Alpha Metallurgical Resources Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 7 speakers on the call.

Operator

And welcome to the Alpha Metallurgical Resources Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Emily O.

Operator

Quinn, Senior Vice President, Investor Relations and Communications. Emily, you may begin.

Speaker 1

Thank you, Paul, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance contains 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 Thanks, Sam. Please refer to the company's Q2 2023 earnings release and the associated SEC filings. Please also see those documents for information about our use of non GAAP measures and their reconciliation to GAAP measures.

Speaker 1

Participating on the call today are Alpha's Chief Executive Officer, Andy Eidson and our President and Chief Operating Officer, Jason Whitehead. Also participating on the call are Todd Munsey, our Chief Financial Officer and Dan Horn, our Chief Commercial Officer. And with that, I'll turn the call over to Andy.

Speaker 2

Thanks, Emily, and good morning, everyone. I'm pleased with our team's performance in the Q2, especially in light of some challenging circumstances that we worked hard to Our June operational update press release detailed the circumstances around the events at our Road 452 Mine in West Virginia And the Dominion Terminal Associates terminal in Virginia, so I won't recount them here. But I will say due to the diligence of our team, each of these challenges was resolved in As our press release this morning stated, the delayed tons from ETA shipped out in July as expected and the Road Fork 52 production levels are back to normal. And we expect to be able to make up the delayed tons impacted by this issue within the Q3. Despite these hiccups, we produced quite well during the Q2.

Speaker 2

In terms of realizations, the metallurgical indexes have experienced volatility in recent months, but have generally followed a downward trend coming off the highs of last year. I believe Alpha is well positioned to deal with this volatility in the coal markets and further softness in the indexes should that occur. On the volume side, we are fully committed at the midpoint of guidance across the portfolio for this year as we continue focusing on safely and efficiently producing this coal. For our customers, we are also looking toward next year and the best way to position ourselves for whatever may come in 2024. The The current weakness in steel demand coupled with monetary tightening in the United States and Europe and the residual inflationary pressure on supplies and materials are all considerations in what we expect the back half of the year to look like.

Speaker 2

As these and several other geopolitical and economic factors continue influencing the coal market Over the coming months, we plan to keep our focus on producing safely, optimizing our output based on customer and market needs and controlling our costs. These are the priorities that will serve us well in all pricing environments. Turning to our capital return program. We've not only seen great Success from the buyback program with more than $850,000,000 returned to stockholders in the form of buybacks since the program's inception roughly 17 months ago. We've also heard from our investor base with pretty certain unanimity that share repurchases are the preferred method through which they wish to have capital return.

Speaker 2

With that goal in mind, we've decided to consolidate our capital return efforts into an exclusive focus on our share buyback program. The dividend program will cease following the Board's next dividend declaration with quarterly unit dividend growth coming from the impact of the share repurchases, but this budgeted amount will now be available for redirection to the buyback program. Management will continue to execute on the Board's current $1,200,000,000 share repurchase authorization, provided market conditions and cash flow levels allow. I believe utilizing all available funds for the share buyback program is the most efficient option that represents the best return to our shareholders. So that's what we're going to do.

Speaker 2

With that, I'll turn it over to Todd for discussion of our Q2 financial results. Thanks, Andy. 2nd quarter adjusted EBITDA was $258,000,000 down from our Q1 level of $354,000,000 We sold 4,300,000 tons in the quarter, dollars 4,100,000 of which came from our Met segment and 200,000 tons from the All Other category. Quarter over quarter realizations decreased for the Met segment as a whole with an average realization of $172.51 for the 2nd quarter compared to $208.93 for the Q1. Export met tons priced against Atlantic indices and other pricing mechanisms in the 2nd quarter realized $175.69 per ton, while While export coal priced on Australian indices realized $159.62 These are compared to last quarter's realizations of with $211.31 per ton and $240.76 per ton respectively, which benefited from a more robust to coal pricing environment.

