China, and Southeast Asia where spot demand remained more active. We also experienced higher than normal freight rates for our deliveries into the Pacific Basin due to a combination of market, logistical, and geopolitical factors. The availability of premium steelmaking coals like our Mine 7 Low Vol product remained tight during the quarter compared to second-tier steelmaking coals like our Mine 4 High Vol A product. This was evidenced by the price relativity between both qualities, which remains lower compared to previous years. For example, in 2022, second-tier steelmaking coals traded at price relativities in the low to mid-90s, whereas 2023 price relativities were closer to the mid-80s. Russian steelmaking coal exports into China and India have remained at historic highs and show no signs of slowing down. Likewise, the protocol for Mongolia into China remained strong, having secured its spot as the largest source of imported coals for the country. U.S. steelmaking coal exports in the Pacific Basin continue to increase as more suppliers target the growth markets of India and Southeast Asia. We expect that 2023 will be a record year for U.S. exports into India as well as for exports into Indonesia, Malaysia, and Vietnam. Although U.S. exports into China are lower than the highs observed in 2021 during the ban of Australian coal imports, they remain strong compared to historical averages. The major indices were fairly stable throughout the fourth quarter with the exception of some upward volatility in October. Our primary index, the PLV FOB Australia, ended the fourth quarter at $294 per short ton which was $8 lower than its October 1 value. In sharp contrast, the PLV CFR China increased by $47 per short ton during the same period, closing the fourth quarter at a price of $301 per short ton. It's worthwhile pointing out that the East Coast High Vol A price averaged $255 per short ton during the fourth quarter, which is one of the primary indices used to price our Mine 4 High Vol A product. According to the World Steel Association monthly report, global pig iron production increased by approximately 0.5% for the full year of 2023 as compared to the prior year. The positive growth was mainly driven by higher Chinese steel production, which grew by 0.1% in 2023. India's steel production, although lower in absolute terms compared to China, continued to grow at impressive rates, increasing by 7.3% for the same period. Most other large steel-producing regions of the world experienced production declines compared to 2022. Now turning back to our results. Our fourth quarter sales volume of 1.5 million short tons was 6% higher than the comparable quarter last year. The increase was primarily driven by the additional production volumes due to the end of the labor strike, the improved performance by our transportation partners, and the McDuffie Terminal, which enabled us to export more product last year. Our sales by geography in the fourth quarter breaks down as follows: 56% into Europe, 16% into South America, 25% into Asia, and 3% into the U.S. markets. As we've previously noted, demand from the Asian spot markets has been growing this year, resulting in full-year agent sales up 9% year-over-year to 29% of total sales, while European sales are down 12% year-over-year to 48% of total sales, primarily due to weak spot markets. Our spot volumes, 38% in the fourth quarter, were much lower than the 44% in our third quarter, as we took a more strategic approach to selling our premium products into the spot markets to maximize margins. As we previously indicated, our spot volume was higher in 2023, primarily due to the incremental volume resulting from the end of the labor strike earlier last year and, to a lesser extent, the change in mine force quality from the Mid Vol to a High Vol A product in the second half of the year. With these dynamics in mind, it's important to understand pricing in the Pacific markets and how it differs from our traditional spot markets, depending on market conditions. Typically, the Pacific markets are priced based on a CFR basis rather than the PLV FOB Australia basis which is more common in our traditional markets. The freight differential was borne by the supplier on a CFR basis whenever the buyer has market leverage, which was the case in the fourth quarter. Turning now to other details on our fourth quarter performance, production volume in the fourth quarter was better than expected and totaled nearly 2 million short tons compared to 1.5 million short tons in the same quarter in 2022, representing a 34% increase. This was the highest quarterly production output since the first quarter of 2021 and contributed to a record-setting year for Mine 4. Twelve months operated at higher capacity levels in this quarter and for the year as a result of the additional employees returning from the labor strike, increasing production volumes 21% year-over-year. Our headcount was 36% higher at the end of this year compared to the prior year. The higher production over sales volume in the fourth quarter drove our coal inventory up to 968,000 short tons from 489,000 short tons at the end of the third quarter. We're well positioned heading into 2024 to create incremental value from the global demand for our premium products in the current high-price environment. During the fourth quarter, we spent $182 million on CapEx and mine development. CapEx spending was $181 million, which includes $128 million on the Blue Creek project which I'll discuss more in a moment. Mine development spending on the Blue Creek project was almost $2 million during the fourth quarter. Moving on to the development of a world-class Blue Creek growth project, during the fourth quarter, we continued to make excellent progress on the project, and I'm pleased to share that our work remains on schedule and within the cost estimates we outlined previously last year. During the fourth quarter, we continued to make progress on the production slope, service shaft, ventilation shaft, which will be fully connected in the second half of 2024 to allow continuous miners to start development. In addition, we continue to make good progress on the construction of the preparation plant, the mine belt structure, the bathhouse, the warehouse and developing the rail and barge load-out sites during the fourth quarter. Capital expenditures for the development of Blue Creek were $128 million for the first quarter and $319 million for the full year. We've spent $366 million on the development of Blue Creek since the beginning of the project. We remain on track for the first development tons from Blue Creek's continuous miner units in the third quarter of 2024 and the longwall scheduled to start up in the second quarter of 2026. We're extremely excited to begin the journey of producing coal from this new asset later this year. We expect approximately 200,000 short tons of production of High Vol A, steelmaking coal from the continuous miner units in 2024. Since the new preparation plant will not be operational until sometime in the middle of 2025, we do not anticipate selling any of those tons until 2025, due to the incremental cost to transport the tons to another preparation plant to be washed. I'll now ask Dale to address our fourth quarter results in greater detail.

