CONSOL Energy Inc. Common Stock

Good morning, everyone, and welcome to the Consol Energy Third Quarter 2021 Earnings 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. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Nathan Tucker, Director of Finance and IR. Sir, please go ahead.

Thank you, and good morning, everyone. Welcome to Consol Energy's third quarter 2021 earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have outlined in our press release and in our SEC filings, and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled comparable GAAP financial measures in our press release and furnished to the SEC on Form 8K, which is also posted on our website. Additionally, we filed our 10-Q for the quarter-ended September 30, 2021, with the SEC this morning. You can find additional information regarding the company on our website, www.consolenergy.com. On the call with me today are Jimmy Brock, our Chief Executive Officer, Mitesh Dakar, our Chief Financial Officer, Dan Connell, our Senior Vice President of Strategy, and Bob Braithwaite, our Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our key achievements during the third quarter of 2021 and specific insights on operations and sales. Mitesh will then provide an update on our liability management initiatives, our financial performance during the quarter, and our 2021 guidance. In his closing comments, Jimmy will lay out our key priorities as we head into 2022. After the prepared remarks, there will be a Q&A session in which Dan and Bob will also participate. Finally, we posted a supplemental slide deck on our website this morning, which can be referred to for additional information. With that, let me turn it over to our CEO, Jimmy Brock.

Thank you, Nate, and good morning, everyone. I want to start by highlighting a few developments for Consolve that we're very excited about. First, we recently announced a very important strategic goal related to reducing our Scope 1 and 2 direct operating greenhouse gas emissions across our entire operating footprint. Specifically, We committed to a 50% reduction in scope one and two greenhouse gas emissions compared to 2019 baseline levels by the end of 2026 and net zero scope one and two admissions by 2040. We are very pleased to be among the first pure pay coal companies to set these targets. I also want to emphasize that this isn't a new focus for us. Since becoming an independent company in 2017, we've prioritized an ESG approach centered around enhancing employee safety, reducing environmental impacts, and creating sustainable value. Developing direct operating greenhouse gas emission reduction targets underscores ESG as a core component of our business strategy while complementing our technology growth and diversification initiatives. We expect to achieve these targets through multiple pathways, including the expansion of our methane destruction program, which began at the PAMC in 2017. We believe our world-class assets will continue to play a vital role in securing the world's electricity and infrastructure needs, and this effort is aligned with our commitment to sustainably lead the coal industry in carrying out this role. Due to the improved and sustained demand for our product, we announced this morning that we are recommencing the development of our fifth long wall located at our Enloe Fort mine. This wall will go to the newest reserve area of Enloe Fort after we recently finished sealing off the northern section of the mine. As such, Enloe will be a light new mine with an efficient layout moving forward. Given the supply-demand imbalance we've witnessed this year, as well as our recent multi-year contracting success, we believe the market fundamentals exist to support this decision. Finally, our Ipman mine and preparation plant are progressing as expected. The mine continues to operate productively on a single production shift with a second support shift that was recently added. Due to the improved market dynamics, the underground operations are generating positive operating cash flows on a consistent basis. We continue to explore options to further ramp up production and promote the Ipman product in the low vol met market. Prep plant earthwork began in Q3 and is approximately 50% complete. Teardown of the recently purchased plant is underway, and the primary processing equipment has been removed and is awaiting transport to the Ipman site. The main steel structure of the plant and rail loadout is now being disassembled. Earthwork and foundations are targeted for completion by the end of the fourth quarter, and the erection of the plant will then commence. Commissioning of the Ipman plant remains targeted for the second half of 2022, which will coincide with the wrap-up to full production at the mine shortly thereafter. On the safety front, our Enloe Fort mine Bailey Preparation Plant, Consol Marine Terminal, and Ipman Project each had zero employee recordable incidents during the third quarter of 2021. Our year-to-date total recordable incident rate at the Pennsylvania Mining Complex remains significantly below the national average for underground bituminous coal mines. Now, let me move on to our Q3 21 operational performance. Coal production at the Pennsylvania mining complex came in at 5.3 million tons in Q3 of 21 compared to 4.5 million tons in Q3 of 20. The improvement versus the prior year period was due to the increased demand for our product as coal markets were just beginning to recover from the COVID-19 related demand decline in Q3 of 20. we encountered multiple operational, geological, and logistic issues as well as planned maintenance shutdown that limited our production in the quarter. As a result, our average cash cost of coal sold per ton was elevated, finishing Q3 21 at $30.64 compared to $28.64 in Q3 of 20. The increase in our per ton Cash cost was mostly the result of limited production, as well as increased maintenance, supply, contractor, and project expenses associated with the operational and geological issues that we encountered in the quarter. We continued to deal with certain geological challenges in the early part of the fourth quarter. However, this has been largely mitigated, and we are back to running four loan laws more consistently. The Consol Marine terminal had a throughput volume of 2.8 million tons during Q3 of 21 compared to 2 million tons in the year-ago period. The increase was again due to improved demand in the seaborne markets compared to the prior year quarter, which was still being impacted by COVID-related cold demand decline. Terminal revenues for the quarter came in at 14.1 million compared to 17 million in the year-ago quarter. Despite the increase in throughput tonnage, revenue was impaired in Q3 of 21 compared to Q3 of 20 due to the take-or-pay contract that was in place in the prior year period. DMT operating cash costs came in at $5.8 million versus $4.8 million in the year-ago quarter, driven by the increased throughput tonnage. On the marketing front, We continue to witness demand for our products strengthening throughout the third quarter of 2021 due to the ongoing economic recovery and improved electric power and industrial demand here at home and across the globe. During the quarter, we sold 5.4 million tons of coal at an average revenue per ton of $47.46 compared to 4.5 million tons at an average revenue per ton of $40.55 in the year ago period. The improvement was due to the increased demand for our product and ongoing supply tightness compared to the prior year period when coal markets were just beginning to recover from the COVID-19 demand destruction that bottomed out in the middle of 2020. Pricing was improved as the quality markets continued their rise in the third quarter of 2021. Henry Hub natural gas spot prices averaged $4.35 per million BTU during Q3 of 21, a 118% increase compared to Q3 of 20. Average PJM West day ahead power prices also continued to improve, ending Q3 21 81% above the year ago quarter. Pricing has further improved since the end of the third quarter, with Henry Hub natural gas prices now in the $5.50 million per BTU range for December deliveries and calendar year 2022 trading above $4 per million BTU. On the export front, the seaborne thermal coal markets continued their upward trend in the third quarter of 2021 as well. API2 spot prices ended Q3 21 at $151 per ton, or 193% improved versus Q3 of 2020. LNG prices also continued to rise in the third quarter of 2021, and the Asian marker ended the quarter more than five times higher than Q3 2020 prices. Petcoke prices remained supportive, propping up demand and pricing for Northern Out Coal and high CB markets. Turkey recently announced that it has eased its restrictions to allow up to 3% dry sulfur coal to be imported. We believe that our PAMC product is a natural fit and we've already received inquiries. We continue to see improvement in our domestic customers' contracting appetites and our marketing team was successful in securing additional sales contracts in 2022 and 2023. As such, Our contracted position has grown to 20.2 million tons in 2022 and 5.8 million tons in 2023. Due to our strong contracted position and free cash flow generation, we feel good about our business as we head into 2022. With that, I will now turn the call over to Mitesh.

