Alpha Metallurgical Resources, Inc.

Good day and welcome to the Alpha Metallurgical Resources second quarter 2021 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Emily Auckland, SCP Corporate Communication. Please go ahead.

Thank you, Matt, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks Q&A period, our comments regarding anticipated 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 second quarter 2021 earnings relief and the associated SEC violence. 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 office chair and chief executive officer, David Stetson, and president and chief financial officer, Andy Edson. Also participating on the call are Jason Whitehead, our chief operating officer, and Dan Warren, executive vice president of SAILS. With that, I'll turn the call over to David.

Thank you, Emily, and good morning to everyone on the call. Today we are pleased to announce another solid quarter of financial performance. The team and I look forward to discussing those results along with mid-year analysis of 2021, how we see the back half shaping up, and what we're doing to set ourselves up for an excellent start to 22. Before we do that, I want to briefly reflect on the significant progress that made during the last couple of years and connect those accomplishments to our current circumstances and our vision for the future. Approximately two years ago, Alpha's senior management team came together as a cohesive unit, established a broad vision and strategy for the future success of the company. The expansive volume of good work that has been done in a relatively short period of time is remarkable. We've divested non-core assets and set ourselves on a nearly complete pathway becoming a pure-play metallurgical producer. Slab Camp, our last remaining thermal mine, is expected to close roughly one year from now, at which point we'll have no remaining thermal operations. We have strategically fine-tuned our metallurgical portfolio with an eye toward longevity and diversity of products, carefully deploying capital to transition away from higher-cost mines. This work coupled with the implementation of Jason's vision for a more streamlined enterprise, has also yielded a more advantageous cost structure that allows us to weather downturns in the market and capture upside when the markets rebound. Above all, our team has stayed focused and disciplined in building the strong foundation for our future growth and success. Now we see this work beginning to pay off. In terms of the current market, the Australian PLV index hit a low for the year in January at approximately $102, with gradual increases throughout the second quarter. This left the Australian-linked portion of our portfolio lagging and negatively impacting our overall average cost realizations in the second quarter. However, that index has increased by roughly 115% in just six months to recent levels in the $219 range. With this rebound in Australian indices and a general positive market environment across the globe, we expect our second half realizations to reflect these much stronger levels. We're increasing our production guidance for the year as we anticipate mining roughly an extra one million tons of coal than the midpoint of our prior range. Looking ahead, we've already settled some 22 North American business and expect discussions to begin in earnest in the coming weeks. With demand projections remaining strong for the immediate future, we expect to be able to build our cash balance and aggressively pay down debt. In keeping with my previously stated interest in delevering, we accelerated the timeline for completing one of our legacy payment obligations with the West Virginia LCC note. This occurred subsequent to the quarter close, and Andy will cover this decision in more detail. From a high-level perspective, I see this as another step in solidifying the organization financially and as further evidence of the executive team's focus on strengthening our balance sheet. Along those lines, our cash management strategy will continue to hinge on the prudent use of funds to help build and maximize value in our organization. In his remarks, Jason will tell you more about our decision to add a fourth section at Road Fork 52 and why we believe this is advantageous use of our capital that will service well and offer expected paybacks in well under six months. In summary, in addition to reporting another strong quarter performance, I think the state of the business is solid and well prepared to capitalize on the current market strength and high demand for met coal that is projected to extend well into the future. Now for some additional details and operation, I turn the call over to Jason Whitehead.

