Earnings Call Transcript
Warrior Met Coal, Inc. (HCC)
Earnings Call Transcript - HCC Q4 2021
Operator, Operator
Good afternoon. My name is Betsy 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 2021 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. This call is being recorded and will be available for replay on the company's website. 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 have also been asked to note that the company has posted reconciliations of the non-GAAP financial measures discussed during this call. In the tables accompanying the company's earnings press release located on the Investors section of the company's website. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the Investors section of its website. Also, for more labor-related information, go to warriormetcoalfacts.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks.
Walt 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 2021 results. After my remarks, Dale will review our results in additional detail and then you'll have the opportunity to ask questions. During the fourth quarter, we were pleased to deliver our most profitable quarterly results in the last three years on the back of strong customer demand and our ability to capitalize on a favorable pricing environment. The global supply of Met Coal remains tight during the fourth quarter, even with China continuing to reduce its steel production. We are well-positioned from a cost and supply standpoint to take advantage of the current strong market for high-quality premium met coal, which has been strengthened by robust economic growth. In addition, we capitalized on favorable conditions within the capital markets to refinance our senior notes and extend the maturity of our ABL facility in the fourth quarter, which Dale will discuss in more detail later in his prepared remarks. As reported cases of COVID-19 rose during the fourth quarter and impacted most of the country, we continued to take the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations and regulators to protect the health and safety of our employees while maintaining our operations. I would like to thank our employees for their hard work and dedication to safety during these challenging times. While we continue to run the operations at lower operating rates due to the UMWA strike, we never changed our philosophy or dedication to providing a safe working environment for our employees. In fact, despite the disruptions during the year, our safety incident rate dropped significantly last year to 1.25 rate from a 3.36 rate in 2020, which we believe is significantly better than the underground mining industry. Global market demand and pricing over the quarter were solid, largely driven by strong ex-China demand and overall supply tightness. However, we did experience a higher degree of volatility as we saw CFR China prices drop from their all-time high of $615 per metric ton on October 21 to a low of $337 per metric ton at year-end. Most of the 45% price erosion occurred over a short period of 4 weeks and was caused by a combination of government mandated steel production cuts and a governmental focus on domestic coal production, as well as a clearance of stranded Australian coals from bonded warehouses. Despite the release of these coals, the bandwidth and protocols remain fully in place. During the quarter, we saw Chinese buyers retract from the spot markets, leaving very few transactions to support the indices. Similarly, the FOB Australian Index corrected from a high of $403 per metric ton on November 5 to a low of $315 per metric ton. Contrary to the CFR China Equivalent, the FOB Australian Index managed to recover some of the pricing erosion, closing the year at $357 per metric ton. Supply tightness in Australia due to weather disruptions and maintenance was the primary driver for the late December uptick in the index. It is interesting to point out that for the last 10 days of the year, the CFR China index was actually at a discount to the FOB Australian Index, a situation that has persisted into 2022. As recently reported by the World Steel Association, global pig iron production increased by 0.6% for the full year of 2021, with Chinese production decreasing by 4.3%. The decrease in China's production was expected given the governmental mandate to reduce production year-over-year. China was the only country among the major producing countries to experience a decline year-over-year. Excluding China, which makes up 66% of the world's pig iron market, the rest of the world's production grew at an impressive rate of 11.4%. As for Warrior, our sales volume in the fourth quarter this year was 1.5 million short tons, compared to 2.2 million short tons in the same quarter last year. This quarter was lower primarily due to the ongoing strike which lowered total production. We're now operating near normal inventory levels as well. Our sales by geography in the fourth quarter were 44% into Europe, 10% into South America, and 46% into Asia. The higher-than-normal sales into Asia were primarily driven by Chinese demand that we capitalized upon during the fourth quarter, while capturing 100% of the CFR China index price on the day of the sale. Our spot sales in the fourth quarter were approximately 15% and were 33% year-to-date. Our normal expectation of spot sales is approximately 20%. The higher spot sales for the year were primarily attributed to the increased sales to China. Our gross price realization for the fourth quarter of 2021 was 85% of the Platts Premium Low Vol FOB Australian Index price, and was lower than the 102% achieved in the prior-year period. The lower gross price realization was primarily due to a rising market this year versus the declining market last year. Also, 47% of our sales volume in the fourth quarter this year occurred in the month of October, which were based on lower met coal prices from the third quarter. Let me say a word about the gross price realization. The metric is a point-in-time calculation that can be significantly impacted by many factors, including the timing of sales, shipments, and the volatility of indices, and does not reflect the discounting of our product. In addition, explaining the changes in our gross price realizations is a time-intensive process every quarter, which we believe provides little to no value to our business or our stakeholders. We do not place any significance on the metric internally. Therefore, this will be the last quarter we report this metric. Instead, we will focus on average net selling prices, which we believe provide a more meaningful and relevant measure. Production volume in the fourth quarter this year was 1.1 million short tons compared to 1.8 million short tons in the same quarter of last year. The tons produced in the fourth quarter resulted from running both long walls and four continuous miner units at Mine 7, and one continuous miner unit at Mine 4. By running the continuous miner units, our lead days or float times have not materially changed since April 2021 and are still several months out into the future. The Mine 4 long wall remained idle during the fourth quarter. We finished the year running the mines with a combination of salary and hourly employees representing approximately 50% of the normal workforce, while producing almost 75% of the normal production volumes. Capital spending in the fourth quarter was $24 million. For the full year, we spent $58 million on capital expenditures, which was the lowest amount since 2016, and 34% lower than last year. This is partly due to the idling of Mine 4 during the year. The mines have been well-capitalized by significant number of investments since 2017, which provides flexibility in managing our spending during pandemics, industry cycles, and other disruptive impacts to the business. I will now ask Dale to address our fourth quarter results in greater detail.