Thank you, Jimmy, and good morning, everyone. Before I move on to the financial update, let me add some more color on the recent coal market strength, which Jimmy had just highlighted. A lot of what is driving the improvement is the significant supply-demand imbalance that we are witnessing. We expect that overall market conditions will continue to remain robust due to the accelerating global economic recovery and a muted supply response. IHS market estimates that total U.S. coal demand in 2021 will increase by 110 million tons versus 2020 levels, while total U.S. coal production will improve by only 59 million tons. This is leading to tight supply and declining coal inventories. The EIA reports that August coal inventory levels at domestic power plants stood at 84.3 million tons, the lowest level since at least when Ronald Reagan was president. While the low number is important, what is even more important is that the market is fundamentally undersupplied and power plants are already in preservation mode ahead of the winter. Additionally, the EIA also estimates that these inventory levels will continue to decline and finish 2021 at approximately 73 million tons, a reduction of 45% from year-end 2020 levels. Barring any significant reduction in demand, we expect this imbalance will continue, driven by a lack of investment in the coal space in recent years and the dwindling access to capital for coal companies, which we expect will remain the trend going forward. Combine this with the fact that active reserves continue to deplete during each year of operation, and you have a situation where it will be challenging for supply to ramp up or even sustain at current levels in the future. This highlights the significant value of an already installed asset base and the advantage we have to be able to restart the development of our fifth long wall to restore capacity in an environment where such few opportunities exist. Now let me provide an update on the progress we have made on our key financial priorities. I also want to touch on some of the volatility we have recently witnessed in the API 2 market. I will then review our third quarter 2021 results and our guidance. Despite the operational challenges we face this quarter, we still made significant progress on our financial priorities. First, we continued to maximize free cash flow generation and generated nearly $35 million of free cash flow in the third quarter, which brings our year-to-date total to $162 million for the first nine months of 2021. Second, we continued to make strides on our overall debt reduction goal as we made total debt payments and repurchases of approximately $23 million in 2021, including $2.9 million of open market repurchases of our outstanding second lien notes. Third, our cash balance increased by approximately $12 million during 3Q21, bringing our total unrestricted cash and cash equivalents to $162 million at 9-30-2021. When accounting for our restricted cash of $50 million, our total cash and cash equivalents balance sat at more than $212 million at quarter end. We ended 3Q21 with a liquidity position of $402 million, which allows us to continue to make prudent capital allocation decisions, such as moving forward with the ITMINT project and accelerating our debt reduction goals. Finally, we reduced our net leverage ratio to approximately 1.6 times at the end of 3Q21. As a reminder, this ratio does not account for the restricted cash from our tax-exempt bonds due to the treatment of restricted cash under our credit agreement. However, if we include the $50 million of restricted cash, our leverage ratio as of September 30th would be below 1.5 times, and our consolidated net debt would drop to $469 million. Before moving to the financial results for the quarter, let me highlight some of the volatility we have seen in the API 2 market as it relates to our financial hedges for 2022. As a reminder, we hedged 2 million metric tons in the API 2 market for calendar year 2022. at a weighted average price of $79.34 per ton. On a year-to-date basis, we have recorded nearly $168 million in unrealized pre-tax losses on commodity derivative instruments, $147 million of which were recorded in the third quarter of 2021. Calendar year 2022 API 2 forwards have been highly volatile throughout 2021, ending September 2021 at $157 per metric ton versus $76 per metric ton at the beginning of May 2021, an increase of 107%. However, as of end of October, calendar 22 API 2 prices have reduced by 28% compared to September 30th, and we estimate that approximately 112 million of these unrealized losses have been reversed. With that, let me now recap the third quarter results before moving on to our 2021 guidance. CEIX ended the third quarter of 2021 with a net loss of $113.8 million, or $3.30 per diluted share, which included the previously mentioned $147.3 million of unrealized pre-tax market losses related to commodity derivatives and adjusted EBITDA of $66.6 million. This compares to a loss of $7.2 million, or $0.28 per diluted share, and adjusted at the dollar of $68.3 million in the year-ago quarter. In 3Q21, we generated $80.5 million of cash flow from operations, which included $27 million of positive working capital changes driven by a reduction in our accounts and notes receivables balance and an increase in our accounts payable balance. This compares to cash flow from operations of $15.7 million in 3Q20, which included $31.7 million of negative working capital changes. The improvement in operating cash flow compared to the prior year period highlights the improvement in the core markets and demand for our product. Additionally, we spent $45.9 million in capital expenditures in 3Q21 compared to $19.5 million in 3Q20, This resulted in free cash flow generation of $34.8 million in 3Q21, compared to 4.3 million in the prior year period. Now let me provide you with our updated outlook for 2021. Due to the operational and logistical challenges we encountered during the third quarter, we are decreasing the top end of our expected sales volume range for 2021 to 23.5 to 24.5 million tons. Additionally, Due to our recently announced recommenced fifth long-haul development, as well as the operational challenges and modest inflationary pressures we have encountered, we are increasing our expected average cash cost of coal sold per ton range by 50 cents on the low and high ends to an updated range of 2750 to 2850 for ton. On the pricing front, we are fully contracted for 2021 at an expected average revenue of $46.26 per ton, assuming PJ Invest power-forwards for the fourth quarter of $54.84 per MWh. Finally, we are reducing our capital guidance range by $10 million at the midpoint to a range of $150 to $170 million. Additionally, As discussed earlier, our IPMN project is progressing as expected and on budget, and we are reaffirming our guidance of a second half 2022 startup, as well as all operating assumptions. As we firm up our expectations for 2022, we will provide our 2022 guidance ranges on our next earnings call. With that, let me turn it back to Jimmy to make some final comments.