Thanks, David, and good morning, everyone. As you know, we've made great strides in the last year to streamline and optimize our operations, shifting production to lower-cost mines. As David said, this work has already paid off with a much improved cost structure. Our teams delivered again this quarter with met cost of coal sales coming in at $69.94 a ton, roughly $2 than the prior quarter. Some of the inflationary and supply-demand pressure I mentioned on our last call has continued, but we're keeping our previously announced 2021 cost guidance, as we still believe we'll end the year within the range of $68 to $74 a ton in the MET segment. Also today, we announced an increase in our production guidance, bumping our overall tonnage up by about a million tons at the midpoint for the year. reflecting excellent productivity by our miners and our ability to ramp up production quickly when the market demands. Andy will provide more detail on that later. With coal supply expected to remain tight for the near term, we believe we are well positioned for any desired production adjustments to match that increased demand, whether seaborne or domestic. Our existing group of operations offers one of the most diversified portfolios of any coal company, but we're always looking for ways to incrementally add value. We continually analyze potential bolt-on or development projects, like our most recent Flynn Branch and Road Fork 52 projects, where we can spend a modest amount of capital in a way that offers swift return with long-term value. To that end, we're in the process of adding a fourth supersection at Road Fork 52. It will provide the ability to mine additional low-wall coal from an operation that has exceeded productivity expectations since its inception. This section should be up and running by year-end, and we're looking forward to putting some additional alpha tons into a tight market. We're raising CapEx guidance for the year by $8 million at the midpoint in conjunction with this addition, but the projected payback on this investment is expected to come in less than six months. and at today's spot prices, perhaps even in a quarter's time. This makes great sense to us, especially given the current market environment, and even with the increase, we expect CapEx for the year to come in under $100 million. We don't have any other mine development announcements to make today, but there are a few other projects our teams are currently evaluating, and they all have similar CapEx profiles to what I just described for Road Fork. Modest spend with a fast return expected on the investment. I will plan to provide more information on future calls as appropriate, but the takeaway here is that Alpha is ready and able to increase production either by augmenting our existing portfolio or investing in cost-effective development projects. I'll now turn the call over to Andy for some additional details on our financials for the quarter. Thanks, Jason. As we reported in our release this morning, our second quarter adjusted EBITDA was $39.9 million, up nearly 40% from our first quarter figure. Q2 volumes for sales were roughly flat with the prior quarter, but one area we want to specifically highlight is our MET segment realizations. On our last call, there was a lot of discussion about the tensions between China and Australia. and the various market impacts stemming from that situation, but especially the lag on pricing tied to the Australian indices. While the Aussie and Atlantic indices have found more of an equilibrium in the past few weeks, past eight weeks actually, the lag on pricing persisted well into the second quarter and continued to impact our realizations. To illustrate the magnitude, we introduced a new table in our earnings release to provide additional granularity on our realizations for MET shipments in the quarter based on the various market pricing mechanisms. To that table's point, we realized $101.80 per ton on our export business for the quarter that was based on the Atlantic index and other pricing mechanisms. By contrast, our export business link to the Australian indices yielded realizations of $67.77 due to the index weakness that persisted well into the quarter. Now that the spread between the indices has tightened to a more normalized level and effectively at parity, we don't really expect to see much of a variance between the regions going forward. For the met segment as a whole, our realizations came in at $83.38 per ton. up slightly from first quarter, while realizations dropped slightly within the all-other category to $60.45 per ton. As Jason mentioned earlier, our Q2 met cost of coal sales performance was excellent, and despite continued inflationary pressures, it improved by nearly $2 as compared to Q1, down to $69.94. Costs also improved in the all-other category, with cost of coal sales down in Q2 from first quarter to $42.77. SG&A excluding non-cash stock comp and non-recurring items increased from $12.7 million to $13.7 million in the second quarter. And we are increasing our four-year SG&A guidance largely due to increased corporate insurance costs as well as the adjustment of accruals related to our incentive compensation plan that reflects an improved outlook for the back half of the year. As such, with these recent adjustments, we now expect SG&A for 21 to be in the range of $48 to $52 million, up from the prior $44 to $49 million range. Our CapEx for the second quarter came in at $17.6 million in Q2. And as Jason mentioned, we are increasing our CapEx guidance for the full year from our previous range of $75 to $95 million to a more narrow window of $88 to $98 million. And of course, this increase is a result of the additional section at Road Fork 52 that Jason discussed, which we obviously believe is a beneficial use of capital and well worth the modest increase in projected spend for the year. And the timing honestly couldn't be better for that spend. Turning to the balance sheet and cash flows, we ended the quarter with roughly 20% more in total liquidity as compared to the end of the first quarter. We ended the quarter with $72 million in unrestricted cash and $60 million in availability on our ABL for total liquidity of $132 million. Cash used in operating activities for the corridor was $6 million. At the end of the corridor, our ABL had $129 million of letters of credit outstanding and no borrowings. As we've already explained in connection with earlier comments, our updated guidance reflects our expectations for how Alpha will round out the year. We've increased total shipments guidance for 21 from the prior range midpoint of 15.5 million tons up to our new range midpoint of 16.6 million tons. This is now comprised of an expected midpoint of 13.5 million tons of pure MET and a midpoint of 1.6 million tons of incidental thermal production within the MET segment. Our prior guidance for the all other category remains unchanged. Against the midpoint of guidance, around 21% of our MET segment, or just over 2.8 million tons, is currently unpriced and can be expected to benefit from the improved market environment we're seeing. Of that 21% unpriced in the MET segment, around 18% is committed. The thermal byproduct portion of the MET segment is effectively fully committed and priced at an average price of $52.68, and we remain fully committed in price for 21 in our all-other category at an average price of $59.66. As Jason mentioned, our 2021 MET cost guidance remains unchanged, as does the all-other category, with range midpoint costs of $71.47 per ton, respectively. As I mentioned on prior calls, you still expect to receive the NOL carryback tax refund of around $70 million, sometimes in the back half of this year. Additionally, subsequent to the end of the second quarter, Alpha made a $21 million payment to eliminate the West Virginia portion of the Lexington Coal Company note one year ahead of schedule. We also negotiated a return of $14 million in related charity collateral, meaning the early payment also allowed us to extinguish this liability at a lower net cash outflow than we previously expected and had disclosed. Finally, a comment on cash allocation strategy as we move forward into strong markets with anticipation of additional free cash flow. We've been pretty clear over the past several quarters about our intention to build cash balances and aggressively pay down debt, but I want to reiterate those two items as our highest financial priorities. Our focus is on strengthening the balance sheet, deleveraging the enterprise, both of which we believe will maximize shareholder value over both the short and the long terms. So with that, I'll turn the call over to Dan Horn for market analysis and sales outlook.