Speaker 2

Realization for our metallurgical sales in the 2nd quarter was a total weighted average of $176.04 per ton, down roughly 17% against the prior quarter's $213.21 per ton. Realizations in the incidental thermal portion of the Met segment decreased quarter over quarter, coming in at $115.50 per ton in Q2 as compared to $137.65 in Q1, reflecting the lower thermal pricing for the period when the tons were sold. Similarly, 2nd quarter realizations in the all other category were $99.66 down from $109.36 in the Q1. This quarter over quarter drop in realization was due to the declining pricing environment for thermal coal. Cost of coal sales within our Met segment decreased to $106.35 per ton, down from $110.56 per ton in the Q1.

Speaker 2

Cost of coal sales in the all other category increased quarter over quarter to $88.59 per ton as compared to $74.69 per ton in the Q1. This increased cost level in the all other category is due to expected inefficiencies associated with the Slabcamp mines approaching end of life. SG and A excluding non cash Stock compensation and non recurring items decreased to $14,000,000 in the 2nd quarter as compared to $17,700,000 in the 1st quarter. Q2 CapEx was $54,900,000 down from $74,200,000 in Q1 2023. The lumpiness in CapEx spending we mentioned last quarter has continued, but we have reiterated our previously established CapEx guidance range of $250,000,000 to $280,000,000 for the full year 2023.

Speaker 2

Moving to the balance sheet and cash flows. As of June 30, 2023, we had $312,400,000 in unrestricted cash, up from $222,500,000 at the end of the first quarter. We had $93,100,000 in unused availability on our ABL at the end of the quarter. Alpha had total liquidity of $405,500,000 as of the end of June, which is net of the $155,000,000 in share repurchase By comparison, total liquidity at the end of the Q1 was $315,600,000 Cash provided by operating activities increased quarter over quarter to $317,200,000 in Q2 as compared to $177,400,000 in Q1. As of June 30, our ABL facility had no borrowings and $61,900,000 of letters credit outstanding unchanged from the prior quarter.

Speaker 2

Turning now to our committed position for the year. Due to On customer deferrals, we have reduced our full year guidance for thermal byproduct coal volumes within the Met segment to 1,000,000 to 1,400,000 tons, down from the prior range of 1,400,000 to 1,800,000 tons. Walking through the committed table, 71% of Our metallurgical tonnage in our met segment is committed and priced at the midpoint of guidance at an average price of $189.15 Another 29% of our 2023 met tonnage at the midpoint is committed, but not yet priced, which means we are fully committed for the rest of the year at the midpoint of guidance. The Thermal byproduct portion of the Met segment is 100% committed and priced at the midpoint of the new guidance range at an average price of $99.67 And we are fully committed and priced for this year in our all other category with an average price of $90.47 Alpha's Board has declared a quarterly cash dividend of $0.50 per share, which will become payable on October 3rd for holders of record as of September 15. The Board has also determined that the fixed dividend program will cease at year end to consolidate our capital return efforts on the buyback program.

Speaker 2

Pursuant to the share repurchase program, we repurchased just over 1,000,000 shares at a cost of $155,000,000 in the Q2 of 2023. Since the beginning of the program, we have spent approximately $850,000,000 to acquire roughly 5,700,000 shares of Alpha's common stock at a weighted average price of $149.64 per share. The outstanding share count has been reduced by roughly 26 of $10,700,000 I will now turn the call over to Jason for some details on operations. Thanks, Todd. Good morning, everyone.

Speaker 2

As you've seen in our financial results, our cost of coal Over the last several months, we realized the corresponding drop in sales related costs of severance, taxes and royalties, But the other pieces of the cost equation tend to take longer to respond to shifting dynamics. Labor, for example, is an area where we have not seen any reversal of the COVID era inflationary pressure. The extremely tight labor market conditions are causing us to compete for talent with other mining companies as we normally do, but we now find ourselves competing with He's outside of the industry as well. We are aggressively working to both retain our talented workforce and attract to our team The up and coming stars of the next generation. In addition to higher labor costs, we've also seen stickier inflationary pressure within certain aspects of our supply chain.

