Warrior Met Coal Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Warrior 4th Quarter and Full Year 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. This call is being recorded and will be available for replay on the company's website. Before we begin, today's discussion may contain forward looking statements and actual results may differ materially from those discussed.

Operator

For more information regarding forward looking statements, please refer to the company's press releases and SEC filings. The company has posted reconciliations of the non GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release Located on the Investors section of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the Investors section of its website atwww.warriormetcoal.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer and Mr.

Operator

Dale Boyles, Chief Financial Officer. I would now like to turn the conference over to Mr. Scheller. Please go ahead.

Speaker 1

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our Q4 and full year 2023 results. After my remarks, Dale will review our results in additional detail, then you will have the opportunity to ask questions. Our 4th quarter results reflect the culmination of a highly productive year for Warrior, where we made meaningful progress on our strategic priorities to build significant sustainable stockholder value and we were very pleased to end the year on a strong note. We met or exceeded both sales and production volume targets for the year recording a 34% increase in sales volumes and a 21% increase in production volumes.

Speaker 1

These are run rates not seen since 2020. We also achieved record high annual production at Mine 4 of 2,500,000 short tons. Our cash generation from operating activities was exceptionally strong, allowing us to fund a record high amounts of capital expenditures and mine development. We further strengthened our balance sheet with the early retirement of debt. As a quick aside, there is 1 4th quarter metric, Total sales volume that could have been better by 129,000 short tons had our last two customers' vessels made it to the terminal on time as scheduled.

Speaker 1

These contracted shipment delays lowered our adjusted EBITDA by approximately $23,000,000 for the 4th quarter. We know that some investors put a significant amount of emphasis on the MSHIP production data equaling sales volumes, which can lead to expectation differences. So, it's important to understand the impact of timing differences here and our strategic focus. Our approach to spot volumes is working quite well. As we indicated on our Q3 earnings call, we took a more strategic approach to selling spot volumes in the 4th quarter.

Speaker 1

Our goal was to leverage our high quality brands, maximizing our cash margins and build inventories for optimal operations as we prepared for 2024. As a result, we increased our margin per short ton by 63% $70 in the 3rd quarter to $114 in the 4th quarter. In addition, we anticipate that this strategic approach of leveraging our high quality steelmaking coal to maximizing our cash margins will benefit us in 2024 as we expect our spot volume to be lower with higher contracted volumes. I'll share more about our 2024 outlook in a little later. First, let's discuss the steel and steelmaking coal markets during the Q4.

Speaker 1

As expected, steel output from China continued to slow down during the quarter, but net exports from the country remained higher than usual. Additional volumes from China found their way into different geographies, impacting the domestic markets of some customers and putting pressure on steel prices. Demand from India was strong and customers in India continued to indicate an interest in developing relationships with U. S.-based producers like Warrior. Although overall demand was stable from our contracted customers, we continue to see very little spot activity in our traditional markets compared to India, China and Southeast Asia, where spot demand remained more active.

Speaker 1

We also experienced higher than normal freight rates for our deliveries into the Pacific Basin due to a combination of market, logistical and geopolitical factors. The availability of premium steelmaking coals like our Mon 7 low vol product remained tight during the quarter compared to the availability of 2nd tier steelmaking coals like our Line 4 High Vol A product. This was evidenced by the price relativity between both qualities, which remained lower compared to previous years. For example, in 2022, the 2nd tier steelmaking coals traded at price relativities in the low to mid-90s, Whereas 2023 price relativities were closer to the mid-80s. Russians still making coal into China and India remained at historic highs and showed no signs of slowing down.

Speaker 1

Likewise, imported coal from Mongolia into China remained strong, having secured its spot as the largest source of imported coals for the country. Continues to increase as more suppliers target the growth markets of India and Southeast Asia. We that 2023 will be a record year for U. S. Exports into India, as well as for exports into Indonesia, Malaysia, Vietnam.

Speaker 1

Although US exports into China are lower than highs observed in 2021 during the ban of Australian coal imports, they remain strong compared to historical averages. The major indices were fairly stable throughout the 4th quarter, with the exception of some upward volatility in October. Our primary index, The PLV FOB Australia ended the 4th quarter at $2.94 per short ton, which was $8 lower than its October 1 value. In sharp contrast, the PLD CFR China increased by $47 per short ton during the same period, closing the 4th quarter at a price of $301 per short ton. It's worthwhile pointing out that the East Coast High Vol A price averaged $2.50 per short ton during the Q4, which is one of the primary indices used to price our mine for High Vol A product.