Dale Boyles, CFO
Thanks, Walt. As Walt noted in his remarks, the market for met coal was strong during the fourth quarter, driving prices to levels never seen before. The strength of the met coal and steel markets and strong economic recovery from COVID, coupled with robust capital markets, led us to capitalize upon favorable timing to refinance our senior notes and ABL facility. We believe the timing of the refinancing was excellent as the markets had been experiencing a significant amount of inflation, and we believe that the Federal Reserve would start raising interest rates sooner rather than later to manage it. We believe that it would have been more costly and more difficult to complete a refinancing if we waited to do it closer to the maturity of the senior notes. Our decision to refinance our senior notes and ABL facility during the quarter accomplishes several important goals. It enhances our already strong balance sheet and financial position, takes advantage of current low borrowing rates, which are expected to start rising in the near future, modestly lowers our cash interest expense, and further increases our financial flexibility with the maturity extension as we pursue the creation of long-term shareholder value. It will also position us to resume our growth strategy and increase our return of cash to shareholders in the future. For the fourth quarter of 2021, the company recorded its largest quarterly net income in three years on a GAAP basis of approximately $139 million or $2.68 per diluted share compared to a net loss of $34 million or $0.66 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the fourth quarter, excluding the nonrecurring business interruption expenses, idle mine expenses, and the loss on early extinguishment of debt, was $3.17 per diluted share compared to an adjusted net loss of $0.63 per diluted share in the same quarter last year. Adjusted EBITDA was $240 million in the fourth quarter of this year, the largest in three years, as compared to $9 million in the same quarter last year. The quarterly increase was primarily driven by a 193% increase in average net selling prices, partially offset by a 34% decrease in sales volume. Our adjusted EBITDA margin was 58% in the fourth quarter of this year, compared to 4% in the same quarter last year. Total revenues were approximately $416 million in the fourth quarter compared to $212 million in the same quarter last year. This increase was primarily due to the 193% increase in average net selling prices, offset partially by a 34% lower sales volume in the fourth quarter versus the same period last year. In addition, other revenues were positively impacted in the fourth quarter this year by a 121% increase in natural gas prices plus a non-cash mark-to-market gain on our gas hedges of approximately $7 million. The Platts Premium Low Vol FOB Australian Index price averaged $260 per metric ton higher, or up 241% in the fourth quarter this year compared to the same quarter last year. The index price averaged $369 per metric ton for the fourth quarter. Demurrage and other charges reduced our gross price realization to an average net selling price of $274 per short ton in the fourth quarter this year, compared to $94 per short ton in the same quarter last year. Cash cost of sales was $153 million, or 39% of mining revenues in the fourth quarter, compared to $190 million, or 92% of mining revenues in the same quarter last year. The decrease in total dollars was primarily due to a $65 million impact, a 34% lower sales volume, partially offset by $28 million of higher variable costs associated with price-sensitive wages, transportation, and royalty costs. This resulted in a cash margin of $168 per short ton in the fourth quarter, compared to only $7 per short ton in the same period last year. Cash cost of sales per short ton FOB port was approximately $106 in the fourth quarter compared to $86 in the same quarter last year. Transportation and royalty costs accounted for $22 of the increase offset slightly by lower other production costs, which tend to be relatively stable most of the time. Cash costs and price-sensitive items such as wages, transportation, and royalties that vary with met coal pricing were significantly higher in the fourth quarter this year compared to the same quarter last year. As you may remember, transportation costs lag on a one-quarter basis and prices averaged a $105 higher in the fourth quarter versus the third quarter this year. As a result of the significantly higher prices period-over-period, favorable transportation royalty costs are significantly larger components of the cost per ton than the normal approximately one-third percentage. Favorable transportation royalty costs were 43% of the cost per ton of $106 in the fourth quarter this year compared to only 27% in the same quarter last year, driven primarily by higher met coal pricing. As we look forward into the first quarter, we expect our cash cost per ton to increase over the fourth quarter as transportation rates reset in the first quarter based on the average of higher met coal prices in the fourth quarter. Keep in mind that index prices averaged $105 per metric ton higher in the fourth quarter than the third quarter of 2021. Also, we expect the variable cost of royalties to increase in the first quarter based on the higher met coal prices. Combined, transportation and royalties per short ton will be a higher percentage of our cash cost per short ton in the first quarter than the fourth quarter of 2021 because our production or mining costs remain fairly stable, except for the smaller variable labor cost. We also expect to see