Speaker 2

On a positive note, many parts and services have been their availability has improved and we continue benefiting from our own processes of building parts and equipment in house. Pricing for supplies and materials continues to climb as annual contracts come up for renewal and vendors are charging more for their products and services. We remain focused on mitigating these cost pressures to the degrees that we can. Looking at the ops Portfolio, in addition to the issues at Road Fork 52, which feeds the Kepler processing plant, We experienced some geologic challenges within our band mill group. The band mill issues have improved and the Kettler problems were resolved early in the Q3.

Speaker 2

Despite these interruptions, we continue to demonstrate our resiliency by flexing production at other locations within the Alpha Enterprise. Our large surface and underground mining fleets, which include 64 active continuous miners, 16 production excavators or loaders, 20 D11s and 6 high well miners. I believe that breadth of our operation capabilities give Alpha a competitive edge We are not putting too many eggs in one basket, and we work hard to optimize each piece of the organization to serve us well. As we've spoken about in previous calls, our last remaining thermal coal mine Slabcamp has been nearing completion. We have set a date of August 31, 2023 when this operation will mine out and idle.

Speaker 2

The workforce at Slabcamp and the Mammoth Preparation Plant that supports Slabcamp have been instrumental in its success. We are excited to transition these employees over to our new Rolling Thunder Deep Mine, which took its first developmental cuts on June 6 and is ready to staff up, making the timing on this transition virtually seamless. While it's something we've talked about for quite some time, Slabcamp Mining Out at the end of this month, Alpha will compete our years long transition to Pure Play Metallurgical Coal Company. I'm proud of this accomplishment and all the hard work and planning and implementation from our nearly 4,000 employees. We look forward to marking this occasion.

Speaker 2

I will turn the Over to Dan for some additional information on the coal markets.

Speaker 3

Thanks, Jason, and good morning, everyone. Due to several economic and geopolitical factors, metallurgical coal markets have continued to soften as economies across the globe attempt to find stable footing. As the Russian war in Ukraine persists, inflationary impacts remain and monetary tightening continues in the United States and Europe, Economic indicators like manufacturing production data indicate that many of the regions of the world are still contracting instead of expanding. The recovery growth expected following China's reopening from its 0 COVID policy has instead been muted. And China's June producer price index continued its Multi month decline fueling concerns of economic weakness and possible deflation in the world's 2nd largest economy and a significant consumer of steel.

Speaker 3

All these factors are influencing steel demand and the metallurgical indices. During the Q2, coal market indices Experience volatility as they continue the overall downward trajectory of recent quarters. Each of the 4 indices Alpha closely monitors decreased by 20% or more over the course for the Q2. The Australian premium low vol index decreased from $300 per metric ton at the start of the quarter to $2.33 on June 30. The U.

Speaker 3

S. East Coast Low Vol Index decreased from $2.84 per metric ton at the beginning of April to $2.27 at the end of the quarter. The U. S. East Coast High Vol A Index dropped from $2.84 per metric ton at the start of the Q2 to $2.16 at the end of June.

Speaker 3

And finally, the U. S. East Coast High Vol B Index decreased from $2.65 per metric ton on April 1 to 2 0 6 further softened slightly from their June 30 levels with the Low Vol, High Vol A and High Vol B indices measuring $215, $208,000 and $193 per ton respectively as of yesterday. The Australian premium low vol index, however, has increased from its quarter close level to $2.46 per metric ton on the same date. The thermal market has also continued its downward trend with pricing dropping at more significant intervals than in the metallurgical markets.

Speaker 3

The API2 Index fell from 1 $146.55 per metric ton on April 1 to $122 per metric ton as of June 30. The most recent report show the UNIX dropping from its 2nd quarter close levels with the API 2 at $112.90 as of August 3rd. As we announced in late June, DTA, Dominion Terminal Associates in Newport News Experienced a mechanical failure on 1 of the stacker reclaiming machines, which caused roughly 3 days' worth of downtime and impacted Approximately 250,000 tons of Alpha shipments due to vessel loading delays. These tons were previously expected to ship in the month of June, They were made up in the month of July once the stacker reclaimer was repaired and came back into operation. In terms of planned maintenance, DTH has successfully completed their annual dumper outage, which occurred in early July.