Speaker 1

According to the World Steel Association Monthly Report, global pig iron production increased by approximately 0.5% of 1% for the full year of 2023 as compared to prior year. The positive growth was mainly driven by higher Chinese steel production, which grew by 0.1 in 2023. India Steel production, although lower in absolute terms compared to China, continued to grow at impressive rates, increasing by 7.3% for the same period. Most other large steel producing regions of the world production declines compared to 2022. Now turning back to our results.

Speaker 1

Our 4th quarter sales volume of 1,500,000 short tons was 6% higher than the comparable quarter last year. The increase was primarily driven by the additional production volumes due to the end of the labor the improved performance by our transportation partners in the McDuffie terminal, which enabled us to export more product last year. Our sales by geography in the 4th quarter breaks down as follows: 56% into Europe, 16% into South America, 25% into Asia and 3% into the US markets. As we've previously noted, demand from the Asian spot markets have been growing this year, resulting in full year agent sales up 9% year over year to 29% of total sales, while European sales are down 12% year over year 48% of total sales, primarily due to weak spot markets. Our spot volume was 38% in the 4th quarter, which was much lower than the 44% in our 3rd quarter as we took a more strategic approach to selling our premium products into the spot markets to maximize margins.

Speaker 1

As we previously indicated, our spot volume was higher in 2023, primarily due to the incremental volume resulting from the end of the labor strike earlier last year and to a lesser extent, the change in mine force quality from the mid vol to a high vol A product in the second half of the year. With these dynamics in mind, it's important to understand pricing in the Pacific markets and how it differs from our traditional markets depending on market conditions. Typically, the Pacific markets are priced based on a CFR basis rather than the PLV, FOB Australia basis, which is more common in our traditional markets. The freight differential is borne by supplier on a CFR basis whenever the buyer has market leverage, which was the case in the 4th quarter. Turning now to other details on our 4th quarter performance.

Speaker 1

Production volume in the 4th quarter was better than expected and totaled nearly 2,000,000 short tons compared to 1,500,000 short tons in the same quarter of 2022, representing a 34% increase. This was the highest quarterly production output since the Q1 of 2021 and contributed to a record setting year for Mine 4. Both mines operated at higher capacity levels in this quarter and for the year as a result of the additional employees returning from the labor strike, increasing production volumes 21% year over year. Our headcount was 36% higher at the end of this year compared to the prior year. The higher production over sales volume in the 4th quarter drove our coal inventory up to 968,000 short tons from 489,000 short tons at the end of the 3rd quarter.

Speaker 1

We're well positioned heading into 2024 create incremental value from the global demand for our premium products in the current high price environment. During the Q4, we spent $182,000,000 on CapEx and mine development. CapEx spending was $181,000,000 included $128,000,000 on the Blue Creek project, which I'll discuss more in a moment. Mine development spending on Blue Creek project was almost $2,000,000 during the Q4. Moving on to the development of a world class Blue Creek growth project.

Speaker 1

During the Q4, We continue to make excellent progress on the project and I'm pleased to share that our work remains on schedule and within the cost estimates we outlined previously last year. During the Q4, we continued to make progress on the production slope, service shaft, ventilation shaft, which will be fully connected in the second half of twenty twenty four to allow our continuous miner to start development. In addition, we continue to make good progress on the construction of the preparation plant, the mine belt structure, the bathhouse, the warehouse and developing the rail and barge loadout sites during the Q4. Capital expenditures for the development of Blue Creek were $128,000,000 for quarter $319,000,000 for the full year. We've spent $366,000,000 on the development of Blue Creek since the beginning of the project.

Speaker 1

We remain on track for the 1st development tons in Blue Creek's continuous monitoring units in the Q3 of 2024 and the longwall scheduled to start up in the Q2 of 2026. We're extremely excited to begin the journey of producing coal from this new asset later this year. We expect approximately 200,000 short tons of production of High Vol A steelmaking coal from the continuous monitoring units in 2024. Since the new preparation plant will not be operational until sometime in the middle of 2025, we do not anticipate selling any of those tons until 2025 due to the incremental cost to transport the tons to another preparation plant to be washed. I'll now ask Dale to address 4th quarter results in greater detail.