increases in labor costs next quarter as we increase our hourly headcount at the mines, plus the impact of expected inflation on material and supply costs. Depreciation depletion expenses for the fourth quarter this year was $39 million and flat compared to last year's fourth quarter. However, the fourth quarter this year includes the immediate recognition of $8 million of expense related to Mine 4 depreciation that would have normally been capitalized as inventory as it was produced. However, since Mine 4 was idled in the fourth quarter, it was instead directly expensed. This increase in expenses was offset by $8 million due to the 34% decrease in sales volume. SG&A expenses were about $9 million or 2.3% of total revenues in the fourth quarter this year, and were higher than the same quarter last year, primarily due to higher employee-related expenses, partially offset by lower audit and legal expenses. During the fourth quarter, we incurred incremental non-recurring business interruption expenses of $7 million directly related to the ongoing UMWA strike. These non-recurring expenses were primarily for incremental safety and security, legal and labor negotiations, and other expenses. As Mine 4 remained idle during the fourth quarter, except for the one continuous miner unit that was running, and as Mine 7 ran at a reduced rate of production, incurred $14 million of idle expenses. These expenses were for electricity, insurance, maintenance, labor, taxes, and are primarily fixed in nature. The amounts were higher than the second and third quarters as we incurred more labor costs from higher headcount in Mine 4, costs associated with restarting one continuous miner unit at Mine 4, and preparation work anticipating restarting the longwall at Mine 4 in the first quarter of 2022. Net interest expense was about $9 million in the fourth quarter and included interest on our outstanding debt, interest on equipment financing leases, plus amortization of our debt issuance costs associated with our credit facilities, partially offset by interest income. A slight increase quarter-over-quarter was primarily related to new equipment financing leases. The loss on early extinguishment of debt represents the write-off of debt issuance costs and premiums paid in connection with the refinancing of our senior notes during the fourth quarter. We recorded income tax expense of $27 million during the fourth quarter this year on pretax income of $165 million compared to a benefit of $11 million in the same quarter last year on a pretax loss of $45 million. The fourth quarter tax expense was primarily due to pretax income, partially offset by benefits for depletion and additional marginal gas well credits. The fourth-quarter expense primarily represents the utilization of our tax shield, and therefore, we paid no cash income taxes. Turning to cash flow. During the fourth quarter this year, we generated $151 million of free cash flow, which resulted from cash flows provided by operating activities of $175 million less cash used for capital expenditures and mine development costs of $24 million. This resulted in free cash flow conversion of 63% this year versus last year's fourth quarter of 13%. Free cash flow in the fourth quarter of this year was negatively impacted by a $34 million increase in net working capital. Increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing, offset partially by lower inventories due to higher sales volume. Cash used in investing activities for capital expenditures and mine development costs were $24 million during the fourth quarter of this year compared to $29 million in the same quarter last year. Cash flows used by financing activities were $24 million in the fourth quarter this year, and consisted primarily of payments related to the refinancing of our senior notes of $14 million, capital lease payments of $7 million, and payment of the quarterly dividend of $3 million. Our total available liquidity at the end of the fourth quarter was $479 million, representing an increase of $123 million, or 35%, over the third quarter, and consisted of cash and cash equivalents of $396 million and $83 million available under our ABL facility. This is net of outstanding letters of credit of approximately $9 million. With the refinancing in the fourth quarter, we have no near-term funding debt maturities. We believe our total liquidity position, strong balance sheet, and low and variable cost structure are strengths in the company that will allow the company to navigate volatile markets and challenging business conditions. As a result of the uncertainties facing the business these past two years, the company has been stockpiling cash, resulting in net debt of less than zero, further strengthening the balance sheet and providing the company a significant amount of flexibility to navigate challenging markets. We continue to appropriately adjust our operational needs, including managing our expenses, capital expenditures, working capital, liquidity, and cash flows. In addition, we have delayed the development of the Blue Creek project, and our stock repurchase program also remains temporarily suspended while we accumulate and preserve cash and liquidity. The combination of strong met coal markets with high prices and the refinancing of our debt, pushing out the maturities, has resulted in a stronger balance sheet and positions us to resume our growth strategy and increase returns of cash to stockholders in the future. However, at this time, we're taking a patient wait-and-see approach to capital allocation and have not made any other significant changes to our capital allocation policy except