Alpha Metallurgical Resources, Inc.

Good morning and welcome to the Contour Energy first quarter 2020 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone zone. Please note this event is being recorded. I would now like to turn the conference over to Emily O'Quinn, Vice President of Corporate Communications. Ms. O'Quinn, please go ahead.

Thanks, Anita, and good morning, everyone. Before we begin, let me remind you that during our prepared remarks and the Q&A period, our comments relating to expected business and financial performance contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company's first quarter 2020 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Contreras Chairman and Chief Executive Officer, David Stetson, and Chief Financial Officer, Andy Edson. Also participating on the call is Jason Whitehead, our Chief Operating Officer, who is available to answer questions on operations. With that, I'll turn the call over to David.

Thank you, Emily. Good morning, everyone, and thanks for joining the call today. As we all know, over the last several weeks, the coronavirus pandemic has created unprecedented uncertainty in our country and across the world. This has not only disrupted global economies to a degree not seen in my lifetime, but has also created a public health challenge. These are difficult times, and as we said on our last earnings call, we are committed to taking precautions that will reduce the risk of exposure to COVID-19 for our people at Comptura. We understand that these are challenging circumstances for everyone, and we are grateful to our more than 4,000 employees for their dedication and cooperation in implementing precautionary measures across the company. The health and safety of everyone on our team is important to us, and we take these issues very seriously. As I turn to our operational results for the first quarter, I want to start by highlighting our exceptional EBITDA of $60 million for the quarter, which was largely driven by outstanding cost performance by our operations team. Our central net cost reached a multi-year low of $70.68 per ton, compared to fourth quarter cost of $82.36. which was already a meaningful improvement over previous quarters. This stellar cost performance is among the high points of the quarter. When I returned to Contura last fall, I sat down with the management team to discuss our vision for Contura. We recognized that we had to drive efficiencies at both the operating and corporate levels in order to secure the long-term viability and profitability of Contura. The team put a great short and long-term strategy in place to achieve this vision, and the success of that strategy is evident in the first quarter results. I want to thank Jason Whitehead for his leadership and congratulate the entire operations group on a job well done. Looking at our results against a broader economic backdrop, I think it's important to point out that we were able to post impressive cost numbers despite the onset of the coronavirus late in the first quarter. Although my hope for Contura was to build off this strong quarter, the markets and headwinds resulting from the virus will challenge us as well as everyone else in our industry. However, the hard work we have done over the past nine months and the building blocks we've put in place will help Contura weather the expected market disruptions over the next few quarters. The capital projects we invested in are allowing us to build a bridge to even lower cost future for Contura. The millions of dollars in savings from streamlining our operation and SG&A infrastructure are even more important now. These strategic actions, coupled with meticulous cash management instituted by Andy, will position Contura for durability in these unprecedented times. We remain committed to an aggressive cash preservation strategy, and we finished the first quarter with $257 million in total liquidity. As a result of the CARES Act that was passed by Congress, we expect to receive an accelerated AMT tax refund of roughly $68 million early in the third quarter. We also anticipate the ability to defer approximately $14 million of this year's payroll taxes in connection with the coronavirus relief package. Before I turn it over to Andy to provide additional color, I want to briefly touch on some market analysis and discuss some of the external factors we are watching. Even though the first quarter MET coal prices continue to be challenging, it was encouraging to see the demand for our MET coal held up quite well. As our reported volumes show, our MET shipments of 3.3 million tons in the first quarter matched our fourth quarter 2019 shipments. Despite the announcement of many blast furnace idlings and coke plant slowdowns, our strong shipments continued well into April. However, pricing began to weaken significantly as the COVID-19 pandemic spread, and price volatility increased the last couple of weeks. While the supply has been reduced across basins in the United States, demand has fallen at an even faster pace, resulting in substantial price weakness ranging from a 13% decline in high vol A market to a 26% decline in Australian premium hard coking spot prices in April alone. To put this in perspective, prices have dropped 35% to 50% over the past 12 months. There are some estimates indicating that temporary U.S. coal production cuts may have been as high as 50% of the total supply. We'll have to wait a little longer to get April trade and demand data, but March numbers gives us hints of what to expect in the coming months. Globally, the crude steel production posted one of its worst months in recent years, with the overall global production declining 6%, compared to March 2019, and excluding China, the production was down more than 10%. Among the markets that are most important to us, the decline was quite challenging as well, with European crude steel production showing a 20% decline, and both North and South America declining nearly 10%. I won't bore you with much more data, but it's sufficient to say that while March numbers were weak, The initial manufacturing PMI readings indicate that April numbers are even weaker. That index was 36.1 in April, down from 48.5 in March. As you know, a PMI index below 50 indicates contracting business conditions. And manufacturing slowed dramatically in a couple of key regions for our business. The Eurozone manufactured PMI declined from an already weak March level of 44.5 to 33.6 in April. Additionally, Brazil fell from 48.4 to 36 in April. So in summary, there are obviously some adverse circumstances that we and many other companies are having to manage around. The real question is what will happen in the coming weeks and how will those developments influence the back half of 2020 might look like. That visibility is admittedly quite limited at this time. And in this environment, it's frankly impossible to actually predict exactly what pricing demand will do. In uncertain times like these, I believe having a solid financial foundation and strong fundamentals are essential to withstand the disruption. That's why I'm so proud of the work our team has done over the last nine months to shore up the foundational elements of our business, to cut costs, and to transition to a more nimble company. Those challenges are going to serve us well, and I'm optimistic about our ability to successfully navigate the path ahead. I'll now turn the call over to Andy for some additional details on our financials.

