Ramaco Resources, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Ramaco Resources Second Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. It is now my pleasure to introduce, Chief Financial Officer, Jeremy Sussman.

Thank you. On behalf of Ramaco Resources, I'd like to welcome all of you to our second quarter 2020 earnings conference call. With me this morning is Randy Atkins, our Executive Chairman; Mike Bauersachs, our President and CEO; and Chris Blanchard, our Chief Operating Officer. Before we start, I'd like to share our normal cautionary statement. Certain items discussed on today's call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Ramaco's expectations concerning future events and it is possible that the results discussed will not be achieved. These statements are subject to risks, uncertainties and other factors, many of which are outside of Ramaco's control, which could cause actual results to differ materially from the results discussed in the forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and except as required by law, Ramaco does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, I encourage everyone on this call to go on to our website, ramacoresources.com and download today's Investor Presentation under the Events Calendar. With that said, let me introduce our Executive Chairman, Randy Atkins.

Thank you, Jeremy. As always, I want to thank everyone for joining us today to discuss our second quarter results. We're trying something a little bit different today given the current situation, as we're calling in from two different parts of the country. Part of our management team is in West Virginia, while part is now out in Wyoming. I started last quarter's call by quoting some Chinese proverbs about operating in interesting times. I'm not sure how to characterize this quarter other than to say, I'm sure we would all like to never repeat the experience of operating in this kind of an environment again. First, I want to point out that for Ramaco this quarter reflects only two months of economic activity for us, not three. We were essentially closed for much of the month of April, and that in itself is a condition we hope never to repeat. Under the outage, sometimes it's better to be lucky than smart. It's also true that sometimes you get lucky by working hard. And I think all of our team worked extremely hard and creatively last quarter. Fortunately, despite all the overall macro conditions, we were able to post a financially solid first half and second quarter. As you know, on the numbers we booked EBITDA of roughly 19 million in the first half and almost 11 million for the second quarter, which was up about 30% quarter-over-quarter. Net income also bumped about 35% for the same period, and of course, Jeremy will follow me with some more granular detail on economic and financial statistics. One unusual item that was in April was that we received approximately 8.4 million in PPP or Paycheck Protection financing from the U.S. Treasury. As a result, we were able to book 7 million of that this quarter as other income. As a result of securing that facility, we brought back about 200 miners that had been furloughed in late March given the effects of the pandemic. That financing has now been completely expanded on qualified expenditures. We have also been advised by both our auditors and outside counsel that based on recent clarified accounting standards we could treat this as other income this quarter, since we properly qualify under the PPP for expected loan forgiveness. We will be applying for such forgiveness later this year following discussions we've had with our PPP agent banks, and Jeremy again can certainly supply some additional detail on the accounting treatment. When we looked at our operating results for the second quarter, during the months of May and June, when we actually did operate, we had strong cost results at our Elk and booked mine costs of about $64 per ton. We also managed to increase our liquidity this quarter by about $13 million, which came from funds received from the PPP facility and a separate equipment line. We continue our central focus to remain very conservatively geared to ride this market turmoil out and be poised to react with some degree of financial and operational agility when market conditions seem to normalize. With respect to the market in general, there are some macro trends that we pointed out in our earnings release which could lead somebody to become modestly optimistic. I'm afraid from our perspective that optimism is tempered by a heavy dose of humility. There are uniquely