Thanks, Andy, and good morning. In my remarks, I will share a few additional observations about the year so far, what we have to look forward to in the back half, and the way we're starting to think about 2022. The second quarter was another solid period for our sales team. While you've already heard some commentary on the significant shift in the Australian indices in recent weeks, there are a couple of additional areas that I want to highlight in this regard. Although our contracts tied to Aussie indices work as lucrative in the first half of the year as they would have been on another pricing mechanism, I am proud to say that we continue to fulfill our contract obligations to our customers. We have longstanding and in some cases, decades-long relationships with customers around the globe and in markets where metallurgical coal demand is expected to continue climbing for many years to come. We've also seen some opportunities created by the Chinese ban on Australian coal. While China has not historically been a destination for office products, we found great acceptance of our high-quality coals at multiple Chinese steel mills. Therefore, we have built on these initial shipments into the country early this year, and several of our recent vessels were actually larger than shipments sold earlier in the spring. Including business recently agreed upon but not yet shipped, Alfa has sold approximately one million tons of coal into China this year, with a significant possibility of more to come. It's impossible to predict how long this window of opportunity will last, but we continue to evaluate this new market for us and sell additional tons if it makes sense. While the FOB and CFR indices are currently at high levels, it's also important to note that these so-called headline prices are often substantially different from the netbacks at the mine or port, especially considering that the freight costs to get a product across the world are not insignificant. Even still, this has been very good business for us, and I applaud my team for their flexibility and willingness to think creatively to help Alpha mitigate some of the negative impacts of the Chinese-Australian trade tensions with new advantageous business. As you've heard already, we plan to produce more coal this year than we previously guided, and we're pleased to have some additional tonnage to offer to our customers, especially given the strong demand environment for metallurgical coal and the tightness of current supply. Economic indicators continue to signal positive conditions for the near term, with the most recently reported U.S. steel mill capacity utilization at 85%. Globally, the World Steel Association crude steel production statistics show year-over-year growth of 11.6% in June. India showed growth of 21.4%, while China increased 1.5% over the period a year ago. Regionally, North American and European crude steel production increased 45.2% and 34.7% respectively against the year-ago period. All of these are signs of strength in Alpha's key markets. Turning specifically to next year, as David mentioned, we've settled a couple pieces of North American business for 2022 and continued discussions with others. While we obviously will not be providing further details while negotiations are ongoing, we can say that this business was concluded at market prices well above our 2021 settlements. We are also strategically evaluating our product mix and continuing the most advantageous destinations for these products in 2022. While we have historically placed roughly a third of our business into the domestic market in a given year, we might decide to adjust that percentage depending on how the export demand shapes up. Regardless, we look forward to having plenty of our high-quality coal to sell. And based on what we're seeing on our current conversations, we believe that 2022 should be a good year for us. This concludes our prepared remarks for the quarter. Operator, we are now ready to take questions.

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 are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Nathan Martin with the Benchmark Company. Please go ahead.