Speaker 3

Everything is back to normal throughput levels and operating well. In terms of getting our coal to the port, we continue to be pleased with rail performance to DTA, which has remained positive in Transportation to and from some of our other locations has been more challenged at times throughout the quarter. But we are continuing to work around those issues with some success and staying in touch with our transportation partners. Finally, as we look ahead to 2024 volumes and where our coal will be sold next year, we are in the early days of discussions with our domestic customers of contracts for the coming year. We look forward to productive dialogue with them in the weeks months ahead.

Speaker 3

And with that, operator, we are now ready to open the call for questions.

Operator

Thank you. We will now be conducting a question and answer Thank you. Our first question is from Lucas Pipes with B. Riley Securities. Please proceed with your question.

Speaker 4

Thank you very much, Operator, good morning, everyone. Congrats on a very good quarter and also that Rolling Thunder just got a little bit louder. So great job across multiple fronts. Dan, I first want to turn to the markets For a little bit, you just gave a good summary. But to hone in on the seaborne market first, What's your assessment?

Speaker 4

Is the market still a little soft here? Or is it are you seeing signs of Strengthening dynamics, maybe in Asia, would appreciate if you could kind of walk us through the different regions across to globe and where you're seeing opportunities and where it's maybe a little stiffer headwind. Thank you very much.

Speaker 3

Hey, Lucas, this is Dan. I guess broadly speaking, I'll say we've probably seen a bit of a summer low in the markets, which is Not unusual. A lot of buyers disappear from their desks and then go on holiday, and we've certainly seen some of that this year in the Atlantic Basin. I think Opportunities in Asia have been there all year. We're pretty selective on which ones we take.

Speaker 3

There's some pretty low pricing opportunities there. But I think in Alpha's case, I'll just say that I think we're pleased that our contract position this year into the particularly in the Atlantic basin and also in Asia It's kind of kept us from having to participate in a lot of those lower priced spot opportunities. So we're I think We think that will continue through 2023, that we won't have to play in those some of those lower markets.

Operator

Thank you. Thank you for that, Ben. That

Speaker 4

is helpful. You commented on the domestic negotiations and I wondered if you could remind us how much you typically sell Into the domestic market on the met coal side, and what is the flexibility to Shift more into the seaborne market, I assume there might be transportation considerations, but if you could kind of walk us through Some of the flexibility you may have there depending on how negotiations shape up, would appreciate how you might think about it? Thank you.

Speaker 3

Yes, Lucas. Well, I guess, I've been doing this a long time. There's really no typical number. I mean, you can look at our historical numbers. It could be Somewhere between 3,000,000 to 5,000,000 tons a year we could place into the domestic market and we'll wait into that and see what our customers want and look at the opportunities in those markets.

Speaker 3

So I don't have a typical number for you. And in some years, it depends on the strength of the steel industry The coke and blast furnace production in the U. S. Dictates that as well. So and as far as Flexing the tons, we certainly can do that.

Speaker 3

We have the ability to move a lot of tons seaborne, as you know, and we could increase that if the opportunity made sense.

Speaker 4

Very helpful, Dan. So kind of historically, what has typically taken you to the 3,000,000 level versus the 5,000,000

Speaker 3

level? Well, I guess, as I said, those would be in years where historically the U. S, The North American let's say the North American steel industry would be in a weaker position, less co production, less hot metal, but I don't necessarily see that this year. The North American industry is running pretty well. Steel pricing is holding up pretty well.

Speaker 4

Appreciate it. Thank you, Dan. And to turn over to the cost side really quickly, Wanted to ask kind of where you're still seeing, if any, inflationary pressures and also where things might be easing from the cost side. Thank you all for your perspectives on that.

Speaker 2

Hey, this is Jason. Really, it's on the cost front with supplies and repairs, it's other than those that are Linked to steel indexes or fuel or something like that, really the cost pressure continues across the board. It's very competitive on the labor side. It's very hard to find skilled labor. A lot of annual contracts are coming up for renewal as we work throughout the rest of the year.

Speaker 2

And a lot of these people are coming and saying, look, we've been underwater this contract and it's time to We've got to fix this. So it's there's really not one area that you can pinpoint. It's more or less across the board. But I would speculate that we're more than halfway through it as far as contract renewals for 2023. And was there a second part of your question?