Dale Boyles, CFO

Thanks, Walt. For the fourth quarter of 2023, the company recorded net income on a GAAP basis of $129 million or $2.47 per diluted share, representing a 29% increase over the net income of $100 million or $1.93 per diluted share in the same quarter of 2022. Non-GAAP adjusted net income for the fourth quarter, excluding the nonrecurring business interruption and other expenses, was $2.49 per diluted share. This compares to adjusted net income of $1.90 per diluted share in the same quarter of 2022. These increases quarter-over-quarter were primarily driven by 6% higher sales volumes and a 3% higher average net selling price, which were offset partially by lower results from our gas businesses. We reported adjusted EBITDA of $164 million in the fourth quarter of 2023 compared to $148 million in the same quarter of 2022. Our adjusted EBITDA margin was 45% in the fourth quarter of 2023 compared to 43% in the same quarter of 2022. These increases were driven primarily by the previously mentioned higher sales volumes and higher average net selling prices, offset partially by the lower results from our gas businesses. Total revenues were $364 million in the fourth quarter compared to $345 million in the fourth quarter of 2022. This increase was primarily due to the 6% increase in sales volume, plus a 3% increase in average net selling prices and lower demurrage and other charges. The merge and other charges were $3 million lower compared to 2022's fourth quarter. As you may remember, the higher demurrage and other charges in the fourth quarter of 2022 were the result of temporary delays in vessel loadings due to severe weather and port congestion. Emerge and other charges reduced our average net selling price to $235 per short ton in the fourth quarter of 2023 compared to $227 per short ton in the same quarter of 2022. Other revenues, primarily from our gas businesses, were 72% lower in the fourth quarter of 2023, primarily due to a 55% decrease in natural gas prices between the periods. The Platts premium Low Vol FOB Australian index price was relatively stable for much of the fourth quarter. The index price averaged $303 per short ton for the fourth quarter which on average was $50 per short ton higher compared to the same quarter of 2022. We primarily target pricing our Mine 7 premium product from this index, which represents about 70% of our volumes. While Mine 4 High Vol A product, which is about 30% of our volumes, we primarily target using the East Coast High Vol A index price for our traditional markets. As we mentioned, we transitioned Mine 4 from a Mid Vol to a High Vol A product in the second half of 2023. As a result of the demand and balances between the Pacific and Atlantic basins this past year, we have at times used other indices to price our Mine 4 High Vol A product such as the CFR China Index, CFR India Index or the Low Vol HCC Index and price relativities between these indices and the PLV FOB Australia can be and have been significantly different depending upon market conditions. In addition, as noted earlier, the Pacific Basin markets usually require the producer to cover the freight cost to these markets, which lowers our average net selling prices. Cash cost of sales in the fourth quarter of 2023 was $185 million or 51% of mining revenues compared to $179 million or 54% of mining revenues in the fourth quarter of 2022. Of the net $6 million increase in cash cost of sales, $10 million was due to the 6% increase in sales volumes offset partially by $4 million of lower transportation costs due to timing. Our headcount was 36% higher at the end of 2023 compared to last year due to a focus on hiring workers during the labor strike and the addition of employees who returned from the labor strike in the second quarter of 2023. Cash cost of sales per short ton, FOB port, was approximately $121 in the fourth quarter compared to $123 in the fourth quarter of 2022. Transportation and royalty costs were slightly lower in the fourth quarter this year as compared to the same quarter of 2022. Our cash cost of production per short ton was slightly higher in the fourth quarter as compared to the same quarter 2022, despite the incremental cost associated with the 36% higher headcount. SG&A expenses were about $13 million or 3.6% of total revenues in the fourth quarter of 2023 and were slightly higher than 2022's fourth quarter of 3.4%, primarily due to an increase in employee-related expenses. The interest income earned on cash investments will exceed the interest expense on outstanding notes and equipment