Thank you, Mitesh. Before we move on to the Q&A session, Let me take this opportunity to reiterate our priorities as we move forward. First, we continue to emphasize the importance of our balance sheet and prioritize improving our liquidity and financial flexibility. We've had a lot of success in this regard since becoming an independent public company due to our consistent free cash flow generation in all parts of the commodity cycle. We are optimistic moving forward that we will continue to de-level the balance sheet and reduce our absolute debt levels, especially given the significantly improved cold markets that we are now seeing. Second, given the confidence that our customers have shown in us by providing duration to our contracted position and reversing the recent trend of shorter-term domestic contracts, we are committed to getting our fifth long wall up and running once development is completed which we believe will be in the fourth quarter of 2022. We think this is a positive sign for us moving forward and provides justification for beginning the work to adding more PAMC tons to the market. As we stand today, we have a solid order book for 2022, and we will remain opportunistic on additional sales we book. Third, while we view recent domestic term business as a positive development for us, We continue to focus on our longer term strategic shift into the export market, which we expect will de-risk our domestic exposure and allow us to capitalize on growing international demand for our high CV product. Year to date, we've shipped approximately 50% of our total sales volume into the export market. And owning our own terminal is a huge differentiator for us compared to our peers. The value of our PAMC coal has always been tied to its high quality, which allows it to play in many markets across the globe. We will continue to prioritize balancing markets at home and abroad with a longer-term focus on shifting to global demand growth. Fourth, we are pleased to be well underway with our efforts to relocate a preparation plant to the Ipman site. This project is the next phase of our growth and diversification strategy. We are very anxious to get this project completed and start placing our high-quality, low-volume metallurgical Ipman product into the market. Finally, let me reemphasize our excitement about our recently announced greenhouse gas emission reduction targets. Our commitment to ESG, with a focus centered around enhancing employee safety, reducing environmental impacts, and creating sustainable value aligns well with our top core values of safety, compliance, and continuous improvement. We expect to be a part of the energy mix for the long haul, and our dedication to reducing our emissions will allow us to do that responsibly and sustainably. I want to end the call by thanking our employees for working safely and compliantly and dealing with some of the challenges we faced during the quarter and getting us ready to head into the new year primed to excel in 2022 and beyond. Our employees are the key to our success, and once again, they have proven their value in challenging situations. There's always more work to do, but we continue to focus on our goal of strengthening our balance sheet and creating long-term value for our shareholders. With that, I will hand the call back over to Nate for further instructions.