way too many unknowns at this play at the moment, all of which are outside of normal market forces, which temper an ability to really have much clarity in terms of prediction. In reality, it would be pretty foolish to provide any meaningful, strong sentiment on where the market will move on a forward macro basis, frankly, even in the next six weeks, say at much less six months or a year. But with that said, the tea leaves are out there for any of us to read, and I'll provide just sort of a short list of some of the headlights we're looking at. First of all, general economic conditions in the U.S. seem to be creeping forward; they’re somehow looking for a reason to have some continued momentum. U.S. steel capacity utilization is up about 59% since last month. U.S. manufacturing of passenger cars has jumped from about 2,000 units in April to about 140,000 units in June, which is clearly below the 200,000-some units for the same period of '19. But that trend is probably what the U.S. steel groups are looking at as they restart blast furnaces and certainly approach the 2021 domestic tender season. The forward curve is telling you that hope may be around the corner; current pricing in the first quarter of '21 is now about $136 a ton FOB Australia against a current spot of about $107. That's about a 25% upward bet on a worldwide recovery. Turning to China, the Chinese domestic and imported met coal pricing hovers around a record $50 a ton. And certainly, China's domestic steel production has essentially fully rebounded. Lastly, the supply constraints which have been lingering around have now no doubt become aggravated by current market conditions. One is the extremely lousy market pricing conditions; combine that with the fact that most producers have higher mining costs per ton than us, and add to that the fact that most producers have little or no access to any new liquidity. This is kind of a perfect storm designed to precipitate some supply contraction at some point. One of my favorite one-liners is that the market could always remain irrational longer than you can remain liquid. So, we'll see. It also goes without saying that the dance of the 2021 domestic tender season is upon us. We have submitted our last final bids for both high vol and low vol coals this week. I will again this year, sadly, disappoint Lucas Pipes, who I suspect is on the line, and not provide him with either our customer list or our bid prices. But as you know, we have successfully executed in the domestic markets over the past few years. Hopefully, we'll be able to do so again this year. I am sure by the time our next earnings call rolls around, we will be able to report on where everybody ended up in the dance. We're also making new inroads into export markets we hadn't explored before. This past quarter, we did our first test shipment to a group in Brazil. We also entered into a market arrangement with a highly regarded trading group in Brisbane, Australia called Square Resources. We hope Square will be able to provide us with a window into several Asian markets we've not yet touched. We look forward to building our Asian presence over time. On the development front, we are pursuing a policy of honestly keeping our powder dry until we can see more clarity. We've talked before about some interesting low vol, low cost new mine projects, which I'm not going to iterate here in any detail, but we feel we could bring one or more of these online in a relatively short timeframe, and at a very reasonable CapEx we’ve discussed. Because we could operate and execute on these projects so quickly, we don't feel the need to pull the trigger on anything until we see some real market strength. However, once we see that clarity, we've got the existing liquidity to prudently advance several projects at once, all within a six to 12 month time horizon. Ultimately, if we add all these projects up, they could provide a very meaningful new level of production for us. So to conclude my remarks, let me say that we continue to stay the course with the same philosophy we have preached for some time. We are low debt, we are low ARO, we're low mine cost. We have strong liquidity, and we've got a taste for being opportunistic. We're very comfortable with this operating philosophy, particularly in this kind of market. We operate to cover the downside in these perilous times, but when we see a little bit of upside, we feel we can react quickly and hopefully we'll be rewarded for our degree of prudence. Now let me turn the platform back to Jeremy to provide some detail on our financial results. So, Jeremy?