leases during the fourth quarter of 2023, primarily due to lower interest expense from the early retirement of nearly 50% of our senior secured debt in the third quarter of 2023. Our fourth quarter income tax expense reflects expense on pre-tax income and includes an income tax benefit for depletion expense and foreign-derived intangible income. Turning to cash flow, during the fourth quarter of 2023, free cash flow was $63 million. This was a result of cash flows generated by operating activities of $245 million, less cash used for capital expenditures and mine development of $182 million. Free cash flow was $34 million lower than 2022's fourth quarter, primarily due to higher Blue Creek CapEx spending. Free cash flow in the fourth quarter of 2023 was positively impacted by a $90 million decrease in net working capital from the third quarter. The decrease in net working capital was primarily due to a decrease in accounts receivable on lower sales volumes, partially offset by higher inventories and lower net accounts payable and accrued expenses. Despite the higher capital spending associated with the Blue Creek growth project this year, we generated full-year free cash flow of $176 million, of which $61 million has been returned to stockholders in the form of a special dividend earlier last year on top of the regular quarterly dividends which increased 17% last year. Our total available liquidity at the end of the fourth quarter of 2023 was $846 million, representing an increase of $36 million over the third quarter and consisted of cash and cash equivalents of $738 million and $107 million available under our ABL facility. The fourth quarter of 2023 capped off a robust year of building stockholder value as full-year volumes returned to levels not seen since 2020. And market pricing for our premium products was high. This combination led to another year of strong cash flow generation from operations of over $700 million that enabled us to fund an all-time record high amount of capital expenditures and mine development of $525 million for the future growth of our business. It also allowed us to retire early $162 million or nearly 50% of our senior secured debt. These results demonstrate the significant cash flow generation of our existing operations that we expect to grow tremendously in the near future with the addition of our new Blue Creek mine. Now let's turn to our outlook and guidance for the full year 2024. We expect the demand from our contracted customers to remain stable, while we also expect spot demand to continue to be stronger in the Pacific Basin compared to our traditional markets in the Atlantic. We will continue to pursue our successful strategy of focusing on contracted customers with value-add to spot activity. We believe the current tightness in the supply of premium coals like our Mine 7 Low Vol will persist for some time, which should support higher pricing relative to the second-tier steelmaking coals. Our full year outlook encompasses this favorable landscape, and we believe 2024 should be another strong operational year for Warrior primarily driven by higher volumes. We expect sales volumes may exceed production volumes using the midpoint of the ranges by up to 0.5 million short tons in 2024 as we take advantage of market pricing and the higher inventories on hand. We anticipate our contract to spot volume ratio will be better in 2024 than last year at about 75% contract and 25% spot. This compares to 59% contract and 41% spot in 2023. In addition, we expect to hire approximately 250 new employees in 2024 to fill in gaps in the existing mines and ramp up our hiring for the Blue Creek mine later this year. Inflationary cost in the mining sector continues to persist and pressure cost structures for labor, supplies, materials, and equipment purchases. These additional costs are expected to drive up our cost per short ton in 2024 as outlined in our targeted range for cash cost per short ton. Lastly, after considering our total liquidity and our favorable outlook for 2024, we recently announced that the Board of Directors has decided to increase the regular quarterly dividend by 14%. We expect to distribute the dividend on February 26. This marks the third consecutive year the company has raised its quarterly dividend while developing its world-class Blue Creek reserves. In addition, we recently announced our plans to distribute a special cash dividend of $0.50 per share in March, demonstrating our continued commitment to returning excess cash to stockholders while driving long-term growth of the business.