Thank you, Jimmy. We will now move to the Q&A session of our call. At this time, I'd like to ask our operator to please provide the instruction to our callers.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your touch-tone telephones. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Lucas Pipes from B. Reilly Securities. Please go ahead with your question.

Hey, good morning, everyone. I have a few questions. The first one is on the fifth long wall, and I wondered if you could elaborate a bit on the capital costs that are required for that project and then the payback period and ultimately the returns of that project. We very much appreciate your perspective on that. Thank you.

Okay. Hi, Lucas. Good morning. Well, as far as the capital goes, as you know, we already own the equipment. So it was just said in our idol, there may be some project rebuild cost in that, but we don't expect that to be anything out of the normal because we have the equipment there. The cost that we'll have in the fifth long wall is developing those two panels to get it started. You know, it'll take two sections to do that. We're driving them both now. So we expect that capital cost will be the same as our others. Lucas, it'll be, you know, we say somewhere around $5 a ton for maintenance capital. This will be the same.

Got it. Got it. So there's no, um, So the upfront investment to get this long wall start producing is in the tens of millions of dollars? Is that the right way to think about it? I know you would probably expense it, but I'm just trying to think about what sort of returns you're looking for to bring additional production back online. And I understand this is a very low-hanging fruit.

Yeah, the way to look at it, Lucas, is, It won't even be tens of millions. It'll be in the single digits. It's just rebuilding some of that equipment that we have now. So we'll send, just like a normal rebuild, we'll send it out to get it rebuilt, and then we'll bring it back in. Usually each long wall move is somewhere, you know, it's in the single digits of millions to do that. And, of course, the payback will be as soon as we start that wall up, which we're anticipating Q4 of 2022, then we'll start earning that money back. Got it.

And Lucas, as you're probably aware, that a lot of the development cost might also be expensed through operating costs, so it might not all show up in capital.

Yeah, yeah. No, no, that makes sense from an accounting perspective. Obviously, we do want to see high returns to bring back additional thermal coal production. That's why I was asking these questions. So I appreciate that perspective. Thank you. And kind of piggybacking on that, you commented on the appetite from utilities to book longer term business and obviously bringing back the Longwell place into that as well. So what sort of pricing for 2022, 2023 have you been able to lock in under fixed price contracts? Would very much appreciate your perspective.

Well, Lucas, you know, in terms of pricing, let me kind of be clear that, you know, we continue to layer in volume for 2022, you know, over the past, I'll call it nine to 12 months. And you may recall that on our first quarter 22 earnings, we announced we had 5.5 million tons sold for 22. At the end of Q2, we were at 10.9. And now we're at 20.2 at the end of Q3. So, again, taking into consideration and based on, you know, where recent API 2 and power forwards are for 22, as some of our contracts, you know, are linked to API 2 and power prices, our average price across that 20.2 million tons are expected to be in the low 50s. And for the balance of our portfolio for 22, you know, we will remain opportunistic in contract volumes that yield the best price for us, whether that be domestic or export. And then looking ahead at 2023, you know, we have increased our sole position. As of this morning, we announced we had 5.8 million tons sold for 23. I can also tell you that we are in negotiations for additional volumes in 2023. Again, so that provides us with this confidence to move forward in the development of that fifth long wall.

Okay. Can you comment a bit on pricing for 2023?

Being that we're in the middle of these negotiations, Lucas, we're not prepared to comment today, but I can just basically tell you if you look at the published prices, we're close to that type of level for 2023 today.

Okay, okay. A follow-up question on your prior comment for 2022 pricing. The low 50s, it sounds like that's a mix between Domestic and export, is it possible to break that down between those categories?

Yeah, right now on the export front, we have approximately 6 million tons sold for 2022, so the balance would be domestic or roughly 14 million tons.

And for the 14 million domestic, what's the recent pricing that you've been able to obtain there?

Again, it's been pretty close to what the market has been for the most recent tons that we contracted, but as I mentioned to you, they were contracted throughout the third quarter, so when you go back and you look at what the published pricing was, and I believe you'll find that the average pricing across NAP coal for Q3 was right around $60, give or take. We've been able to secure volumes at or slightly above those published prices during that quarter.

Got it. Thank you very much. And then my last question, the logistic issues during the quarter, can you elaborate what cost them? Where in the chain are you seeing the biggest bottlenecks and how quickly do you expect the logistic issues to be resolved from here? Thank you very much.

Yeah, I mean, as we mentioned, the rails did have some issues throughout the quarter, but I can tell you that they continue to improve. I mean, we're having conversations at all levels across the railroads, and we are expecting a strong finish to the year, followed by a strong start to 2022. I think the challenge continues to be employees. I think they continue to try to ramp up. I don't think anybody really saw this demand transition increasing as quickly as it did, but they are in the process of hiring, you know, hundreds and hundreds of conductors and engineers to ensure that they're ready for this uptick in demand that, you know, we're seeing now and we expect to go through 2022. Okay.