for the recent announcement to increase the fixed quarterly dividend by 20%. We continue to evaluate market conditions for 2022 while expecting a met coal pricing reset to lower levels and continue to negotiate with the union on a new contract to resolve the ongoing strike. We continue to monitor changing Chinese policies that may significantly impact the met coal and global steel markets. And finally, we expect to re-evaluate the prospect of developing our Blue Creek reserves in the coming months. Now turning to our outlook and guidance for 2022. We believe we are well-positioned to fulfill anticipated customer commitments for 2022. In the current operating environment and without a new union contract, we believe that our production and sales volumes will be as outlined in the outlook section of our earnings release. The volumes outlined include the restart of Mine 4, although at lower production rates, and running Mine 7 at lower operating rates than normalized production.
Walt Scheller, CEO
Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments on our outlook for the first quarter and full-year 2022. As Dale noted earlier in his remarks, our cash cost per short ton in the first quarter 2022 is expected to be higher than last quarter, and possibly the highest we've ever seen in our business as a result of Met Coal prices at all-time highs. This is not necessarily a bad thing because our margins are expected to be higher as a result of the higher Met Coal prices. However, this negatively impacts our variable costs for wages, transportation, and royalties. We expect transportation royalty costs which are normally about a third of our cash cost of sales to be a significantly larger portion of our total cash costs in the first quarter than in previous quarters. Another factor that may negatively affect our cash costs is the impact of inflation. U.S. inflation hit its fastest pace in nearly four decades in 2021 as pandemic-related supply and demand imbalances along with stimulus measures intended to shore up the economy pushed the consumer price index up to a 7% annual rate. That rate of inflation continued to rise at the end of January to 7.5%, a 40-year high. We expect COVID-19 to continue impacting global supply chains, resulting in shortages, extended lead times, and increased inflation, thereby impacting our operations and profitability in 2022. While we did not experience any material inflation in 2021, we're expecting anywhere from 10% to 25% increases in steel prices, freight rates, labor, and other materials and supplies in 2022. These increases affect, among other things, the cost of belt structure, move bolts, cable, magnetite, rock dust, and machinery and equipment purchases. We're applying a number of different strategies to mitigate the impact of these challenges on our operations. Liquidity, extending our demand planning, typing purchase orders earlier, utilizing short-term contracts, and leveraging our supplier relationships. Looking ahead, we understand that there are questions about the status of the UMWA negotiations, estimates of potential outcomes, and possible timelines. Unfortunately, we cannot speculate at this time on any of those topics for various reasons. Let me just say we value and appreciate the hard work of our hourly employees. Our priorities have always been keeping people employed and working safely with long-lasting careers, and ensuring the company remains financially stable in a particularly volatile met coal market. While we are disappointed the union continues with the strike, we continue to negotiate in good faith to reach a resolution. Since the beginning of 2022, we've seen a renewed interest from Chinese customers, albeit with limited transactions, and expect the country will re-establish its normal purchases of imported coals to supply their steel mills once the Chinese New Year holiday and Olympics are past. The new year has also exposed the well-known vulnerabilities of the global met coal supply chain for both mining and logistical operations. With extreme rain in Australia, winter storms in North America, disruptions in Russia, as well as the upsetting force that the new COVID variant had on labor. As such, we expect pricing to remain strong throughout the first quarter. However, we do acknowledge that the risk of a pricing correction is high given the extreme levels we are currently experiencing. But we also know that predicting the timing and magnitude of such a correction is difficult, if not impossible. For that reason, we expect relative strength in prices for the short-term and we hope that when a pricing correction does start, it will be a slow and steady decline back towards historical levels. We remain prepared for a quick and steep correction however, should it come. As a reminder, if we encounter a steep downward correction in the quarter, our cash costs will lag to the price decrease as we previously indicated by about one quarter. You may have noted in our earnings release that we begin providing our annual guidance again for the company. We believe that we are well-positioned to fulfill our customer volume commitments for 2022 of approximately 5.5 to 6.5 million short tons. This range assumes we are unable to reach a new contract with the union in the near-term. We expect this range of production from operating both long walls in Mine 7 at lower operating rates and restarting the long wall in Mine 4 on a limited schedule at about 50% capacity. We will continue to ramp up our continuous miner units and long walls at both mines. As we expect our headcount to increase during the year. By continuing to run the continuous miner