Speaker 2

Thanks, Walt. For the Q4 of 2023, the company recorded net income on a GAAP basis $129,000,000 or $2.47 per diluted share, representing a 29% increase over the net income of $100,000,000 were $1.93 per diluted share in the same quarter of 2022. Non GAAP adjusted net income for the 4th quarter, excluding the non recurring business interruption and other expenses was $2.49 per diluted share. This compares to adjusted net income of $1.90 per diluted share in the same quarter of 2022. These increases quarter over quarter were primarily driven by 6% higher sales volumes and a 3% higher average net selling price, which were offset partially by lower results from our gas businesses.

Speaker 2

We reported adjusted EBITDA of $164,000,000 in the Q4 of 2023 compared to $148,000,000 in the same quarter of 2022. Our adjusted EBITDA margin was 45 in the Q4 of 2023 compared to 43% in the same quarter of 2022. These increases were driven primarily by the previously mentioned higher sales volumes and higher average net selling prices, offset partially by the lower results from our gas Total revenues were $364,000,000 in the 4th quarter compared to $345,000,000 in the Q4 of 2022. This increase was primarily due to the 6% increase in sales volume plus the 3% increase in average net selling prices and lower demurrage and other charges. Demurrage and other charges were $3,000,000 lower compared to 20 22's Q4.

Speaker 2

As you may remember, The higher demurrage and other charges in the Q4 of 2022 were the result of temporary delays and vessel loadings due to severe weather and port congestion. Emerge and other charges reduced our average net selling price to $2.35 per short ton in the Q4 of 2023 compared to $2.27 per short ton in the same quarter of 2022. Other revenues primarily from our gas businesses were 72% lower in the Q4 of 2023, primarily due to a 55% decrease in natural gas prices between the periods. The Platts premium low vol FOB Australian index price was relatively stable for much of the 4th quarter. The index price averaged $303 per short ton for the 4th quarter, which on average was $50 for short ton higher compared to the same quarter of 2022.

Speaker 2

We primarily target pricing our Mine 7 premium product from this index, which represents about 70% of our volumes. For 9 4's High Vol 8 product, which is about 30 of our volumes. We primarily target using the East Coast High Vol A Index price for our traditional markets. As we mentioned, we transitioned Mine 4 from a mid vol to a high vol A product in the second half of twenty twenty three. As a result of the demand imbalances between the Pacific and Atlantic Basins this past year, we have at times used other indices price our Mic4 High Vol A product, such as the CFR China Index, CFR India Index or the Low Vol HCC Index.

Speaker 2

The price relativities between these indices and the PLV FOB Australia can be and have been significantly different upon market conditions. In addition, as noted earlier, the Pacific Basin markets usually require the producer to cover the freight cost to these markets, which lowers our average net selling prices. Cash cost of sales in the Q4 of 2023 was $185,000,000 or 51 percent of mining revenues compared to $179,000,000 or 54 percent of mining revenues in the Q4 of 2022. Of the net $6,000,000 increase in cash cost of sales, dollars 10,000,000 was due to the 6% increase in sales volumes, offset partially by $4,000,000 of lower transportation costs due to timing. Our headcount was 36% higher at the end of 2020 compared to last year due to a focus on hiring workers during the labor strike and the addition of employees who returned from the labor strike in the Q2 of 2023.

Speaker 2

Cash cost of sales per short ton, FOB port, was approximately $121 in the 4th quarter compared to $123 in the Q4 of 2022. Transportation royalty costs were slightly lower in the Q4 of this year as compared to the same quarter of 2022. Our cash cost of production per short ton was slightly higher in the 4th quarter as compared to the same quarter 2022 despite the incremental cost associated with the 36% higher headcount. SG and A expenses were about $13,000,000 or 3.6 percent of total revenues in the Q4 of 2023 and were slightly higher than 20 Q4 of 3.4%, primarily due to an increase in employee related expenses. The interest income earned on cash investments will exceed the interest expense on outstanding notes and equipment leases during the Q4 of 2023, primarily due to lower interest expense from the early retirement of nearly 50% of our senior secured debt in the Q3 of 2023.