Okay. Well, I appreciate that and hopefully things improve on that front as well. So, thank you and best of luck. Thank you.

Our next question comes from Nathan Martin from Benchmark. Please go ahead with your question.

Hey, good morning, guys. Thanks for taking my questions. Good morning. So Lucas kind of touched on the pricing side for 22. Maybe I'll shift over to the cost side. Obviously, we're seeing some inflationary pressures, some logistics issues, maybe labor issues as well. Maybe could you guys kind of help quantify any headwinds you see and then It also appears there will be probably a sales-sensitive increase as well next year. So maybe just get your overall thoughts on how costs might trend in 2022.

Well, I think when we look at costs, there are some small inflationary pressures that we're seeing now, and it's with many of the products that we use to mine the coal with. Also, labor is getting, you know, labor is very tight across all the markets. You've heard many people talk about that. But for us, you know, we have been able to hire the people. We've been able to bring some people on down at Ipman, and we'll continue to do that. Now, it's not easy to go out into the labor pool today. The market is very, very tight. And I think what our hopes is as we move forward, you know, some of these geological issues that we have behind us here in this third quarter will go away and we'll get back to some sort of operating normal, whereas we're We've always said, we'd like to keep the inflationary project somewhere below that 5% number when we're looking at inflation. And we believe we'll be able to do that.

Great. Thanks for those comments, Jimmy. Um, maybe again, just kind of going back to the fifth long wall ramping up here. Um, you know, it looks like again, that production wouldn't begin until fourth quarter next year. Maybe could you guys give us your early thoughts on what production out of the PM stone, Pennsylvania mining complex might look like in 22 at this point, and then maybe touch on, on Ipman. Um, you guys gave a little update on the progress there, but what kind of shipments could we see from that minus in 22? Thanks.

Well, looking at 22 for the fifth long wall, you know, in the Pennsylvania mining complex, it'll be late in the quarter and it all depends on how development goes. This wall is going into our newest section of reserve. We just sailed the northern portion of the mine off, and these panels are going to be 3,000 feet longer in length than the others, and that's why it's taking a little extra time to do that. So it'll have minimum impacts in 2022 as far as the fifth long wall goes. Hopefully we can get it up and running for a month or so and do well there. But I think when you look into... 2023 and beyond we can be back to that fifth long wall whereas you know we ran in the past we used a midpoint of 26 million tons so we could be in that neighborhood there moving forward all depends on the market on how hard we run that fifth wall and if the market's there we'll run it to the same level as we run before if it's not obviously we'll pull one of those walls back uh itman itman is going very well you know we're really happy that we found the prep plant that we can demobilized, take down there and have running. They continue to run very productively on the one shift that we've been running. We did add a second crew to pick up some additional tons there. But we're happy with where the Ipman project is now. And I'll let Dan add to that a little bit about the ramp up of production and what our expectations are.

Yeah, sure. Nate, you know, our expectation given the development mining that we've been able to do here since starting the project is that we will be positioned to ramp up very quickly at Ipman when our prep plant project is complete. We are still targeting second half of next year. You know, we've said our annual run rate is going to be on the order of call it 900,000 tons. So we would expect to get close to that level of run rate in the latter part of next year. Between now and then, you know, Jimmy mentioned we're currently operating one section. This is ultimately a three-section mine. You know, so figure somewhere around a third capacity probably for the first half of next year.

Got it. That's helpful, guys. Appreciate that. And then finally, just, I guess, touching on CapEx, guidance lowered by $10 million at the midpoint for this year. Any early thoughts on how that might shape up for next year?

Nate, I think it's a little too early to give you a 2022 CapEx guidance range. But generally speaking, as Jimmy has mentioned in the past, if you think about from a maintenance CapEx perspective, $4 to $5 a ton range with some inflationary pressures, And then ITMN residual spending, which I believe could be in the order of $30, $35 million for next year. And then some other stuff that typically is there from a CapEx perspective. But generally in that range, no major changes. Jimmy mentioned that the fifth long wall could be low single digits that could be potentially capitalized. So maybe you add that in.

Got it. Thanks, Mitesh. That's it for me. I appreciate all your thoughts, guys. Thanks again for the time, and best of luck in the fourth quarter.

Thank you.

Thank you. Our next question comes from Michael Dudas from Vertical Research Partners. Please go ahead with your question.

Yeah, good morning, everyone. First question is, you talked a little bit about that interesting news out of Turkey. Maybe an element in your marketing plans, you know, Are there going to be a significant shift of who's buying your coal, who's looking to buy the coal? Certainly, India is going to continue to be an important customer base. Is there any shift there, that impact on pricing? And a second, I guess, a follow-up to that would be looking at today's market and, you know, as people start to figure out what you can price tons without giving away too many state secrets, but relative to what netbacks might be today and the appetite of the consumer, given where prices are extraordinarily high, And this craziness is certainly going on in Europe on natural gas. Are our customers just, are they panicked? Are they trying to play cute? Or how are they portraying it? And how is that going to be able to help you secure some of those pricing that we might be seeing as we move into 2022?