units, our lead days are still months into the future and have not deteriorated significantly since April 2021. If we are able to reach an agreement soon with the union, we believe that we could ramp up to a run rate of production of approximately 7.5 million short tons in about three to four months. Before I close, I want to take a moment at the end of our fiscal year to reflect on what has been an extraordinary journey for our company over the past two years. Between the impact of the COVID-19 pandemic and the ongoing UMWA strike, Warrior had to manage through significant headwinds in market volatility. But when adversity appears, we have the opportunity to show our true strengths, and Warrior has shown these true strengths across the company. The resiliency of our business model has been tested time and again over the past few years, and our financial results show our ability not only to endure persistent challenges, but also to overcome them with significant out-performance. I encourage our stakeholders to look at our strengths and acknowledge our achievements, as our resilience in particular is attributed to the dedicated employees who come to work every day. They are the real heroes of this story. Moreover, their efforts build on the foundational and in some cases unique building blocks of our company, which are a dedicated and high-performing workforce maintaining a safe work environment, premium products in high demand that achieved the highest prices even in adverse price environments, a variable cost structure that flexes with prices, delivering profitability through the cycle, our logistical cost advantage to the global seaborne markets, and a strong balance sheet with low leverage and minimal legacy liabilities, and disciplined financial policies to ensure sustainable performance. Finally, after achieving what we have in the past two years, we enter 2022 with great optimism for our business and the confidence that we can weather any new storm that could disrupt our momentum. We're proud to improve our sales in the most difficult of times. With that, we'd like to open the call for questions.
Operator, Operator
At this time, I would like to remind everyone that to ask a question, please press star one on your telephone. We will pause for just a moment to compile the Q&A roster. The first question today comes from David Gagliano with BMO. Please go ahead.
David Gagliano, Analyst
Hi, thanks for taking my questions. I just wanted to ask about the capital allocation policy considering the cash generation. Warrior generated about looks like equivalent about a 40% annualized free cash flow yield in the quarter and that was on lower than current prices and higher than 2022 targeted cash costs, the balance sheet is in great shape and I understand the ongoing strike and concerns about prices falling. However, my question is, will Warrior pay out special dividends, even in the midst of the ongoing strike?
Dale Boyles, CFO
Thanks, Dave. Your question is for Dale. It’s a possibility. We mentioned several factors we want to clarify, such as our expectations for the market for the rest of the year. With the Chinese returning after the new year and the Olympics, we want to see what policies and market impacts they may have. We also need to consider the strike and review the developments at Blue Creek. The data we have on Blue Creek is about two years old, and we want to update the total project costs and metrics to see if it still makes sense. Once we gain clarity on these issues, we might have an update on our capital allocation policy. We recently raised our quarterly dividend by 20%, which, while a small change, is still beneficial for us.
David Gagliano, Analyst
Okay. And what's the reasonable timeline to expect those updates to be completed and have a more definitive capital allocation policy plan in place?
Dale Boyles, CFO
Well, really nothing changed in our policy. But maybe in the next few months.
David Gagliano, Analyst
Okay. That's helpful. And as you think about Blue Creek versus returning cash to shareholders, as Warrior considers those two options, what's the preference at this point?
Dale Boyles, CFO
We don't have a specific preference. We're aiming to balance both options. We'll have to see how Blue Creek develops and what the capital construction costs will be, considering the current inflation and its impact on the project. We want to ensure we can pursue both approaches, rather than making a choice between one or the other.
David Gagliano, Analyst
Okay, great. Thanks. And my last question. The $95 to $100 cash costs range, you mentioned that was on lower than current prices, obviously. What's the reference price embedded in that $95 to $100 assumption for the full year? And what would those cash costs be if magically prices happen to stay where they are now for the full year?
Dale Boyles, CFO
If prices remain at their current levels, there will still be an increase due to the one-quarter lag in transportation costs. You might see first-quarter cash costs per ton rise by 10% to 15% compared to the fourth quarter, which could also reflect some inflation. There are many factors to consider regarding cash cost guidance. We anticipate a significant correction beginning in the second quarter that will last for the rest of the year. However, this will be offset by higher volumes expected throughout the year. Additionally, transportation costs will also lag behind, while royalties will adjust sooner. Therefore, while the cash cost guidance might appear somewhat conservative, we believe prices will correct notably for the remainder of the year as we address various supply chain issues.