Thank you, Randy. In terms of second quarter 2020 financial highlights, please remember, as Randy pointed out, we only had Elk Creek running for a little over two months. With that caveat, EPS of $0.06 was up from Q1 2020 EPS of $0.05 and compared to $0.26 a year ago. Revenue was $36 million, down 13% from Q1 and down 45% from the same period of 2019. Other income totaled $8.5 million as we recognized roughly $7 million of income for the anticipated forgiveness of funding under the Payment Protection Program loan. This was based on our Q2 2020 usage of proceeds, largely for eligible payroll expenses. The accounting for this funding as a grant is based on guidance issued in June from the American Institute of CPAs and approved by our independent auditors. On the operational side, Q2 sales were 362,000 tons, down 27% from the same period of 2019. Despite a lengthy furlough in April, our Q2 2020 production of 390,000 tons exceeded our sales, which were weaker than originally projected based on demand contraction due to COVID-related issues. The second quarter average price per ton came in at $91, compared to $116 in the same period of 2019. Cash margins came down on the back of lower pricing and higher costs; margins on company-produced coal were $17 per ton in Q2 2020, down 35% from Q1 and down 62% from the same period of 2019. The cost of company-produced coal came in at $74 per ton in Q2, up 4% from $71 per ton in the same period of last year. It helps to put second quarter costs into context. First, Elk Creek overall mine costs came in at $72 per ton for the entire quarter. Excluding April, mine cash costs at Elk Creek averaged $64 per ton in Q2. While the April furlough was necessary from a cash management standpoint, the limited production caused overall Elk Creek mine cash costs to be adversely impacted by having fixed costs spread over fewer tons. I also want to touch upon capital expenditures a bit. Last quarter, we made the decision to stop virtually all our growth CapEx, a decision which is still in place today. During our last call, I said that there would be some growth CapEx leading into the second quarter. This was certainly the case as Q2 CapEx came in at $9.1 million. While this was down roughly 21% from the same period of 2019, it still included roughly $6 million of growth CapEx from two items. Specifically, the final $3.4 million of our $8 million plate press project at Elk Creek was spent in Q2, which Chris will touch upon later. Additionally, roughly $3 million was spent at our Berwind Development Complex. Subsequently, in early July, we made the difficult decision to reduce our workforce at Berwind by over 60%, which materially lowered our spend there. Looking forward, we are now at maintenance CapEx levels on both cash and an accrual basis and would expect third quarter 2020 CapEx to come in roughly two-thirds below Q2 2020 levels. This is in line with our historical guidance of $6 to $7 per ton of maintenance CapEx. In Q2, as Randy noted, we took on $13.2 million of new debt, consisting of $4.75 million of new equipment debt and $8.4 million from the PPP. As we said, we anticipate ultimate forgiveness for all or most of the original PPP loans. Moving on, our trailing 12 months net debt to adjusted EBITDA ratio remains the envy of the industry. It's just under 0.3 times as of June 30. In addition, we have liquidity of $31.8 million as of June 30. This is despite a number of working capital items that were treated as the first half 2020 use of cash. First, inventories have risen by $10.2 million since the beginning of the year. Second, when comparing Q2 2020 to the first quarter, we had a $1.4 million increase in accounts receivable and a $4.9 million decrease in accounts payable, which now sit at their lowest quarter-end level since 2016. We anticipate working capital items to be a source of cash in the back half of the year, especially in the fourth quarter. Lastly, as Randy noted, I'd remind investors that we have designed our operations to be resilient in turbulent times and to take advantage of strength in markets in good times. We do not know when the good times will roll again, but they generally do. I would now like to turn the call over to our President and CEO, Mike Bauersachs.