Thanks, David. Obviously, the uncertainty around the impacts of the coronavirus, both in terms of the human toll and the new economic realities, has created an extremely difficult environment to plan for. And as David mentioned, it's going to be impossible, particularly right now. likely for the very near future to know exactly what the new normal will look like. For that reason, Contura suspended its 2020 guides a few weeks back, and we do expect it to remain suspended for the next several weeks until we do have some better visibility on how things are going to develop. Given that backdrop, it's only appropriate that I'll begin by discussing the most important financial items and the items that most people will likely be very interested in, our cash position, liquidity, and our cash flows. We ended the quarter with approximately $227 million in unrestricted cash and $156 million of restricted cash, including $30 million available under our ABL. The total available liquidity was $257 million at the end of March. As we announced on March 23rd, we drew $57.5 million on our revolving credit facility as a precautionary measure to bolster our cash balances and increase financial flexibility. This revolver draw is reflected in our first quarter cash balance that I mentioned. Naturally, an ABL is subject to variability and volatility based on accounts receivable and inventory balances and values. As such, the open capacity of our ABL can fluctuate. As we go forward, there could be some movement in the availability, but the long-term trends typically dictate a relatively static figure. Turning to our cash flows, our first quarter operating cash flow was roughly break-even while CapEx was just under $50 million. Inventory bill was approximately $22 million during the quarter. And as we previously announced, the company idled most of its operations in April in response to market conditions and expected customer deferrals, but also in light of inventory levels. Now, through the idling period itself that wrapped up at the end of April, we ended up approximately 800,000 tons down during that month. All the operations are back online and nearly all of our furloughed workforce has returned to the job as we continue to try to match production to sales. There's one important cash inflow that I want to highlight, a future cash inflow that David referred to, the AMT credit monetization refund. At the beginning of the year, we had expected to receive approximately $35 million of this probably in the fourth quarter of 2020, followed by $16.5 million each of the following two years. Due to the CARES Act passed by Congress and the diligent efforts of our tax team, we now anticipate receiving all $68 million of the tax fund likely in July of this year. Also, as David mentioned, in connection with the CARES Act, we expect to defer approximately $14 million in payroll taxes until 2021 and 2022. On our last call, I commented on a letter we received from the Department of Labor regarding potentially higher collateral amounts for certain black lung obligations in which we could see our self-insured collateral increase from $2.7 million to nearly $66 million. As we said then, we strongly disagree with both this demand by DOL and the methodology through which they've arrived at these new requirements. We still intend to appeal this determination and have received an extension for filing an appeal until May 22nd. more details on that as it develops. Moving to our financial results, we posted a very strong first quarter EBITDA of $60 million, nearly doubling from the fourth quarter, mainly due to the excellent performance by Jason's team on cost, specifically CapNet, which came in at $70.68 per ton. As David mentioned, that's a multi-year low for that particular metric. If you drill down a little bit further, to just the cost of Contura-produced coal that was sold during the quarter. So this would exclude the small amount of coal that we purchased from third parties. Our cost was right at $69. Overall, CapMet generated $69 million of EBITDA during the quarter, while our two thermal segments in Central App and Northern App combined to add another $2 million of EBITDA. And SG&A allocation is not factored into these segment EBITDA results. And just to add a little bit more context, on our CapMet cost, because again, it was just a phenomenal quarter. At roughly $70.68 per ton, down from roughly $82 a ton in the prior quarter, that's a 70% reduction quarter over quarter, but it's a staggering 34% reduction from Q1 2019 cost of $94 a ton. Our CapMet underground productivity is measured by feet per shift, increased an impressive 9% over the fourth quarter. continuing a strong trend over the past couple of quarters. We have thermal costs increased from a relatively low level in the fourth quarter, and it was primarily attributable to a 31% reduction in volume as we continue curtailing production of certain thermal operations. In our northern app segment, a $5 increase in the cost of sales was due to a planned longwall move, which was completed in March. We expect the next longwall move to take place in September. On the revenue front, our cap and F volume remained quite robust in the first quarter, with total shipments roughly even with the fourth quarter, 3.3 million tons, and revenue per short ton slightly declining by $2.18 to $92.80. Northern F revenues and realizations increased slightly with volumes remaining at 1.5 million tons, and cap thermal sales tonnage declined by 31% in connection with our continued de-emphasization of thermal production, which results in a $15 million decline in cap thermal revenues. As David commented earlier, our MET volumes continue to be very strong in April. SG&A, after excluding non-cash stock comp and one-time items, remained roughly flat at $13.4 million in the first quarter, compared with $13.1 million in the fourth quarter. As Jason has done with reducing our operating costs, we've reduced our corporate overhead by approximately $10 million since the first quarter of last year. We continue to highly manage all of our controllable expenses going forward. And with those details, operator, I believe we're ready to open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. The first question today comes from Lucas Pipes of D. Riley SDR. Please go ahead.