Walter Scheller, CEO

Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments. As Dale just noted, we have a favorable outlook for 2024 as orders from customers in our traditional markets suggest stable demand for our coals for at least the first half of the year, while we expect markets like India and Southeast Asia to continue to experience increasing demand with new projects coming online. We're closely monitoring the dual logistical challenges posed by low water levels in the Panama Canal system as well as geopolitical tensions in the Red Sea. For now, the impact for Warrior has been higher freight costs, especially in the Asian markets, which continue to be above historic averages, while the impact of some of our customers has been longer transit times. It's difficult to predict that this will improve or deteriorate during the next few quarters. We believe steelmaking coal pricing will remain bifurcated as the availability of premium Low Vol steelmaking coal should stay tighter than the availability of second-tier steelmaking coals. As such, we believe the lower price relativities of the second-tier steelmaking coals will continue for the near future and will also depend upon the geography of spot volumes. While we are well prepared to address a variety of market conditions, we are also extremely excited and laser-focused on the disciplined development of our world-class Blue Creek reserves. We expect another year of high capital spending on the project ranging from $325 million to $375 million which can be funded out of cash on our balance sheet if the market should turn unfavorable in 2024. As I mentioned earlier, we continue to make excellent progress in developing Blue Creek. We are on track for the first development tons from the continuous miner units in the third quarter of 2024, with the Low Vol scheduled to start up in the second quarter of 2026. We expect approximately 200,000 short tons of production of High Vol A product from the continuous miner years in 2024. This raw coal production has been included in our production guidance. In conclusion, our full-year outlook encompasses a favorable landscape, and we see 2024 representing another strong year of operational success and growth capital deployment, driven by expected higher steelmaking coal production and sales. With that, we'd like to open the call for questions.

Operator, Operator

Thank you. Our first question comes from Lucas Pipes of B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Hi. Thank you very much, operator. Good afternoon, everyone. My first question, Walt and Dale, is on the sales mix for 2024. I wondered if you could maybe provide a rough breakdown of anticipated sales kind of on a percentage proportional basis, High Vol A, FOB port, PLV FOB port and then also High Vol A PLV kind of CFR China so we can get a better sense of how these higher freight costs impact realizations. Thank you very much.

Walter Scheller, CEO

Well, generally, our expectation for Mine 7 is that we're probably 70% to 80% contracted, and those will all be sold FOB port. The remaining 20% to 30% will be spot tons, which could go into our traditional markets or into markets affected by the CFR issue going into Asia. For Mine 4, we're about 55% contracted this year, some of it going into traditional markets. However, at least 50% of that coal will likely be allocated to CFR sales. In total, you're looking at approximately 70% from Mine 7 and 30% from Mine 4. I hope that answers your question.