Mike, I'm going to answer your questions in reverse order, starting off by just, you know, these API2 prices, or I should say just indices in general. You know, a lot of this volatility is based on speculation from what's coming out of Russia and China. Russia obviously saying they're going to increase gas supply, which, by the way, we have yet to see. And then China putting, you know, a cap on their coal pricing. And, you know, obviously China does affect the world market. However, you know, just looking at the fundamentals, the globe certainly remains energy short. And I think as we continue through time, we'll continue to see these international prices, you know, prop back up. You know, we might not see $300 API2 prices, but, you know, I wouldn't be surprised if you see another, I just call it $20, $30 improvement for where they are today. And, you know, although these markets are continuing to bounce all over the place and there is volatility in the export prices, what I can tell you is, First, we are now seeing our physical coal sell to a premium to the paper. And secondly, we have been successful in just the past two weeks to book additional thermal cargoes in Q1, of which yield very close to $100 back to the mine. So again, physical continues to sell at a premium to paper. As far as Turkey is concerned, we are excited about the new opportunity that We are receiving inquiries on a daily basis. I will tell you that if we could ship a cargo tomorrow, they'd be interested. However, as we mentioned, we are fully contracted for 2021. There will be opportunity for us in 2022. Again, it's exciting. It actually places a little bit more pressure on the Indians. You know, typically the Indians will kind of look at the API2 markets and pet coke markets. Now they also got to understand that you know, we have another outlet for our coal. So it puts another sense of competitiveness into the marketplace. And, again, I wouldn't say a major shift from what we're doing today. India will still be a large consumer of our coal going forward, and that's our expectation. But the good news for us is now we have another market opening up to our northern ab coal.

Thank you for that. And maybe, Mitesh, Thinking about locking in and hedging and such, any thoughts on going forward? If there's appetite, ability, how do you think through this, given trying to take advantage of some of these spikes relative to the craziness of the market, yet trying to be a little bit more measured on what the company might be able to secure and certainly drive some pretty, you would think, very supportive cash flows to continue to recabalize?

Mike, that's a good question, and we often have the discussion about forward hedges and stuff like that. I think one of the challenges is just the overall volatility, and at times there is a disconnect between the paper and the physical market. So, for instance, when the prices ran up, you start to see physical trade at a little bit of a discount to paper, and more recently, as Bobby pointed out, you are seeing paper trading at a premium to, sorry, physical trading at a premium to paper. And unless you have a very good one-to-one correspondence there, it becomes a risky proposition. And that is okay if you have a lot of open position that you can offset some of the future sales against it. But for example, for 2022, we are not looking to add additional paper sales for the three or four million tons that we have opened because you will have that issue where you don't have a lot of open position to offset against, right? 2023 is something that we'll look into. 2023 rallied a little bit and then pulled back. We'll look into it, but again, you know, I would much rather prefer Bobby to sell some API tool in contracts and then offset against that than just going naked against future sales. Not that we'll never do it, but it makes it a little bit of a difficult proposition for us.

And just finally, logistics on the size seeds, the availabilities, you know, issues with regard to, you know, containers and crews and those issues. Obviously, it's being priced in the marketplace, but are you going to sense any delays or backups or Anything that could cause some shift to Q1 from Q4, you know, vessels that you might be thinking of that you anticipate to book this year moving into next? Just a sense of that and maybe what pricing might be. And, of course, I'm sure that's maybe not as volatile as the paper markets, but certainly I'm sure very volatile as the shippers or the transportation companies want to make their pay as well.

Yeah, I don't anticipate any issues with getting our export volumes loaded this year. In fact... Almost all of our vessels that we have for the balance of this year have been nominated and have ETAs. As far as vessel rates, freights are still inflated from where they were earlier this year. However, most people I talk to believe that vessel rates will come back down approximately 10% to 20%. A lot of this has to do with some of the Australian ships that have been under load you know, for over a year now, you know, pre, I'll call it the pre-China-Australia tensions. And once they offload, you know, that'll add some additional ships in the market. And then with this, you know, I'll call it slight softening in the markets, it should help as well. Thanks, guys.

Thank you.

Our next question comes from Andrew Cosgrove from Bloomberg Intelligence. Please go ahead.

22. So just wanted to double check, are the 20.2 million tons that are contracted, are those committed and priced or are any of those tons still yet to be priced?

Andrew, I'm sorry, could you start the first part of that question over? You were muted or something. We only heard the part about the tons for 2022.

Okay, sorry. Yeah, I was just curious if the tons earmarked for next year, those contracted, which is that 20.2 million ton figure, Is all of that committed and priced, or are there some slug in that mix that are still yet to be priced?

So of the 20.2 million tons, we have about, call it 3.5 million tons that are subject to power prices, which would be our net back contracts. And then we have between a million and a million and a half tons that are linked to API 2 prices. Balance are... fixed price contracts.

Okay. And then I guess the, the remaining, um, call it five that are left, assuming we do 25 million tons next year. Are those all export oriented tons?