Thank you, Jeremy. The second quarter of 2020 marks one of the most unusual quarters experienced to-date at Ramaco Resources. As the quarter progressed, we dealt with some of the worst uncertainty that we face as a public company, with the primary concern being both our employees and how our customers will be impacted by the pandemic and the corresponding effects on our contracted sales. Our view today is that things have stabilized, with demand from the auto sector picking up and some domestic customers restarting blast furnaces that were idled earlier this year. While we will continue to face challenges during the back half of 2020 from a demand and shipment standpoint, it appears to be manageable, and we hope to see continued steady improvement, especially in the domestic space. From a macro perspective, we continue to see slow recoveries and reduced demand in the traditional Atlantic Basin markets. China, the most influential mover in the marketplace, continues to recover nicely from a steel production standpoint. Conversely, they appear to be more actively enforcing import quotas, keeping downward pressure on seaborne coking coal pricing. Recovering from COVID disruptions in the increasingly important Indian marketplace has been challenging, but recent data shows improvement. While there are concrete instances of production cutbacks, most sources point to a continued oversupply of coal production, particularly from the U.S., traditionally a swing supplier in the seaborne market. It appears that the key to near-term recovery will need to be in the form of government stimulus and even more impactful for the metallurgical sector, infrastructure spending. Like others, we were recently surprised by the European Union's ability to unite for a stimulus effort for all members through shared borrowing. While recent projections show that the EU is expecting their economy to shrink by about 8.7% in 2020, they project a rebound in 2021 with growth of 6.1%. That stimulus should help reach their goal. This and additional actions domestically and internationally could have positive impacts on the near-term prospects for our customers and, in turn, metallurgical coal producers. We're taking small but positive steps in our efforts to expand our international sales position. We completed our first shipment to Korea in the second quarter with positive feedback from our customer. We just recently loaded a vessel bound for Europe, marking the first loading this year for a large new customer there. In another first, we agreed to trial cargo to a large high volatile coking customer in Brazil, which will mark Ramaco’s first shipment to South America. While the markets and opportunities for large quantities of international business remains murky, it's still very positive to have secured business with new customers during this unprecedented time in the market. Since we last spoke, domestic customers have provided more guidance relative to material adverse change and force majeure impacts. Additionally, we've had an instance where a smaller customer opted to take 10% fewer contracted tons. The cumulative impact of these events will certainly have a material impact on our back half performance. All of this uncertainty continues to make it difficult to provide meaningful shipment guidance. We can also confirm that most domestic and other North American customers have come out for 2021 business. While it's too early to determine where everything settles out, we remain confident in our ability to differentiate our products from the competition. We also have confidence in our staying power, long reserve life, and some of the lowest costs in the industry. Our well-capitalized mines should be targeted by buyers who increasingly worry about insolvencies and associated performance risk. One additional focus for 2021 is our effort around our low sulfur products. Elk Creek has historically had comparatively low sulfur, but our mining has migrated into a couple of new areas that will allow us to market and ship an even better product. As our customers face increasingly new restrictions on their emissions and have fewer producers who can make a low sulfur product, we hope to be a part of their solution. Regarding production, following a furlough during most of April, we recalled our Elk Creek workforce. We've developed plans to match production with our expected lower shipment volumes for the second half of 2020. All of our mines at Elk Creek are running well. We also extended our July 4th holiday week by adding one furlough week for some employees. It remains to be seen if similar actions will be required in the second half. We continue to go to great lengths to address health and safety concerns related to COVID-19. Our operations are diligently following guidelines, and we remain committed to doing everything possible to keep our employees safe. Chris will provide a more detailed discussion of our pandemic response. At our Berwind mine, we've had to make the difficult decision to make a substantial reduction in our workforce. The mine is continuing to operate at substantially reduced levels. We continue to ship coal to our primary customer, who has altered their consumption downwards for the remainder of the year. We want to make it clear that management has several options for the path forward at Berwind. This includes having the option to develop a small block of coal in the Pocahontas #4 seam, accessible near Berwind infrastructure. Access to this reserve is above drainage, and coal can be developed in a few months if market conditions permit. Alternatives also include proceeding with our Berwind slope, which will take approximately six months to complete. We believe that our high-quality low-pressure Berwind Pocahontas coal will be a great fit for a long list of customers, both domestic and abroad, who continue to express interest and inquire about availability for trial shipments. We continue to labor over CapEx decisions in light of current market weakness and virus uncertainty. As we see how things develop over the third quarter and where we end up with domestic settlements, we hope to provide more color on growth CapEx in our third quarter call. Our guidance remains suspended at this time. Last quarter, I discussed the lack of capital and the fact that we continue to see a lack of investment in the sector. We also discussed challenged cost structures and predicted that there will be more failures and potentially more bankruptcies among some of our competition. Unfortunately, during the last week or so, we saw another competitor file for Chapter 11. We remain focused on actively taking advantage of opportunities as they present themselves. In fact, Ramaco just entered into an agreement with the debtor in the Blackjewel bankruptcy to acquire a couple of permits that provide access to high-quality Jawbone seam reserves that we control. This small transaction was surgical in nature but could create meaningful value and allow us to avoid capital expenditures in the future. Indeed, we remain focused on similar situations. Ramaco Resources continues to perform at profitable levels in less than ideal conditions, especially compared to our peers. While management believes Ramaco is substantially undervalued by the market, the market cap gap between much larger producers is narrowing. In some cases, our valuation is greater than much larger competitors. It appears that investors are beginning to see the differences in management philosophy that make a company like Ramaco able to withstand downturns. ARO liabilities, while not immediately due, still result in spending the cash inevitably. Debt will be repaid, resulting in bankruptcy. Ramaco may be the only company in the coal sector to have not pledged the majority of its assets against debt. We remain confident that the way our company is structured will prove to be one of the winning strategies that ultimately benefit from the current virus-induced downturn. In summary, I would like to thank everyone who is participating in this call, especially those analysts who continue to follow us. Like others in the sector, Ramaco is facing a clear set of challenges as we work our way through the remainder of 2020. As a management team, we're not just focused on problems and obstacles, we're also focused on opportunities. I would now like to turn things over to Chris Blanchard, who will provide additional insight into our second quarter and our operations in general.