Speaker 4

It was I think you touched Most of it was kind of where you're seeing pressures easing. Is there any relief on any cost side?

Speaker 2

Well, so the supply chain constraints, I guess, the availability of parts and components, that has improved. So you would expect there'd be some lag where you'd see improvement on the other side, but we just haven't seen that yet. Yes. And Lucas, this is Andy. If I could throw in one more broader comment on that.

Speaker 2

I've spoken with some of our Suppliers and their issues are the same as ours. I mean, this is all these are all the cascading impacts of an extremely tight labor market. So As they staff up to try to get back to their regular run rates, they're paying higher wages. We're paying higher wages. In It's just a very constricted labor market.

Speaker 4

That is very helpful. I guess with the increased investor interest, maybe you should offer internships for finance professionals or something like that. But All votes aside, keep up the great work. Really, really great job. Thank you.

Speaker 2

Thank you, Lucas. Appreciate you.

Operator

Thank you. Our next question is from Nathan Martin with The Benchmark Company. Please proceed with your question.

Speaker 5

Thanks. Good morning, guys. Happy Friday. Thanks for taking my questions.

Speaker 2

Hey, Nate.

Speaker 5

I'm going to start on the marketing side as well, Dan Busy here. We've kind of touched on the oil price moving up here a little bit to start the Q3. I think to see if our China price is up about $30 or so as well, likely driven by increased domestic price here in China, but we have seen again the U. S. East Coast net price indices creeping lower.

Speaker 5

So Dan, it will be great to get your thoughts on maybe the dynamics that play there, especially that widening spread of Aussie versus U. S. Indices.

Speaker 3

And I guess, I'll attribute some of that to supply and demand. I think there's the demand in Asia is Stronger than it is in the Atlantic at the moment. So you're seeing some of the benefits of that demand on the Aussie pricing. And As you know, we sell quite a bit of coal in Asia using that index. So that's we're pleased to see that.

Speaker 3

On the U. S. East Coast indices, Probably some of that supply that there's some increased high vol supply coming into the market here in 2023, cut some Newmont's in Northern West Virginia. So there's some additional supply out there that might be contributing to that spread a little bit. But That's kind of how I view it.

Speaker 5

Got it. That's helpful, Dan. And then I would say related to that somewhat you guys mentioned, you're now 100% committed for 'twenty three at the midpoint within the Met segment. So It would be really helpful maybe get some insight into how you're thinking about Alpha's export mix in between maybe just off the index tons and maybe some of the other Pricing mechanisms for the back half of the year?

Speaker 3

I think the breakdown that you see in our tables is probably Similar to what we expect the rest of the year, Nate. I mean, shipments will come and go. There will be some vessels, some changes, but broadly speaking, The breakdown that we gave you this quarter is probably a good barometer for that going forward.

Speaker 5

The breakdown Between the exports and linked to Austin?

Speaker 3

Yes. We have a pretty detailed table there that breaks that down.

Speaker 5

Got it. Yes, it's roughly 30% or so to a third to Aussie and then up 40% or so I think to other mechanisms with the balance domestic. Okay, good. That's helpful. I appreciate those thoughts.

Speaker 5

And then maybe shifting to the domestic market, you just mentioned some high Tybalt, production likely coming online here towards the end of the year, but we've also had some supply kind of coming offline in the U. S, some of it operational. I think there's been some idling as well. So assuming tightness is helpful to you guys, but it would be great to get your thoughts Specifically on supply demand here in the U. S.

Speaker 5

And then do you think there needs to be any more idlings or would you expect any more? Just would be great to get some color. There's a

Speaker 3

lot to unpack there, Nate. I guess what I'll say is Yes. The domestic market, I really don't want to touch on that other than to say that the types of coals that the domestic market typically buys are on the higher Quality is end of the spectrum and so some of the supply demand issues that might apply to the seaborne market don't necessarily apply to the Domestic market. But I think the demand I think I would say that across the globe, Supply demand is still fairly tight and it doesn't take a lot of it just takes one event to make it move up or down a little bit and I think All the coals that are coming on to the market will find a home. If they don't find a home in the domestic market, they'll find a home in the seaboard market.