David Gagliano, Analyst
Okay. Just to clarify what's behind that significant decline, what was the assumed benchmark price for the full year that leads to the $95 to $100 range? This will help me align with the assumptions we're incorporating into our model.
Dale Boyles, CFO
We're still working on somewhere near a $200 number.
Lucas Pipes, Analyst
Thanks very much. Good afternoon, everyone, and nice job on the quarter. I wanted to follow up a little bit on Blue Creek and I think you used the word re-evaluation. Can you share or update us on how broad this re-evaluation is? Is it the CapEx cost component of this project or strategically also how this project just fits into your longer-term vision of the coking coal market? Would really appreciate your thoughts on that.
Walt Scheller, CEO
I think we're pretty settled on where this fits in from a long-term standpoint in the company's portfolio. For us, the issue is especially with changes in steel prices and labor shortages, and some things like that, what's the impact going to be on construction, capital spending, and timeline for development. So we're redoing the network to ensure we're confident about where those sit today.
Lucas Pipes, Analyst
That's very helpful. And what's the timing? When should we expect an update on that re-evaluation?
Walt Scheller, CEO
The same as the capital allocation policy. We are looking at both right now, and our expectation is over the next few months we will have more clarity around those topics.
Lucas Pipes, Analyst
That's very helpful. Thank you for that. And on the volume cadence for the year, I may have missed it, but in Q1 should we expect higher volumes because you don't have a long wall move? How should we split the volume comp midpoint of $6 million tons currently between the four quarters?
Walt Scheller, CEO
The real uptick in the first quarter is going to be the fact that we are now running the long wall at Mine 4. So we just started that long wall up so our expectations were that it would take a little while to ramp. But the additional tons as we go out through the year, we said we expect Mine 4 to be at about a million tons for the year. So you can expect that it won't be a quarter of a million, quarter-by-quarter. It should ramp a little bit. But it's not going to be far off from that. That's the real additional — that's where the additional tonnage is coming from.
Dale Boyles, CFO
Lucas, this is Dale. So we've been the last two quarters about 1.1 million tons produced with Mine 7 running at its lower rates. So annualize that to 4.4, add 1 million tons for the Mine 4 long wall, making it 5.4, and then we have the continuous miner units that are running in Mine 4 too. So that just rounds you to the bottom end of that range.
Lucas Pipes, Analyst
Perfect. That is super helpful. Really appreciate that. That addresses my most important questions for now. I will jump back in the queue. Thank you and best of luck.
Dale Boyles, CFO
Thank you.
Walt Scheller, CEO
Thanks.
Nathan Martin, Analyst
Hey, good afternoon, guys. Congrats on the quarter. Thanks for taking my questions. Some of my bigger questions were already addressed, so maybe just some more modeling-related questions. I think you guys mentioned about 46% of sales in the quarter were CFR China prices. Any comments on how many sales you might expect to sell to Asia at CFR China prices within the 22 guidance?
Walt Scheller, CEO
You know what, it's much more difficult to look at '22 because as we've said, it's flipped in terms of CFR versus FOB Australia right now. It doesn't make a lot of sense with where the market is today to be moving coal into China from our standpoint. However, we don't expect that dynamic to stay long term, so we can still see tons moving into China. We always move tons also into Japan and Korea as well. But as far as specifically into China, that's just going to be a wait and see what happens in the market in China.
Nathan Martin, Analyst
And then just Walt find something.
Walt Scheller, CEO
Sure.
Dale Boyles, CFO
Your question touches on an important point. The 47% represents the volume that moved in and out during October, encompassing total volumes beyond just China. There may have been some confusion since we sold all of our CFR China at 100% of the index within the fourth quarter, which is quite similar to what we saw previously.
Nathan Martin, Analyst
I could've misunderstood Dale. I appreciate that. Yeah, I thought it was 46% sales to Asia like you guys breakdown from Europe, South America, etc. But thanks for clearing that up. I guess maybe I'll just shift over really quickly to inventories, obviously you guys exceeded your full-year '21 sales guidance by a pretty good amount which you said was possible in the last call, but your inventories got down to about 243 thousand tons it looks like previously, I think you referenced maybe a 400 thousand ton level as kind of a good comfort level. Does your '22 guidance assume staying at these new levels? Or are you looking to build inventory backup a little bit to that prior level?