Hey, guys. Good morning, and thanks for taking my questions. Good morning, Nate. I really appreciate the extra color this quarter on the Mets side with the breakdown and the time shift at different price realizations. So people will kind of start there. How should we think about that split maybe in the back half of the year? Is it fair to assume domestic kind of stays pretty ratable? And then on the export side, obviously, as you guys pointed out, the Australian length of time kind of hurts you in the second quarter with this depressed pricing. But since then the index has more than doubled. We were talking in the past about moving some business away from that index with contractual loss. You know, you guys have about 21% of your net production on price, as you just pointed out. So, again, you covered a little bit of this in your prepared remarks just now, but maybe give us a little more color on, you know, which markets you're targeting or have shown interest, anything there. Thank you.

Sure, Nate. Well, I guess... Broadly speaking, we're targeting all of them. We expect to continue to ship into India and other markets at high levels. But as I mentioned, China's an interesting target right now. With the indices kind of rebalancing themselves, we'll just have to look among the best opportunities there. We're still selling additional spot tons into Europe, South America as well, and some additional domestic met. So it truly is an all of the above situation right now. But we'll look for where the realizations are the best.

Got it. Thanks, Dan. Yeah, I mean, I guess it's – The allure of the Chinese benchmark pricing is not quite the same. They're now closer to parity, I guess, to the Aussie index. But just kind of looking at the full year, net shipment guidance increased. Can you guys maybe talk about where those funds are coming from or maybe even the cadence to expect in the third and fourth quarters? Obviously, you announced the plan to add that fourth section at Road 452. Sounds like that should be online by the end of the year. What kind of incremental times are you expecting there? I don't think we highlighted that at all. Should that help lower overall met segment costs as well? And is it correct to maybe assume that that production kind of is additive to next year as well?

Hey, Nate, this is Jason. I think, you know, a good portion of our increase in guidance has just come from productivity from the current operations being, you know, slightly above what was expected. With respect to row 452 in the fourth section, it will be up and running by the end of the year, and it'll be, you know, more or less at a full run rate by first of the year. Nominally speaking, you know, I think it would add about 400,000 tons of 400,000 incremental tons across the portfolio.

And that's low vol, correct, Jason? So I guess that would kind of help your mix a little bit.

It is low vol. And I think you asked a question about how it would contribute to cost. And road fork is basically at the midpoint of our guidance. So incrementally, it should be helpful. But I don't think you'll materially see it in overall numbers.

Got it. That's helpful. And then again, you know, another great cost quarter. In fact, I guess the other thermal categories are back-to-back, you know, $43 plus or minus quarters, which is below your full-year guidance. So, you know, kudos to Jason and the team. Obviously, you guys maintain the full-year guidance on both net and other thermal costs. Is there, you know, as we look at the second half, is there anything, you know, you guys see that could, you know, cause these numbers to differ materially, either one way or the other, and 3Q or 4Q, and, you know, maybe high royalties and prices over the other day, but, you know, any long, long moves? You mentioned inflation a little bit, labor costs, et cetera. Any color there?

Yeah. You know, we're all room and pillar operations, so no long, long moves for us. But I think, you know, more or less the The supply-demand pressure that we're seeing has mostly been offset with improved productivity. So therefore, I think we're able to maintain our guidance that we gave at the start of the year.

That's fair, Jason. I apologize for the long question. So I guess just maybe a final question for Andy. Congrats on paying off the LCC liability early. As we think about some of the other legacy liabilities you guys have, is there anything else out there maybe that you're working on or could attack to reduce future cash outflows there? Any thoughts? Appreciate it.

Yeah, thanks, Nate. We're constantly evaluating the balance sheet just to try to pick off some items where it makes sense. Now we're kind of getting to the point where, all of the bankruptcy-related items and the other peripheral below-the-line items are wrapping up at the end of next year. And so we're close enough now where there's probably not too much more to be done in that regard, and that's why we're focusing so heavily on potentially preparing for a pretty aggressive debt reduction because it seems to be the best bang for our buck as far as really achieving and capturing some shareholder value. So I think that's probably the last big lick of non-debt-related liabilities that we'll be able to attack for now. But, again, if an opportunity pops up, we're constantly looking at the balance sheet for other pockets that we may be able to take out.

Great. Thanks for that, Andy. And I'll leave it there, guys. Again, as always, appreciate your thoughts. And best of luck on the second half. Thanks, Nate. Appreciate you, Nate.

Again, if you have a question, please press star then 1. Our next question will come from Lucas Bites with the Riley Securities. Please go ahead.