Thank you, Mike. There were a few key operational milestones from the second quarter and some of our strategies for the remainder of 2020 that I'll briefly discuss this morning. First, our primary operational concern remains the health and safety of our workforce. During this period of the COVID-19 global pandemic, our focus has widened to consider how the virus can affect our miners, both at home and at work. We've taken what we believe to be prudent and proactive steps as the pandemic has developed and we continue to adapt our policies and procedures as conditions have changed over the past month. As previously mentioned, one of the most material steps taken was the furlough of operations during the month of April following the March declaration of a global pandemic and the uncertainty that was created throughout both the steel sector and the coal space. Most of our operations were idled for three weeks during April to assess the situation and to develop action and prevention plans. We returned focused on social distancing, personal protective equipment, and sanitation of all common areas and equipment. Face coverings were provided to all employees prior to any of the now widespread recommendations or requirements. We continue to require face coverings in all enclosed areas or where social distancing is not possible. Now all offices and buildings are deep sanitized on a regular schedule. Despite our focus on limiting and minimizing capital spending during the current period, we are deploying additional capital dollars for additional personnel carriers so that our underground miners can travel in multiple machines and have more space from their co-workers during these congested portions of the workday. As the coronavirus continues to spread and cases increase in the locations of West Virginia and Virginia where our miners live, we continue to adapt our policies to the latest governmental guidelines and modify our work rules to provide the most flexibility for our workers' families while also providing the safest work locations for them. Contingency and action plans are in place for different COVID-19 scenarios that may occur. Now turning to one of our capital projects, during the second quarter, we completed construction, commissioned, and brought into full operation our second plate press building at the Elk Creek plant. We have now upgraded Elk Creek to have a total of four operational fine refuse plate presses. Where our first two presses gave us needed relief and flexibility on the disposal of our fine waste rock, the second edition containing the third and fourth presses gives us the excess capacity and confidence that Elk Creek now has the technology in place to handle plate pressing economically for the entire life of the Elk Creek complex. The additional presses also give Elk Creek enough rateable capacity to handle the future disposal needs of the preparation plant even after a throughput upgrade is under consideration and is part of our medium-term growth strategy. We believe that long-term, the permitting of new sites for disposal of waste rock in Central Appalachia will trend toward combined refuse placement away from traditional slurry impoundments; Ramaco is positioned to operate successfully under either scenario. With this project complete, we do not anticipate any similarly material capital spending at Elk Creek in 2020, limiting planned projects to maintenance capital for the expansion of our underground mines and maintenance of our existing fleet of equipment. Regarding our actual operations, Elk Creek mines generally continue to operate in favorable mining conditions. Naturally, these are coal mines, and we have ebbs and flows at each location, but overall, the complex is poised to perform and exceed expectations in the foreseeable future. We have also moved into areas of our reserve where we're seeing the quality of our coals improve month-over-month, which is certainly counter to the generally deteriorating quality of the Central Appalachian Basin as a whole. We clearly saw a contrast in cash costs between quarters. In the first quarter, costs were lower as our production sales and deliveries were largely in balance and closer to capacity. In the second quarter, however, we saw costs creep upward as production was negatively impacted by the furlough and some deferrals of shipments. Even more pronounced was the stark contrast between April 2020 and the cost in the remainder of the quarter. This serves to emphasize Ramaco's competitive advantage resulting from favorable geology, a solid and experienced workforce, and judicious investments in the best infrastructure and equipment to access those reserves. When we operate our mine at or even near capacity, our cash costs will be among the lowest in the industry. As we move throughout the second half of 2020, Ramaco’s strategy is to match our production profile with our customers’ delivery schedule and needs while remaining nimble to participate in spot sales and export tenders as they arise. Management will continue to take a disciplined approach to potential spot sales. While there's no doubt that our cost advantages and production profiles usually allow us to underbid our peers, with the current supply overhang in the coal market, this is one race to the bottom that we do not need to win. We'll continue to focus on prudently targeting synergistic markets and key customers while positioning the company for the eventual return to normalcy. Turning to Berwind, and following the same principles being applied at Elk Creek, we had to recently make some very difficult decisions. In addition to the decision in early April to idle our slope construction project, in June, we throttled back production shifts; finally, in July we were forced to make permanent reductions in production as a result of the state of the overall coal market and the reduced needs of our customers. Unfortunately, these changes were necessary. I want to formally recognize the efforts of our Berwind employees. Since inception, these miners have safely mined and developed this coal mine through extremely challenging conditions. I look forward to the future when we're able to continue our production ramp-up at Berwind and bring to fruition the planning and efforts exerted over the past couple of years. Our Berwind slope project remains on a hot idle status with all excavation equipment and infrastructure in place for an immediate restart. Once excavations commence, we believe we can see daylight in the low volatile Pocahontas #4 horizon within six months and can quickly move to higher productivity and more profitable production. Within the initial six months of P4 seam coal production, or approximately 12 months following the slope completion, we believe we can mine at the fully budgeted production capacity of 650,000 to 750,000 annual clean tons. The thicker coal seam conditions will result in higher productivities, higher plant recoveries, less mechanical downtime, and less usage of consumables related to the sandstone strata of the current Berwind mine seam conditions. While we continue to balance our liquidity, customer requirements, and production growth plans through this period of uncertainty, we continue to examine other potential low volatile production options. One possibility would be to access and mine a small reserve in the Pocahontas #4 seam located in close proximity to the initial development in our Berwind P3 mine. Access to these tons is permitted and requires only very modest capital expenditure. These tons will be of similar quality to the long-term coal we expect to mine and deliver from our Berwind P4 reserve. While this reserve is not contiguous with the Berwind P4 mine, it provides another option in the short term with less uncertainty and variability than development mining in the thinner Pocahontas #3 seam. Depending on targeted production rates in this reserve, this coal mine could provide a bridge for Ramaco’s low volatile portfolio through 2021 until the main Berwind P4 mine is fully operational. We look forward to finalizing our production and development strategy in the next few months as domestic and export tenders and sales processes unfold. We are committed to the overall growth of Ramaco’s annual production from its current levels to over 4 million annual tons and believe that, given the appropriate market, this could be completed within 24 months. This concludes management's prepared remarks, and I will turn the program back to Randy.