Walt Scheller, CEO
I expect us to increase our inventory a bit. When it drops to around 240, it becomes quite limited at the port in terms of loading vessels. We would prefer to be at a higher level than that. However, that doesn't mean we won't try to expedite shipping an additional vessel or two by the end of the year to get our numbers back to the 250 to 300 range. We are more comfortable with our inventory being closer to around 400.
Nathan Martin, Analyst
Got it. Thanks. And then maybe sticking you're putting an extra vessel or two, well, I think I asked this last quarter and I know transportation doesn't always work exactly how you want, but maybe just some updated thoughts on your rail and barge service currently?
Walt Scheller, CEO
We've experienced some challenges, similar to others in the industry, with rail transport; however, overall, we are quite pleased with both barge and rail services, and we have been able to transport our coal to the port in a timely manner. Therefore, it has not posed a significant problem for us.
Nathan Martin, Analyst
Great. And then maybe one more. I think I heard in your prepared remarks you guys were adding hourly employees. I think there was a part of the discussion of labor costs. Can maybe we get a little more color there? Is this specifically just for the Mine 4 ramp? Any thoughts?
Walt Scheller, CEO
Now, we continue to have hourly employees from Mine 4 and Mine 7 workforces that continue to cross the picket line and joined the workforce. We're also having new hires as well and our intention is to continue to see that occur throughout the year and to grow month by month, additional employees. When we get to the point where we can add a continuous miner unit, if we add a continuous miner unit. When we get to the point where we've got enough continuous miner units to add another shift, the long wall operations at Mine 4 will do that. So it's just a matter of how quickly we are able to get people in here. We're up to over 300 hourly employees at this point and continuing to grow.
Nathan Martin, Analyst
Great, very helpful guys. Thanks. I will leave it there. Appreciate the information; best of luck in '22.
Walt Scheller, CEO
Thank you.
Dale Boyles, CFO
Thanks.
Matthew Fields, Analyst
Hi, everyone. I don't want to revisit the Blue Creek project too much, but the capital expenditures for construction were estimated to be between $550 and $600 million, which was back in February 2020 before costs significantly increased. During your presentation, you discussed various funding options, including cash balances, equipment leases, cash flow, and capital markets. Given the likelihood of a higher total cost now, how do you plan to fund such a large capital project? What is your overall philosophy regarding funding this project, and what should the balance sheet look like? Specifically, how much debt would be appropriate for Warrior to assume to support this, and how do you view the other aspects?
Dale Boyles, CFO
We don't have all the answers yet, but we have several options available to finance the project and will aim for the optimal capital structure during the five-year construction period. Conditions will fluctuate, with periods of low and high prices, and we'll need to navigate those changes as we gather updated cost information. We are in a better position now than we were in 2019, having nearly $400 million in cash at the end of the fourth quarter, and with current prices, we expect to generate more revenue in the upcoming quarters. This provides us with the flexibility to explore various options rather than committing to one specific approach. Currently, we have no debt, but if we initiate Blue Creek, we would likely raise our minimum liquidity targets to protect the balance sheet. Historically, we've indicated that $100 million should be sufficient during downturns, as demonstrated in 2020, so we plan to increase that minimum during the construction phase, although I can't specify the exact amount right now; it will depend on the project's current situation compared to before.
Matthew Fields, Analyst
Okay. And then I know you're still re-evaluating things, like you said, for the next couple of months. But what do you think about maybe at this stage, as a growth strategy, building something like this over a series of five years versus being able to take a minority stake in maybe a large-scale met coal operation? I think one of your peers was in the news today saying maybe 10% of their stake might be in the market for a buyer. What's your take on build versus buy for something like that?
Dale Boyles, CFO
Well, we look at any, and I'll talk about them as acquisition opportunities. We compare everything to Blue Creek and it's going to have to be a darn good project for us to look at it, even though you're right, it's a five-year project and it takes time to get it up and get it productive. We're very confident in the quality of the call in the demand for what this call will be. As a result of that, we'll look at anything and will consider other options. But this is just an outstanding project and one that deserves and needs to be built.
Matthew Fields, Analyst
That's great. I appreciate that and we look forward to hearing the clarity on capital allocation and the Blue Creek decision in the coming months. Thank you.
Walt Scheller, CEO
Thanks a lot.