As we mentioned, you know, we'll, we're going to remain opportunistic and, and contract volumes that yield the best price. And that could be domestic or it could be export. Has to arbitrage. Yep.

Um, okay. Thank you. And then, uh, Along the lines of pet coke, can you just maybe just give us a market, a general indication of where current pet coke prices are? Because, you know, not everyone has access to some of these pricing sources. So I think sometimes even just, you know, telling people where things are at so they get a good idea. And then similarly, you know, where domestic nap prices as well right now.

I mean, pet cook prices, we look at mainly what it is for delivered into India. Obviously, that's what we compete against. Last I saw, I believe we were somewhere in the high 100s on a delivered basis, close to $200. So we just do the calculation back off freight and then also look at the – The calorific value discount that we have, we're 6,900 Kcal into India. Petcoke is at 7,500. So it's basically doing a calculation to come up with what we believe are delivered costs and then our FOBT prices for our NAP coal to compete against Petcoke into those specific markets. And again, specifically, it's India. As far as NAP prices are concerned, I mean, where gas prices are today, you know, call it the 550 range, I think what you're seeing in the published markets are accurate. And then, again, we look at what the future natural gas prices and power prices are to come up with what we believe is a competitive price for our northern AP coal, you know, going into the domestic power gen market. And, again, I think if you look at kind of where the published prices are today, whether you're looking at, you know, SNL, if you're looking at Vaughn, if you're looking at IHS, I think they're They're fairly accurate at where they're at. But, again, we'll continue to watch the gas curve, continue to watch the power curve, and price our coal accordingly.

Okay, great. Thanks for taking my questions, and good luck the rest of the year.

Thanks. Thank you. And our next question comes from Fritz von Karp from Checkaway Capital Management. Please go ahead with your question.

Yeah, hi. Good morning. Two questions. One on... the volume shortfall in the quarter due to some geology in the mine. Sequentially, your production is only down like half a million tons, and it's a seasonally weak quarter because of the scheduled maintenance. How much of that quarter-over-quarter reduction was due to problems, and how much was just the normal maintenance season?

I think if you look at just the recent quarter we had, probably the geological issues that we had on the one wall and the one fall probably equates somewhere between, I'm going to tell you, 250 and 400,000 tons.

Okay. So it was not your usual to have any trouble, but it was a pretty small issue, it sounds like, in the big scheme. I mean, the prices, just to shift gears, the prices you're talking about, I mean, at least if I'm looking at my spreadsheet, right, these are pretty high prices compared to, like, you know, the last five years. Yes, yes. I mean, and there's a lot of operating leverage in the model. I mean, maybe you could update us on what your priority is for the use of all this free cash flow. I mean, you know, what's your target leverage and what are you going to do when you reach that?

Yeah, this is Natasha. So just from an overall capital allocation standpoint, you are right. The pricing that we are seeing is some of the higher prices that we have seen in the last four or five years. So thank you for acknowledging that. And we do anticipate that we're going to have a good year next year, and we're going to use that free cash flow based on our stated priorities of reducing our outstanding debt. So right now we sit north of 1.5 times levered on our bank calculation method, 1.6 times. I would like to get that sub one as a first step, and then We always look at what other initiatives that we have going. For instance, the IPMN project will have some residual spending next year, which will use some capital. And then looking at what the opportunity set looks like from everything from shareholder return perspective, internal projects, those kind of things. I think all those things will be considered.

Okay. Thank you very much.

Thank you. And our next question is a follow-up from Lucas Pipes from B. Riley Securities. Please go ahead with your follow-up.

Hey, thanks very much for taking my follow-up question. I want to get a better understanding of this fifth long wall. So it sounds like this is going to take the majority of 2022 to get up and running. And you have some tons contracted for 2023, but it's 20% in that ballpark or so. So what gives you that confidence to restart this long wall? Has something structurally changed in the market that we're going to need to supply? I would really appreciate it.

Well, Lucas, we still think that, as Bobby mentioned earlier, the world is energy short. And we just do not see, we think the tightness in the market is going to remain there. Any of the capital that's been spent in the last, you know, two to three years has certainly not been spent to have the coal mines in a position to run more tonnage or to add new tonnage. So we have the opportunity at this fifth long haul. Like I said, some of the capital has already sunk in that. Some of the equipment was rebuilt because we planned on running that until the COVID situation happened to us. So we think that the market's going to continue to stay strong. We're pivoting, you know, toward the growing the market, growing markets in the international business. And we believe that we'll be able to get our costs well under control again and compete in both the domestic and international markets. And as it grows, we'll have an opportunity for the tons.

And Lucas, I'll also point out one thing is that if you think about what we said about the fifth long wall is it's got very de minimis capital, so to speak, but it has a long gestation period. So for example, we start work today, we don't see it until next 12 months. This helps us get ready. Hopefully, 2023 is going to be a continuation of 2022 and we are able to capitalize on it. But if it is not, we did not spend a lot of capital, but we avoided the long gestation period. Mining is always difficult. For instance, in the third quarter, it would be nice to have that fifth long wall running when we were facing geological issues. it could potentially help offset some of that risk as well. So on a risk-adjusted basis, it would be nice to have that wall geared up and ready to start. Whether we run it or not depends on what our contracted position is going to be in 2023.