Great. Thank you, Chris. Thank you, Mike. At this point, we’d be happy to take some questions from the analyst or investor community out there. So moderator, if you could proceed?

Our first question comes from Lucas Pipes with B. Riley.

Randy, I may have missed it in the prepared remarks, but can you fill us in on domestic pricing in 2021 ideally by customer and by product? More seriously, of course, I wondered if there has been anything that’s been able to clean on 2021 demand based on the amount and timing of domestic tenders to-date?

Sure. I appreciate that remark, Lucas, because you've been emailing me for the last two weeks to try and get this pricing information, and I'm glad you have come to the realization that we're probably not going to step up again this year on your behalf. But keep trying, Lucas, we appreciate it. I think as far as the '21 tender season is concerned, they came out a little bit early. The reality check is that the steel companies are trying to sort of feel their way through their own demand requirements for '21. We felt last year they probably underbought just a little bit, but in hindsight, that probably proved prudent on their end. Looking at '21, the size tenders that they've come out with are a little better than the '20 numbers. We're not exactly dealing in a market environment where we have a surging benchmark to price against, so we need to approach this with realism. We have some producers that are in various forms of financial distress, and that will likely play a role in how some of our peers look at the market. A number of commentators and some of our peers have taken the posture that they view the second half of next year as potentially brighter than now. I can't disagree with that notion, but, as I mentioned in my remarks, we have a lot of humility in trying to view forward markets when you could have things like a resurgence of the virus that might impede or reverse any recovery steps. Conversely, you might have steps developing a vaccine quickly, getting everyone back on their feet a little quicker, which would positively impact the market. For all of us, at least on our side of the table, we approach the market with realism and optimism, but most importantly, we approach our market view with a lot of humility. I hope that addressed most of your concerns.

Very helpful. Just a quick follow-up on the domestic market now. You are in the enviable position of not having substantial leverage, like some of your peers. Is there a school of thought that says you might consider selling into the international market rather than domestic at this time, or is that not really part of the strategy? I'd appreciate your perspective there.