Jon Ogden, Analyst
Hello guys. And thank you very much for the presentation. I had a few questions. Fiscal China. What percentage of sales of that last year versus previously? I was just wondering if you have any business with China at all in previous years, and then if the market changes, Australia comes back in, would that mean you would go back to minimal China sales? And then why to name that question out to think that market as a whole. Some commentators have said that if Mongolia, the borders reopen, plus the Australia ban is removed, met coal prices will be tumbling very fast. That's one view. Now, my view is different because I think climate change concerns have constrained supply below the lay of coal and met coal as well. And also we’ve got a big ramp-up in the cement industry this year and the full reopening of most economies. Still demand is going to be actually going up. So there is a case to be made, a bull case, full supply and demand so we could have a strong year this year. So it will be interesting to get your thoughts on that. The other nuts-and-bolts question: what's the amount of tonnage you have committed this year? And is that fixed price or is that based on a benchmark? Then, what's your full worth in for royalties and transport? Is it a fixed percent? Or is there a ratcheting up of percent? Or do you transfer a base number and then, if you can give us a bit more detail on that?
Walt Scheller, CEO
We have many questions to cover, so I'll do my best to address a few points. First, let's discuss transportation costs and royalties. Our transportation costs are variable, and our royalties depend on a percentage of the coal sales price. When coal prices increase, the royalty value per ton also rises. For transportation, we have a formula with the railroads that adjusts based on coal prices from the previous quarter, making this cost variable as well. Last year, we experienced a situation where the difference between FOB Australia and CFR China pricing was favorable enough for us to ship to China, despite normally being at a transportation disadvantage. However, the situation reversed, with CFR prices dropping below FOB Australia prices. For us to ship coal to China, the market conditions must be right since most of our coal is sold under contracts linked to market formulas, with only about 20% available for spot sales in a typical year. Last year, we sold more on the spot market due to the CFR spread compared to FOB prices. It's unlikely that our sales to China in 2022 will match the levels of 2021 unless there is a significant increase in demand. Most of our coal sales are contracted and priced according to market conditions.
Dale Boyles, CFO
From there, Dale, buddy, what do you remember? What have I missed?
Walt Scheller, CEO
In the past, we had a very small amount of volume into China in 2020. Before that, due to the price difference for freight, we had no sales to China. This year, the issue arose mainly because of the difference between two indexes. When adjusted for comparison, it became more profitable to sell to China this year than in the past. If it shifts back to being unprofitable, we may not send any volume there. From what I see, we are slightly negative on the supply side relative to demand, suggesting a strong market this year. However, we do not expect prices to remain where they are today, and we are not counting on that. Currently, we observe robust demand for products. I don't anticipate demand being the cause of a price drop. I believe events in China will significantly impact global pricing. We hope for a return to normal levels at a gradual pace, but we are also prepared for a rapid decline if necessary.
Jon Ogden, Analyst
Thank you. Just a quick couple of small follow-ups. So what you're saying is that all the Chinese clients were when you were CFO, whereas your clients, your traditional clients are large places like Japan and Korea. Is that right? And then just looking at the two benchmark prices and seeing if it makes sense.
Walt Scheller, CEO
That's correct.
Jon Ogden, Analyst
Okay, thank you. Any thoughts on Chinese met coal production? Basically, there's a big hub in Shanxi and that is a very mature area. So would you expect that in the coming years Chinese structure will need to import more coal? And therefore, that could be support for the seaborne market?
Walt Scheller, CEO
I think China will continue to support the seaborne market and I think that's evidenced by where they put their newer steel mills, close to the coastal areas. I think they will always try to supply at least some of that domestic coal. But I think they will always be a big importer of metallurgical coal as well.
Jon Ogden, Analyst
Okay. Thank you very much, indeed.
Walt Scheller, CEO
Thank you.
Operator, Operator
As a reminder, if you have a question, please press star one. The next question is a follow-up from David Gagliano with BMO. Please go ahead.
David Gagliano, Analyst
Sure. Thanks. I just have a really quick follow-up on Blue Creek. In the past, there was also talk perhaps for you in a joint venture partner. Would that also be under consideration?
Dale Boyles, CFO
Yeah. I mean, all those thought options are still on the table, David. But if we're in a position to do this ourselves, I mean, why would I give away the project? So it's all good depending on what kind of terms, and if anyone can afford to do it. There are some other peers that are in some pretty challenging positions, so I'm not sure that they have the wherewithal to do it. But it's still an option because traders, marketers, customers, all those have expressed interest. I think we'll be looking at possibly trying to do an off-take agreement or something like that to lower our risk, but we think given the feedback from our customers, we can sell a whole volume and not be positioned where we have to do that. So we will have plenty of options available.
David Gagliano, Analyst
Right? Considering that you're going to have more cash than the total CapEx for the project in a pretty short period of time here, would the preference be to just go it alone, is that the preference or is it more complicated than that?
Dale Boyles, CFO
I don't want to say that right now until we see how this thing rolls back up again, the costs and everything. I think we want to kind of wait and keep our options open until we see what that looks like now.
Walt Scheller, CEO
Thank you.
Operator, Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.