Good afternoon, and welcome to the Hallador Energy Company Third Quarter 2021 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I’d now like to turn the call over to Ms. Becky Palumbo of Investor Relations. Please go ahead.

Thank you, Nat. Hello everyone, thank you for taking the time to join us today. As a reminder, this event is being webcast live and will be available on our website later today. Yesterday afternoon, we released our third quarter 2021 financial and operating results on Form 10-Q and issued a press release containing certain financial metrics. Both documents are posted on our website. Today, we will discuss financial results and our perspective on market conditions and outlook. Following the prepared remarks, we will open up the call for questions. As a reminder, some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the SEC. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, we have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise required by law to do so. With us today are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Now that we have the required preliminaries out of the way, Larry can start us off with the quarter’s financial overview. Larry, the floor is yours.

Good afternoon, everyone. Before I begin, I’d like to define some terms. We define free cash flow as net income plus deferred income taxes plus depreciation, depletion and amortization, plus reclamation accretion, change in fair value of hedges and stock compensation, less maintenance CapEx and the effects of our equity method investments. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization plus stock compensation, plus reclamation accretion and changes in fair value of hedges, less the effects of our equity method investments. Hallador reported net income of $8 million for the quarter or $0.26 a share, and $4 million year-to-date for the nine months or $0.13 a share. Our free cash flow for the third quarter was $14.6 million, and $26.4 million for the nine months. Adjusted EBITDA was $20.5 million for the third quarter, $43.2 million for the nine months. We paid down bank debt by $15.2 million for the quarter, $22.8 million for the year. Our bank debt at September 30 was $115 million, and our net debt was $110 million. Our debt-to-EBITDA leverage ratio was 2.29 times, well within our covenants. I’d like to now turn the call over to our CEO, Brent Bilsland.

Thank you, Larry. 2021 began slowly, but we’ll finish very strong for Hallador. In the first half of the year, we shipped 2.6 million tons. In the last half of the year, we anticipate shipping 3.6 million tons. This total shipments should come in around $6.2 million for 2021. This improvement in pace, when looking at third quarter results year-over-year, our revenue increased by 22%, and our shipments increased by 29% in the third quarter. Shipments outpaced coal production in Q3, and coal inventory was reduced by $21 million. We expect to produce 5.7 million tons to 5.8 million tons in 2021. We are currently ramping up production to 7 million tons for 2022 and 2023. We have all the equipment we need; we just need more people. We added 94 employees in the month of October, and we are focusing on hiring another 110 in the next two to four months. Once complete, new employees will represent roughly one-fourth of our workforce. It will take some time in training before this new workforce becomes efficient and our costs decline. Focusing on costs, Q3 production costs were elevated at $33.15 per ton, which is $2.95 over the prior quarter and $3.85 per ton over Q3 of 2020. The reasons for these increases are as follows. The operating phase at Oaktown 2 is now 10.5 miles away from the portal, requiring long underground travel times for our workforce. To combat this, we’re finalizing the construction of an employee and supply hoist expected to be operational today, which should reduce our labor expenses substantially, particularly at Oaktown 2. Additionally, we’ve been developing new underground mines that have required a lot of additional support and labor. This work is necessary but unfortunately not very productive from a coal production standpoint. This work should also be completed this month. We’ve experienced a few supply chain disruptions from our vendors, causing us to pay premium prices for some of our inputs. We expect these premiums to remain in 2021 and dissipate throughout 2022. Our Ace In The Hole Mine is reaching the end of its reserve life and will mine out in November of 2021. Our Ace is responsible for about 50% of our elevated cost structure during the quarter. We expect to open a new pit for Ace In The Hole Mine in 2022. We expect our production costs to stay elevated in Q4 and return to normal sometime in 2022 as our hoist becomes operational, supply disruptions dissipate, our workforce matures and our Ace In The Hole Mine transitions from an old reserve to a new reserve. Increased shipments and drawdown of our coal inventory created strong cash flows during the quarter, which we utilized to reduce debt. During Q3, we generated $24.1 million of operating cash flow and paid down our bank debt by $15.2 million. Our liquidity improved to $41.7 million in the quarter, and our leverage ratio decreased to 2.3 times at the end of the period. Looking at the markets, all markets have gotten substantially stronger as the year has gone on. Looking at gas, last year, the average price for NYMEX gas in 2020 was under $2. That’s the lowest average in over two decades, just to tell you how tough 2020 was. The first half of this year became the big recovery from that. We saw NYMEX gas prices average $3 in April of 2021 with the 12-month forward curve. Then it jumped up in August to $3.70 and in November it climbed up to $4.43. The strength in this market is based on the price of natural gas, which are quite strong through 2024. Coal export prices have also increased rapidly. In April, we saw API4 in the Asian market at $86. By October, that increased to $102 a ton. I think last night, it was up to $108. We’re seeing stronger prices in both Asia and Europe. Pricing for all forms of energy has dramatically increased since the beginning of 2021, most importantly, natural gas prices have improved to a point where coal has gained large amounts of market share for electricity production in 2021 and beyond. There have been many headlines discussing higher coal prices around the world, but what does this mean for Hallador presently and long term? As previously discussed, Hallador shareholders will see a strong finish to 2021. We’re expecting higher prices in the fourth quarter, somewhere in the $2.70 to $3 range. Next year, we expect our margins to be slightly better than 2021, but with shipments 13% to 15% higher at roughly 7 million tons. In 2023, we believe we’ll maintain sales at 7 million tons and see substantial margin improvements as legacy contracts roll off and are replaced by tons priced at today’s market. We believe that the next three years will be very strong from a sales perspective, and at the end of that time period, we should be at or near debt-free. How long will there be demand for coal is a question we frequently receive. On October 27, the MISO Independent System Operator announced that an emergency declaration is likely if harsh weather collides with unforeseen power generation outages in the next three months. They further stated that they have modeled several scenarios that could cause this to happen. MISO is simply very tight on capacity, leading us to believe that coal-fired baseload generation, with an on switch, will be needed much longer than many headlines suggest. If we sit here with all these coal plants operational today and MISO is warning of an emergency situation starting in December, what happens when you start to shut down some of these generators that do not have on switches? MISO estimates that its grid will not reach 80% carbon-free until 2050, which is 28 years from now. Thus, we believe Hallador is well positioned to continue generating positive cash flow for many years to come. And with that, I will open the call up to questions.