Thanks again. Our leverage position gives us some wind in our sales, but candidly, I think our cost position provides us with additional differentiation as we approach pricing decisions. As Mike highlighted, we have pretty good quality coals, and we're not just a dual thermal producer. That gives us additional leverage because we deal with pure met products that are high quality and low cost. You know our general percentages of market penetration in years gone by; part of that's by design, and part of that’s opportunistic. We approach that with the same philosophy we've had in years past. The arrangement with Square is a positive development, which came about due to connections we had made in the past. They are a respectable group, handling around 10 million tons of met, which is considerable. They have offices in the Far East, and we look forward to building that relationship over time.

Thank you. Our next question comes from the line of Mark Levin with Benchmark.

I know you guys have sent a high proportion of your volume into the domestic market. Is it reasonable to assume in ‘21 that you would at least sell half or more than half of your volume into the domestic market, or have things changed so monumentally that that shouldn't necessarily be the case?

I'm going to let Mike follow up on this, but you have to be opportunistic when discussing spot sales; you're not quite sure when that market will develop and with what volume and pricing characteristics. We'll always start with solid domestic business, and once covered, we will treat international opportunities as they arise. That percentage will likely bounce around. Mike, why don't you add your insights regarding export opportunities?

We continue to prioritize domestic sales, as having contract sales with a 12-month look ahead is important for our planning. You'll see us maintain a significant portion of sales in the domestic market this year. The quality products we offer at Elk Creek are important to our customers, particularly low sulfur coals. While the Atlantic Basin is recovering slowly, focusing on Asia is promising. We successfully made our first shipment to Korea, and we’re hopeful about expanding in Brazil as our coals match well with those customers.

Thank you; just a couple of quick follow-ups.

Before we go to your next question, let me add one comment. We have some interesting development projects that could potentially add a significant percentage of new production, especially compared to what we're currently seeing this year. If these projects are executed, we believe it could enhance our market positioning by August ‘21.

The reference to 12% of sales potentially being at risk due to force majeure letters—how should we model shipments in the back half of the year, given that’s out there?

I'll have Jeremy respond to that, but it's a perfect example of the challenges producers face when constructing models based on external market conditions that are beyond both the producers' and even the customers' control. Jeremy, can you take that from a numbers perspective?

That’s one of the reasons we've chosen not to provide official guidance at this time. We've provided committed tons as contracts were signed, and we value the long-term relationships with our customers. Hopefully, we can preserve as much as we can for both 2020 and into ‘21.

In a previous call, we discussed doubling production; what incremental capital would be needed to achieve that?

Chris will provide more specifics, but we mentioned before that doubling production could require around $10 to $15 million in new capital expenditures. This is dependent on which specific projects are taken on, but we have a couple of development projects that could lead to significant production increases, especially in the context of current output.

That estimation is roughly in line; however, which projects are launched will dictate the total capital needed. If multiple projects are undertaken at once, the capital expenditure could edge toward $20 million.

So to get to 4 million tons from here, you're referencing additional capital of potentially only $20 million?

Yes, while this number could vary depending on the projects chosen; transitioning our mobile equipment fleet from development mining at Berwind allows for more bang for your capital buck.

If we see another market uplift like we did in 2016, we would be in a position to rapidly ramp-up production, which could change our outlook for production considerably.

How quickly and flexible will you be in restarting development activities once the market recovers?

From our perspective, we believe we can react quickly. We have fully discussed development projects with the Board, so they are familiar with them. Our liquidity allows us to mobilize resources quickly if needed. Chris, why don't you add more operational insights?

Once we gain clarity on market direction and customer needs, we can deploy capital for development projects. We're focused on maintaining our workforce at safe levels, and we could likely ramp up production quickly based on market demands.

Regarding costs, do you think it's reasonable to assume cash costs will decrease into the mid 60s?

I'm going to let Mike and Chris talk about costs, so Mike, why don't you start?

Not having the impact of higher costs from Berwind absolutely affects our overall cost structure. We're seeing strong conditions at Elk Creek, which should help reduce our costs further while considering the impact from COVID-19.

We expect our costs to return to that range, barring any significant COVID impacts. Historically, the fourth quarter is weaker due to holiday periods, but we aim to run Elk Creek effectively to stay competitive.

Thank you all for participating in today's Q2 call. We're navigating strange times, and we hope to improve on our performance as market conditions evolve. Most importantly, stay safe and well. We'll look forward to speaking with you in a few months. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.