Hey, good morning, everyone. I'll take another crack at Nate's first question. I also really appreciated the MET segment sales table and You have these three categories, export, other pricing, domestic, export Australian index. And I assume domestic, well, that's not going to change much, kind of Q3 versus Q2 or Q4 versus Q2, just given the nature of it. But can you provide some thoughts as how export other pricing mechanisms, export Australian index, what those numbers might look like?

um q3 q4 but really appreciate your thoughts thank you well lucas you know you can do the math and do the percentage increase in the indices they're you know they're all quite a bit uh quarter over quarter there but just to give you i guess a sense you know that the uh the aussie indices pricing number that you saw there In the current month, if you put the math to it, you'd probably come up with a number that looks like $70 a ton higher than that right now. The indices are way up. So it's a big increase.

Terrific. So kind of $140 per short ton at the mine gate Q3 is a reasonable number for –

I'm looking at the indices today. It's a guess, and there's a freight component involved in there that is moving quite a bit these days as well. But, yeah, that's a good guess.

Got it. And the export other pricing, would those be kind of high vol A into Europe? How would those have moved quarter over quarter or versus spot, whatever? Got it.

Kind of across the board on that, Lucas, we're moving all grades, high ball, mid ball, low ball, into all the markets, whether it's China, Europe. You mentioned Europe. Europe, we are definitely shipping additional tons there, too. So, again, I'm not trying to evade it, but it's just all of the above.

You touched on the convergence of the Aussie index to some of the others. So if I were to conclude from the earlier question on the Aussie pricing that this export other pricing mechanisms is also around 140, would you say, Lucas, you do the math again, or would you say that's about the right ballpark?

I think you've got to go, well, you're probably close, probably a little higher on the other. I mean, the Aussie indices are still, as Andy pointed out, there's a lagging factor there. We're not completely climbed out of that lagging period yet on those. So I don't have a number to give you, but I think the other non-Aussie-linked pricing is going to be a bit stronger.

A bit stronger. Terrific. Very helpful. Really appreciate that. Since we're in such a role on the pricing side, I figure I'd keep going. Domestic contract season seems like it's right around the corner now. What's your read of the market there? I would appreciate any color you could share. Thank you.

Well, as I pointed out, we've done a couple of settlements here. I'm not going to go into any detail at all on those. major negotiating period is coming up here in the coming weeks. But I guess if you want a little extra color, what I will say from our conversations is that with the steel industry running very well and the coke plants and blast furnaces trying to run as hard as they can, they are and will be looking for the higher quality coking coals this year. So I think a lot of the attention will be on what I call the higher rank coals, meaning low vol, medium vol, also on the lower sulfur coals going forward. So that's been our experience here in our early discussions.

And then on the pricing side, there's been a fairly narrow range over the last few years in terms of domestic pricing. Would you say this is a year where pricing could break out to the upside, given what's going on in the international markets. Thank you for your thoughts on that.

I mean, as I point out, so far what we've seen is pricing for 22 much, much higher than 21. I'm not going to get any more granular than that. And within a band, you know, I don't know that there's Domestic grades are not all over the map. Last year, they were probably within a $10 or $15 band. I suppose that's possible. I don't know any reason why it wouldn't be similar going forward in 2022 as far as the range.

Got it. And with that band, you mean a spread between HyLol A and HyLol B, for example?

Well, yeah. Again, it's a little early to comment and put a lot of thought into that. You know, in our portfolio, we have some very high-quality low-sulfur hypo-Bs that I'm not even willing to say that that's the spread on A versus B, to be honest with you. It truly depends on the product rate. Got it. Got it.

Super helpful. Really appreciate your thoughts on this. Last question for me. Congratulations on the cost performance, especially during this inflationary environment. And to the team, you commented on the inflationary pressures. Anything that gives you particular cause for concern? Is it steel for roof bolts? Is it fuel? Is it labor? Which one gives you the most headache? Thank you very much for your perspective.

Hey, this is Jake. I would say yes, you know, to all of the above, everything that you mentioned there, and they seem to be coming up really proportionally with one another. But again, you know, as I said before, I think the productivity from the guys in the field and they're really running well enough to where it's pretty well offsetting that and we're able to maintain the guidance that we previously gave.

Terrific. Well, thank you very much. Really appreciate it, and best of luck.

Thanks, Lucas. Thanks, Lucas. Thanks.

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

Thank you. In closing, I want to thank everyone for joining the call this morning, and we reiterate our excitement about the coming year. Our team will continue to build on foundational changes we've made in recent quarters, and we think we're very well positioned for the future success. We look forward to checking back with you at the end of next quarter, and everyone have a wonderful and great day. Thank you all so much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.