First question comes from Dustin Shapir, CastleKnight. Please go ahead.

Hi, and thank you for taking the question. You made the comment that in 2023, you’re selling some volumes at today’s market prices. Can you talk about today’s market price, and whether or not you’re seeing your customers extending the terms of their contracts?

As far as market prices, they are substantially higher for any new business. The significant aspect here is that we have a small open position for next year. We’re in negotiations with a customer to fill that, and we’re very confident we will get that done. If we don’t, we have other buyers behind them who would like to have that full. We just didn’t finalize the deal before earnings. We’re going to ramp up production, and we have the equipment to do that. For a price increase, we will see a price increase, and we’re seeing some cost increases. So, we expect our margins to be slightly better next year. We think our margins are much larger in 2023 because we are pricing a much larger percentage of our sales versus what we’re doing here in the third quarter. We’ll see more pricing increases in the fourth quarter. We didn’t have a huge open position in 2022, but we’re seeing volume increases that will help our EBITDA. We had some condition issues here in the third quarter that will carry a little into the fourth quarter, but those will dissipate, and we’re already coming through those issues. As our volumes increase, we’re hopeful that our cost structure will come back down, so we expect margins to be slightly better next year. We know volumes will be higher and will be significantly higher in 2022. We also strongly believe that our margins will increase substantially in 2023. For 2024, we haven’t spent a lot of time pricing out there yet, but the gas prices and the curve still look promising. Our business has materially improved looking over the next three years, and we feel confident about our visibility in free cash flow and paying down debt.

Got it. Very helpful. And where are today’s spot prices?

Again, we’ve got ongoing negotiations, so we don’t emphasize what spot prices are today. There seems to be dramatic differences depending on the time period you are talking about. What’s unusual about this period is the market is still very short on coal going into winter, and we believe buyers will still be short. MISO stated that if it gets cold and there’s an unexpected outage of a generator in their system, they’ll declare an emergency. The capacity is tight. We’ve seen many headlines about replacing generation, but it seems challenging considering that the capacity is already tight. We feel that pricing is much stronger, and we believe these assets must run for many years. MISO agrees, although they don’t consistently release that information. You can find it in their publications.

Got it. That’s very helpful. On 2023, you sold a little under $4 million, and you’re expecting to produce or sell around $7 million. That leaves about $3 million that you haven’t sold so far. Could we think of that as having prices 50% to 100% higher than today levels?