Hey, guys. Good morning. This is actually Dan Day on for Lucas. Just want to congratulate you on the call's performance on the CAPMED side. It was a really nice job there. My first question here, we've seen a lot of blast furnace closures, especially in the US and in Europe. You touched on it in the prepared comments. Just are you guys seeing, you know, coke plants differing volumes or, you know, outside of, you know, Q2, Q3? And just any other color on impacts from kind of idle blast furnaces and coke plants? Thanks.

I'll start that off. Dan Horn's also with us. He can provide additional color, but the answer simply is yes. I mean, you're seeing deferrals. You know, we're monitoring this. Dan's in constant communication with both our domestic and international customers. We're reading the same thing. We're hearing the same thing that's being put out in publications. So, you know, we are certainly seeing the deferrals both in the second and third quarter.

I'll start off by saying we've seen this before. We saw this in 2009 and to a lesser degree in 2015. When blast furnaces start to come offline, of course, coke plants have to slow down to match. We follow that and we have seen some deferrals and we're matching our production to those deferrals. Not a surprise at all. We'll watch the blast furnaces, frankly, as a leading indicator and as those do come back online later in the year, we'll adjust our production. We know our customers will adjust their co-production accordingly, too. It's nothing we haven't seen before.

Great. Thanks. One other on sort of the capital projects you guys have lined out, Black Eagle and Branch, Road 452. Any impacts from this to those? I think you had said when Branch first coal in third quarter. Is there any impact to that timeline or anything else we should be thinking about?

No, no impact. Those projects are continuing as we previously indicated.

Great. Thank you. I guess I'll sneak one more in. With these, you know, the AMT tax refund, the CARES Act deferrals, is there any, respecting you guys' suspended guidance, is there a path to positive free cash flow in 2020?

This is Andy. I'll take that one. When you look at all of our below the line cash items, things that go back to the bankruptcy, funding of reclamation accounts and things like that, 2020 was setting up to be a relatively difficult year from a cash burn perspective as it was. I think it's hard when you look at it all inclusive of all those items to really bridge that gap, I think we're still going to be in a position of cash burn during the year. And naturally, any pressures we see in the second and third quarter will, you know, further increase the burn there. But, you know, from a liquidity perspective, we still feel pretty solid that, you know, we've got things as tied up as humanly possible at this point, and we continue to look for other areas to improve. just to shore up for what, you know, whatever's to come.

Awesome. I appreciate all that color. Thanks for taking my questions and best of luck. Thank you.

Again, if you have a question, please press star then one. The next question comes from Mark Levin with the Benchmark Company. Please go ahead.

Okay, great. Thank you very much. So first, congratulations on the met coal cash cost, kind of a huge, huge decrease, I should say. I guess my question is the sustainability of those costs in the second, third, and fourth quarter. It sounds like you'll be dealing with less volume in the second and third quarter to be able to spread out those costs, but maybe, you know, how sustainable is keeping costs down around that $70 level?