Yeah, and Lucas, if you recall in the past, that's exactly what's happened to us. I mean, we've had issues on these other longwalls, and then we ran the other four really hard, and we hardly noticed it. But when you take we were down to four longwalls, When two of those four are down, then you feel the pain of the volume.

And one last thing on a marketing front, Lucas. We are in negotiations for additional volumes in 23, and I can tell you that we've passed on some volumes already for 23. We just didn't feel as though it was the right price for what the market was back in Q3. And I can tell you we're having similar conversations with those same customers, and it's likely we're going to yield higher realizations than if we would have booked those tons in Q3. So I would anticipate... by the time we have our next earnings call that we will have some additional contracted volume for 23. And, um, again, most of that, just about all of that for 23 that we have booked is domestic. There's very, very, very little export in that. And, um, you know, typically we sell, you know, close to 50% of our coal exports. So we feel pretty, pretty confident that the market will be there in 23. Okay.

That's, that's, that's helpful. One, one, one other follow-up question on this topic. Uh, Is there a tradeoff between this gestation period and capital? In other words, given where the market is today, why not spend more money to try to get this up and running quicker?

Yeah, there's really not a tradeoff with this. Plus, we can't get it up and running quicker. We could spend more money, but it won't do anything. We have the crews hired. We're running both of those crews to develop it. It's just a matter of how many feet per machine shift can you drive to get it there. And we're going to run every available shift we can. And we'll update on our next earnings call where we are with that. But currently, it's down to this feet per machine shift to drive up and make the connections to where we can have it ready to move along on to.

OK. Well, I appreciate that additional color. And again, best of luck.

Thank you.

Our next question comes from Arthur Calabartinos from ANC Capital. Please go ahead with your question.

Thank you. Hey, guys, I have a question. On the contracted position, right, so 22 is around the corner in less than 60 days, and you just addressed something on 23, which is interesting, that most of it is domestic. But I'm looking at, you know, like you guys, all the news flow, and you have better news flow than I do, but the inventories, like in India – you know, England had to turn on a new coal plant, are so low. At what point do the international guys, and I understand they don't do as long-term contracts as the U.S. guys do, but inventory is inventory, and if you run out of electricity, it's a bigger problem than what the price is, and you mentioned physical is greater than paper. Do you see a dynamic changing? And I would have thought the 23, again, it's early, but not early, but I would have thought you'd have more international business in 23, or are those guys like calling you up and saying, okay, I want a few hundred thousand tons. I need it in 2023, and I'll sign a contract. If you could just talk on that. Thank you.

Arthur, like you said, inventory levels are at the lowest I've seen them in 17 years across the globe. I think everybody's concerned about tomorrow, and the focus right now for many international customers is basically tomorrow, not 2023. I do anticipate, call it in the next You know, three months or so will probably start those discussions for, I'll call it the balance of 22 and for 2023. But right now, everybody's just focused for tomorrow to try to get as much cool as they possibly can as soon as possible to ensure, again, they keep the lights on. I will also tell you that in terms of India, as you mentioned, you brought that up. Most of our coal goes into the industrial sector, not the power gen sector. It's mainly due to the quality of our coal. Obviously, India burns a lot of domestic product, Indonesia coal, South African coal, et cetera. But we would yield a premium to all that based on our calorific values. So I think a long-winded answer is everybody's concerned about tomorrow. 2023 is a little bit too far out for these international guys, but I think we will get in those conversations here, call it, in the next three, four, five months.

One last question. The domestic guys bring up their inventories. I was talking to another coal company on an earnings call last week, and the way they phrased it was our guys here, they can't get their – not they can't. Maybe they're prohibited or there's something like to keep their inventories higher than – not higher than they should, but much higher than they are now. And the comment was like, the utility would like to have higher inventories, but they can't. Is there anything going on there or anything like that that prohibits them from having higher day supply of inventory?

No, I think the comment that was made was likely due to transportation issues. Obviously, again, I think I mentioned this earlier. No one saw this great uptick. I mean, I think many predicted $4 gas. I'm not so sure. Many predicted $5 and probably not $6. And when that hit, obviously, there was a lot of gas-to-coal switching, and the transportation network just couldn't respond quick enough to be able to get all this coal to the utilities. So my assumption here is the comment on inventory levels can't get built up in a very short time is mainly due to logistics. But again, over time, I think you'll continue to see that improve, but So long as these gas prices remain in this, call it $5 range, I mean, every ton that gets delivered to a power plant is going to get burned. So it'll need to be replaced. And that's, again, another reason why we're very bullish on 2022 and, for that matter, 2023.

All right, good. Thank you very much.

Yes, sir.

And, ladies and gentlemen, with that, we'll be ending today's question and answer session. I'd like to turn the floor back over to Nathan Tucker for any closing remarks.

Thank you. We appreciate everyone's time this morning, and thank you for your interest in and support of CIX. Hopefully, we were able to answer most of your questions today, and we look forward to our next quarterly earnings call. Thank you.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.