Lucas Pipes, Analyst

There were many useful details shared, and I might follow up on some. However, I want to return to Mine number 4. It seems like it’s currently a High Vol A product. Does this description encompass all the output from Mine number 4? Should we consider a Platts or similar index as the best estimate for FOB pricing for Mine 4 at this time?

Dale Boyles, CFO

Yes, Luke, this is Dale. Mine number 4 is mainly a High Vol A product now, having transitioned to that in the second half of the year. It constitutes about 30% of our volume, and we typically aim for the East Coast High Vol A index in our traditional markets. In spot markets, however, it could involve a mix of the different indices mentioned in March, depending on the geography. The markets have shifted significantly, with increased demand in the Pacific basins over the past six months, which we see as the direction of future demand. We expect around 65% of our volume to go to the Pacific Basin in 2024 and about 35% to our traditional Atlantic markets overall.

Lucas Pipes, Analyst

Thank you for your insights. I have a question regarding sales. Can you share some details about the shipment schedule for 2024? It seems like there were some delays at the end of Q4, so I'm assuming those shipments will occur in Q1, potentially making it a stronger quarter for shipments. I'd also like your perspective on the production output in Q4 compared to the tons sold. Does this indicate a downturn in your traditional markets, or were there other factors affecting those shipments? Thank you.

Walter Scheller, CEO

All the contracted tons were delivered to those customers as anticipated. As we mentioned in the third quarter, we moved more into the spot market. In the fourth quarter, we decided to adopt a more strategic approach to maximize margins, which meant we held off on business that could hinder that strategy. Regarding sales cadence, the challenge is that unexpected events at the end of a quarter can significantly impact totals, sometimes decreasing them by as much as 200,000 tons in a single week. While we aim to align production with sales, I can't provide more specific guidance than that. For the year, we have shared our expectations, but I can't specify in which quarter any inventory reductions will occur.

Dale Boyles, CFO

Yes. We're really focused on the overall year, and the quarters can vary based on factors like ship arrivals and complications from bad weather at ports. Our full-year targets are our priority, and we manage for the long term rather than quarterly results.

Lucas Pipes, Analyst

Understood. Understood. No, that's helpful. So maybe to just put it a little differently to help me with the modeling. You have 1 longwall move in Q1. So kind of fair to assume that production may be touch lighter than in Q4. And then you mentioned you're looking to match sales with production. Has that occurred for Q1? Are you currently matched?

Walter Scheller, CEO

We're right on target for where we wanted to be year-to-date.

Lucas Pipes, Analyst

And with the longwall move kind of slightly less than Q4 and production makes sense?

Walter Scheller, CEO

It does make sense.

Katja Jancic, Analyst

Hi. Thank you for taking my questions. First, starting on the Blue Creek CapEx. The original project cost is about $700 million. And then adding the scope gets you to $820 million to $830 million. Now on top of that, there is inflationary pressure. So I get up to about $1 billion. Are my calculations correct?

Dale Boyles, CFO

That's the general trend. And there's really been no update or change to those initial updates that we had back in the summer. So yes, target inflation. We haven't seen any reduction in labor, materials, supplies, and equipment purchases, that inflation is pretty much stuck in this sector. It depends on what particular item, but a range of 25% to 35%. So if you just take the midpoint, 30% on your $700 million plus $130 million scope change, you're right around $1 billion.

Katja Jancic, Analyst

Okay. And I think, Dale, you said you're going to be hiring more miners later in the year for Blue Creek. Is that already included in your cost guide?

Dale Boyles, CFO

Yes.

Katja Jancic, Analyst

And how many miners do you have to add this year?

Dale Boyles, CFO

We're adding in total 250 to the company and somewhere around 100-ish for Blue Creek of that.