Well, we're all looking at each other. Who wants to grab that answer? Obviously, as I have explained in the past, and you know very well, Mark, it all depends on your production levels when you start looking at cost. We suspended guidance because we didn't really have any view or visibility into what the second, third, fourth quarter will look like for the rest of this year. The takeaway from my perspective is that even as difficult as the markets were in the first quarter, We kept production where we needed to keep it and those costs easily came in line there. So, I mean easily, they came in line. Jason, you want to chat about this at all with Mark?

Well, sure. I mean, I think you both hit the nail on the head. As long as we're able to run our mines near capacity, I would say the costs are sustainable. It's interesting how I think Andy mentioned 17% increase quarter over quarter or 17% reduction quarter over quarter, 9% increase on fee per shift. And if you look at Q1 of last year, 34% decrease on cash cost and a 17% increase on productivity, looking at the deep mine productivity. So, you know, if you look at those four numbers, it's really to see, it's really clear, you know, the relationship between productivity or volume and cost. So I think as long as the mines are able to run you know, at a rate that's near capacity, then, you know, those are the price numbers we should expect. Yeah, and Mark, this is Andy. To add one last piece to that, if you kind of imagine a world where the market and our costs were both flat, then Jason's costs would likely have come in even a little bit better than they did because we continue to have to reflect the impact of lower cost for market adjustments. The bad thing when we've got inventory at higher cost is Jason keeps taking the cost down. As we adjust those monthly, some of the cost of inventory that's still sitting on the books has to flush through current period cost of sales. If you flatten that out and you flatten the market, then it's even better. I think by and large, these cost reductions are not just sustainable, but they're, you know, I don't want to put any more pressure on Jason, but there always could be a little bit more squeal in there to squeeze out.

And you'll be bringing on some lower cost mines, I assume, too, so your mix would improve, I would imagine, over time as well. Is that right?

Yeah, with the three projects, which will, you know, when they come online, they should constitute roughly 30, between 25 and 30 percent of our productive capacity, and with those all you know, lower 60s, if not 60 on the button projected cost, it's not unreasonable to expect, you know, some contribution there.

Okay, great. And then just in terms of now the here and now, I realize you guys suspended guidance, but in terms of the stuff that's controllable, CapEx, SG&A, stuff that you guys do have some visibility or should have some visibility around, Any comments or thoughts about, you know, how CapEx will trend in the current environment for the remainder of this year, and then also, you know, SG&A type savings, things that you can do, you know, to control cost, and maybe relative to where you were in previous guidance, is there an upside to the lower end of those guidance ranges that you had previously provided?

Yeah, again, trying to avoid issuing guidance when we've not issued guidance. Sure. Just same way as it is with operational costs, there's always a little bit more squill to be taken out. We have been taking very close looks at SG&A, but we feel like we're getting pretty close to the critical mass required to be a public company, so I don't know that there's a significant amount left. There's always going to be a little bit. But from a CapEx perspective, Jason and I, we're constantly communicating about the different projects. where we may be able to defer some capital. So, again, I think there are possibilities. I don't want to speak to the quantum, but those are things that we're evaluating daily.

And then this question is for Dan, just about the market in general. When you look at some of the U.S. met prices and maybe the indices that we read on flats and other places like that, You know, Dan, do you think that those prices that we see printed are representative of the prices that you guys get, or are things just so tough out there that you have to take, you know, discounts, you know, either mid-single, high single, whatever the case may be, you know, discounts to those indices?

Hi, Mark. Look, you know, I think we've said before when the Prices are going up, we tend to sell at premiums to the index. And when prices are going down, the industry tends to sell at discounts. You know, beyond that, we sell so many different products, low vol, medium vol, high vol, semi-soft. There's a lot of different answers to that question. And I'm really not going to give you any of them. But I could tell you, look, we're matching the market. We're following the market. You know, it's difficult. I can't predict it either. I wish I could, but we're staying with it, and we'll just have to see. Like I said, we've seen it before. I'm confident we'll pull through this.

Got it. And then last and final question, any update on Cumberland and your thoughts regarding that from either a strategic perspective or from a CapEx perspective, however you want to address it?

Well, Marcus, David, I don't have anything beyond what we had said previously. Obviously, in these markets, preservation of capital is key. We spoke the last time about some preparatory work we did as part of the impoundment. But at this point in time, I don't have any real update on Cumberland beyond it. We're still evaluating the future direction there.

Great. Thanks. Congrats again on the cost side.

Thank you, Mark. Appreciate it.

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

Again, thanks, everyone, for joining us today and your interest in Couture Energy. Have a great rest of your day. Thank you so much.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.