Speaker 5

Got it. I appreciate that. I think that's all I had left, guys. So I really appreciate the time and best of luck in the second half.

Speaker 2

Thanks, Nate.

Operator

Thank you. Our next question is from Jonathan Navarat with Cowen and Company. Please proceed with your question.

Speaker 6

Great. Thank you. Good morning. I think markets have been pretty much well covered right now. So only one for me, And that is relating to the dividend.

Speaker 6

So, what would need to occur for to reinstate the dividend? And let's say, let me give you a scenario, let's say, medical pricing skyrocket, would share repurchases remain the preferred method of capital return or would the dividend be considered again in the future? Thank you.

Speaker 2

Hey, Jonathan. It strictly has to do with how the market values our company. If we believe the valuation is appropriate, Then we might consider going that direction, but it seems like we're pretty long ways away from that. So and as we saw back in The last 2 years, we've seen market coal market prices spike to $600 a ton $400 and everywhere in between, and company valuations didn't catch up. So I think we're very content to get to this pure Share buyback program and stay there until the market determines it's going to appropriately value us, and then we'll consider some adaptation to the program.

Operator

Thank you. Our next question is from Lucas Pipes with B. Riley Securities. Please proceed with your question.

Speaker 4

Thank you very much, operator. Thank you all for enduring one more question from me. So there's extensive media coverage of TEC's efforts up in the Elk Valley and separating the coal assets. And There's a lot of talk of steelmakers from around the world, India, Japan Being potentially interested. And so, Juan, very interesting just in terms of how strategically met coal It's important.

Speaker 4

And so my question to you is, as you engage with steelmakers around the world, are you sensing Are you also having a sense that there is interest on the vertical integration side? We would appreciate your color on that. I know it's a kind of higher level question, but any color you could provide would be interesting. Thank you.

Speaker 2

Yes, Lucas, I don't want to declare myself a mind reader here. So these are strictly guesstimates. But And my data set is limited, not a huge sample size here, but over the past 13 years or so that I've been closely monitoring Back in the M and A world, there's been waves of discussions around vertical integration, A lot of heat, a lot of activity and nothing really has ever happened, nothing material. So I think things get stirred up when the market gets weak and perhaps people smell a little bit of blood in the water that these discussions begin. But Until a big one happens, it's kind of hard to imagine it in this current world.

Speaker 2

So I don't know. There are some instances where it makes a lot of sense, But I just don't know when anyone will actually get to the point of executing on something like that.

Speaker 4

That is helpful. Andy, really appreciate the color. Again, best of luck to you and the team.

Speaker 2

Thanks, Lucas.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Andy Edson for any closing remarks.

Speaker 2

Well, thanks again, everyone, for dialing in. We appreciate your time and your interest in Alpha, and we hope you have a great rest of the day and a great weekend.

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Key Takeaways

  • Despite operational setbacks at the Road Fork 52 mine in West Virginia and a stacker-reclaimer failure at Dominion Terminal, both issues were resolved quickly, delayed Q2 tons shipped in July, and production is back to normal with the expectation to make up volumes within Q3.
  • Alpha reported Q2 adjusted EBITDA of $258 million (down from $354 million in Q1) on 4.3 million tons sold, with Met segment realizations down roughly 17% quarter-over-quarter to $176/ton while costs per ton edged lower and SG&A and CapEx were reduced.
  • Metallurgical coal pricing continued to soften, with key seaborne indices falling over 20% in Q2 and domestic steel demand weak, prompting management to emphasize safe operations, output optimization and strict cost control across varying market conditions.
  • Alpha will cease its dividend program after the next declaration to focus solely on its $1.2 billion share buyback authorization, redirecting the former dividend budget and having returned over $850 million to shareholders via repurchases since inception.
  • The announced August 31 closure of the Slabcamp thermal mine completes Alpha’s transition to a pure-play metallurgical coal company, with the new Rolling Thunder Deep Mine ready to deploy the transitioning workforce.
A.I. generated. May contain errors.
Earnings Conference Call
Alpha Metallurgical Resources Q2 2023
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