Nathan Martin, Analyst

What I was trying to say is, Dale, I think you were talking again to Lucas' questions around logistics and obviously, you guys pointed out the 2 late vessels in the fourth quarter, affecting shipments there. You mentioned, I think, low water in the Panama Canal, Red Sea issues. We also have the Demopolis lock outage right now. So I guess it would be great to hear how these are not affecting Warrior. Obviously, it sounds like transportation costs are elevated, but how you guys are working through around some of these issues?

Walter Scheller, CEO

The situation at Demopolis has not had any impact on us. So far, our rail service has been very strong, and we hope it remains that way. We have alternative methods to transport the coal to market if we encounter problems with the rail service. Regarding Demopolis, the core of engineers has been there to assess the situation, but I'm not certain if their timeline for a restart is realistic. Nevertheless, we are ensuring we have other options to get our coal to market. As for the increased costs we discussed related to CFR, the potential longer distances for coal transportation have raised our transportation costs. Additionally, issues in the Red Sea have significantly increased freight costs.

Nathan Martin, Analyst

Appreciate that, Walt. And then maybe sticking with the cost for a second. Again, you just mentioned, obviously, that the $125 to $135 cost per ton guidance for the year includes some of that additional labor. Just curious, is there a net price or net price range that you guys are assuming in that full-year cost guidance range?

Dale Boyles, CFO

Yes. We're around between 250, 260 gross index. PLV index.

Nathan Martin, Analyst

Very helpful, Dale. I appreciate that. And then maybe just one more kind of going back to the capture rate, and you guys had a good idea. I'm sure the guys did a great job kind of explaining the shifts you've seen contract to spot back to maybe a normal higher level of contract coal this year versus 23%. Also talked about obviously the High-Vol A shift at the Mine 4. But with the increase in Pacific Basin sales you guys called out versus typical Atlantic markets, how should we think about your capture rate going forward? As the last few quarters, it has lagged and been below your kind of historical level, let's call it, 90% plus or minus?

Dale Boyles, CFO

Yes, Nathan, it's a bit challenging to predict given all the changes happening. Our target is around 85% to 90% of the PLV index. The pricing from Mine 4 and other indices leads to different outcomes since they no longer base off the PLV. This situation has been worsened by the previously discussed price relativities, which were in the mid-90s last year but have since dropped to around the 80s. Some of this is due to demand imbalances and supply issues. We believe those relativities will return, but it may take some time. So, consider it as 85 to 90 while we aim to maximize our margins, similar to how we increased our margin by 63% from Q3 to Q4.

Chris LaFemina, Analyst

Hi. Thanks, guys. Thanks for taking my question. So I wanted to ask about Mine 7. But first, on the CapEx profile. So if we have $1 billion of total CapEx for Blue Creek, based on your 2024 guidance by the end of this year, you'll have spent a little more than $700 million. Does that mean $300 million more in 2025? And then in addition to kind of general sustaining CapEx, looking at a 2025 CapEx budget of between $400 million and $500 million? Is that roughly correct?

Walter Scheller, CEO

That's likely a bit optimistic for 2025. I think some of that spending will carry into 2026 as we complete the project. But you're correct, we expect to be over 700 million by the end of the year and probably around 200 million or so next year, with completion in 2026.

Chris LaFemina, Analyst

And is there a reason why you haven't explicitly changed the CapEx guidance for Blue Creek? You've talked about the 25% inflation, but you haven't actually formally adjusted the numbers. Are you working on specific contracts around that? Or are there other reasons why you might not have formally changed that number yet?

Dale Boyles, CFO

That is the number, Chris. So that's the math. But there are a lot of contracts that still need to be signed to complete grading work and a variety of other tasks. We are only about 2.5 years into this project, so we have a long way to go, and there are hundreds of contracts involved. Right now, that's the trend, and that's where we're headed.

Walter Scheller, CEO

And I think that's based on a current expectation in terms of inflation. And I think one of the reasons we haven't given a real update is because we can't determine exactly what the inflationary pressures will be. So we've kind of left that. We recognize that, that could change in either direction right now.