I’m not sure how to respond to that. The open position in pricing is substantial; we just know that it’s going to be significantly higher. You’ll likely see our average price move up somewhere in the 10% to 15% range in 2023.

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

Hey, good afternoon gentlemen, and thanks for taking my question. Brent, I wanted to touch base on pricing, especially regarding Q1 versus 2022. You mentioned there’s that $3 per ton price increase in the fourth quarter. In 2022, it seems like the average contract price might drop a bit. Can you clarify this unusual dynamic given the current market context?

What we’re seeing is that we have some spot tons in the fourth quarter. We thought some of that would ship in the third quarter, which some did, but not as much as we anticipated. This higher concentration of higher prices hits the fourth quarter based on when those coal tons were shipped. In the first quarter of next year, there will be a mix of carryover tons from 2021 and new contracts starting. The mix is just different.

Got it. That’s helpful. How many tons do you have left to sell for 2022?

We’re trying to gauge that and that’s part of our ongoing negotiations. We expect to produce 5.7 million tons to 5.8 million tons for the year. We are at about a 6.5 million ton pace as we speak. We’ve recently hired 94 employees, and we’re trying to get them trained while keeping our operations safe and efficient. We’re targeting 7 million tons, but we aren’t certain about our hiring pace.

Should I understand your sellable inventory being contingent on your production capabilities next year? Is the pricing negotiation impacting how many tons you have left?

No. The price level is more than sufficient to justify bringing on additional employees. The market is going to be strong for a while because our customers are short for their winter needs. There is a strong demand for coal, and this market is the strongest I have seen in my career. We focus on hiring as the quickest way to improve our cash flow and deliver more tons.

That’s helpful, Brent. I appreciate the insights.

Thank you.

Our next question comes from Henry Schlett from Ocean Capital. Please go ahead.

Good afternoon. Congratulations on a great quarter. You've effectively conveyed how the near-term future has improved the company’s outlook while accelerating the debt pay-down schedule. Is it an explicit goal to be debt-free?

Yes, I believe it is. We were net debt-free in 2014, and we can be more aggressive on opportunities when we de-leverage. We focus every quarter and every Board call on reducing debt. Our Board feels strongly about this, and it's essential for the company’s longevity. We have seen competitors go out of business due to not being well hedged. Our goal is to generate positive cash flow, reduce debt, and look at opportunities.

Is the history with the $300 million transaction going to inform future transactions? Is there an expressed frustration from the Board regarding the stock's current evaluation?

I wouldn't say frustration is the right term. The Board understands they own a large percentage of a company with positive free cash flow. Our focus has been paying down debt, and we want to ensure shareholder value while exploring future investment opportunities. We aim to evaluate the best use of our capital further down the road. Right now, we're concentrating on securing contracts that ensure significant cash flow.

Thank you.

Thank you.

Next question comes from Andrew Lo of Hallmark Investment Corp. Please go ahead.

Hi Brent. Returning to the pricing question, it's disappointing to see our prices go down this year, especially with our costs increasing. I understand some of this was booked before the market heated up. But I'm baffled as to why our 2023 pricing hasn’t increased significantly given the hot market.

What you're seeing in 2023 was not reported in the second quarter. We have those tons booked but they just weren't reported. We have sales out now as far as 2026 where some tons are booked but unpriced. So, we have commitments to customers particularly for the later years; the prices just haven't been applied yet. You’ll see pricing improvement on the unsold portion.

So the 3.8 million tons booked in 2023, is there any unencumbered tonnage subject to negotiation?

No, those will be new sales.

And regarding the renewable business, can you clarify the grid access?

We have a joint venture development relationship concerning the interconnection to the grid. We obtained rights to plug into the grid once the coal-fired power plant disconnects. We announced that transaction in June.

Was there consideration involved in that right acquisition?

I can’t disclose the details, but there was no money paid upfront.

I understand. Thank you.

We have a follow-up question from Dustin Shapir from CastleKnight. Please go ahead.

My question was answered. Congrats, guys.

Thank you, Dustin.

Thank you. We have no further questions at this time. I'll turn the call back over to Mr. Brent Bilsland for his final comments. Please proceed.

I thank everyone for their interest in Hallador and for joining us for the call today. I look forward to talking to you again after the first of the year. Thank you very much.

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