Chris LaFemina, Analyst

Understood. So my question on Mine No. 7. So at what point does the depletion of reserves there start to impact your production volume and unit costs? You have, what, 7 or 8 more years of production there? Is it later this decade, where you start to see kind of more cost pressures there and potentially lower volumes as a result of depletion? Or is it possible to even extend the life beyond that time frame?

Walter Scheller, CEO

Yes. Our life, actually, what we have right now is just in reserves, we're probably at 13 years, I believe it is, and then resources go beyond that. And we continue to look at what we have and what we can get to continue the total reserve for that coal mine.

Lucas Pipes, Analyst

Thank you very much, operator. Thank you for the follow-up question. I wanted to ask kind of on capital returns and how you think about that. Why not maybe do a little bit on the buyback side versus specialty, would be kind of interested how do you think about that? Thank you.

Dale Boyles, CFO

Yes, nothing has changed in our approach. Our capital allocation priority is Blue Creek. If we have excess cash, we will continue to allocate it in the same way we have been. I don't foresee any changes until Blue Creek is operational, which is the earliest possible time. We have considerable state NOLs, and all the rules and restrictions I have discussed over the past seven years still apply to those state NOLs, which total around $900 million. We still have a clear path to utilize some of these NOLs. Therefore, our current focus is on Blue Creek, and if we do have some extra cash, we will use it, likely in a more special context until we make further progress with Blue Creek.

Lucas Pipes, Analyst

That's very helpful. And Dale, just to make sure I understood you right. You have about $900 million of state NOLs. And at the current level of profitability, called Q4. How long would you expect those NOLs to kind of last?

Dale Boyles, CFO

Well, that's the $64,000 question there, Lucas, depends on what prices are and profitability over the next several years. So mean those NOLs go out until like 2034, something like that, when they start expiring. So they have a long life on them right now. But if we have more profitable years like the last 2 years, we'll burn through them really fast potentially with Blue Creek up and running.

Lucas Pipes, Analyst

Got you. And so in terms of like, when I think about, call it, 2024 cash flow impact from the NOL. So like what is the kind of net impact on your effective tax rate? Like how much cash benefit are you seeing from the NOLs this year, 2024 versus not having them?

Dale Boyles, CFO

Well, I mean the benefit is basically what your state tax rate is 5%, 6%. So that's your benefit on the state side.

Lucas Pipes, Analyst

Got it. Got it. That's very helpful. Thank you, thank you for that. And then maybe just one quick follow-up on the Blue Creek CapEx front. You mentioned earlier that a lot of things are kind of still to be finalized. You have that range out of 25% to 30%. What gives you the confidence in that number given that you still have to finalize contractors and such, would appreciate the additional color? Thank you.

Dale Boyles, CFO

Yes. If you take a look at any construction index, you’ll notice that the supply of labor and materials has been fairly consistent. This is a significant issue in the sector. It’s easy to read reports and see numbers like 3.4% decreases, but that doesn’t reflect the mining sector where we’ve observed a substantial rise in labor and material costs. Over the past three years, we’ve consistently discussed inflation in this sector. I don’t expect this to change. We might experience a period with slightly less or more inflation, but it’s difficult to predict right now. We are only halfway through this situation, and there’s still a long way to go. These contracts aren't just fixed-price agreements; contractors aren't likely to lock in steel prices only to face rising costs later. We have mechanisms to pass costs along, and while we try to work with contractors on these agreements, managing a project of this magnitude involves numerous complexities. It wouldn't be wise for us to estimate a fixed total cost because predicting such specifics is unrealistic. We need to remain pragmatic about the potential changes over the next two and a half to three years, and we will provide updates as needed, but currently, there’s no update to share. That trend is ongoing.

Lucas Pipes, Analyst

Well noted. I appreciate that. And maybe just to put a bow on it. With all of that, you feel 25% to 35% is the right range?

Dale Boyles, CFO

For now, yes.

Operator, Operator

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

Walter Scheller, CEO

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

Operator, Operator

Thank you. Thank you all for participating. You may now disconnect.