Speaker 2

Our 4th quarter income tax expense reflects expense on pretax income and includes an income tax benefit for depletion expense and foreign derived income. Turning to cash flow. During the Q4 of 2023, free cash flow was $63,000,000 This was a result of cash flows generated by operating activities of $245,000,000 less cash used for capital expenditures and mine development of $182,000,000 Free cash flow was $34,000,000 lower than 20 2's 4th quarter, primarily due to higher Blue Creek CapEx spending. Free cash flow in the Q4 of 20 3 was positively impacted by a $90,000,000 decrease in net working capital from the 3rd quarter. The decrease in net working capital was primarily due to decrease in accounts receivable on lower sales volumes, partially offset by higher inventories and lower net accounts payable and accrued expenses.

Speaker 2

Despite the higher capital spending associated with the Blue Creek Growth Project this year, we generate full year free cash of $176,000,000 of which $61,000,000 has been returned to stockholders in the form of a special dividend Earlier last year, on top of the regular quarterly dividends, which increased 17% last year, Our total available liquidity at the end of the Q4 of 2023 was $846,000,000 representing an increase of $36,000,000 over the 3rd quarter and consisted of cash and cash equivalents of 730 $1,000,000 $107,000,000 available under our ABL facility. The Q4 of 2023 capped a robust year of building stockholder value as full year volumes returned to levels not seen since 2020 and market pricing for our premium products was high. This combination led to another year of strong cash flow generation from operations of over $700,000,000 enabled us to fund an all time record high amount of capital expenditures and mine development of $525,000,000 for the future growth of our business. It also allowed us to retire early $162,000,000 or nearly 50% of our senior secured debt. These results demonstrate the significant cash flow generation of our existing operations that we expect to grow tremendously in the near future with the addition of our new Blue Creek Now let's turn to our outlook and guidance for the full year 2024.

Speaker 2

We expect the demand from our contracted customers to remain stable, while we also expect spot demand to continue to be stronger in the Pacific Basin customers with value added to spot activity. We believe the current tightness in the supply of premium coals, like our Mine 7 low vol will persist for some time, which should support higher pricing relative to the 2nd tier steelmaking coals. Our full year outlook encompasses this favorable landscape and we believe 2024 should be another strong operational year for Warrior, primarily driven by higher We expect sales volumes may exceed production volumes using the midpoint of the ranges by up to 500,000 short tons in 2020 as we take advantage of market pricing and the higher inventories on hand. We anticipate our contract Spot volume ratio will be better in 2024 than last year at about 75% contract and 25% spot. This compares to 59% contract and 41% spot in 2023.

Speaker 2

In addition, we expect to hire approximately 250 new employees in 2024 to fill in gaps in the existing mines and ramp up our hiring for the Blue Creek mine later this year. Inflationary costs in the mining sector continues to persist and pressure for labor, supplies, materials and equipment purchases. These additional costs are expected to drive our cost per short ton in 2024 as outlined in our targeted range for cash cost per short ton. Lastly, after considering our total liquidity and our favorable outlook for 2024, we recently announced that the Board of Directors Hesusitis increased the regular quarterly dividend by 14%. We expect to distribute the dividend on February 26.

Speaker 2

This marks the 3rd consecutive year the company has raised its quarterly dividend while developing its world class Blue Creek reserves. In addition, we recently announced our plans to distribute a special cash dividend of $0.50 per share in March, demonstrating our continued commitment to returning excess cash to stockholders, while driving long term growth of the business. I'll now turn it back to Walt for his final comments.

Speaker 1

Thanks, Dale. Before we move on to Q and A, I'd like to make some final comments. As Dale just noted, we have a favorable outlook for 20 24 as orders from customers in our traditional markets suggest stable demand for our coals for at least the first half of the year. While we expect markets like India and Southeast Asia to continue to experience an increasing demand with new projects coming online. We're closely monitoring the dual logistical challenges posed by low water levels in the Panama Canal system as well as the geopolitical tensions in the Red Sea.

Speaker 1

For now, the impact for Warrior has been higher freight costs, especially into the Asian markets, which continue to be above historic averages, while the impact of some of our customers has been longer transit times. It's difficult to predict if this will improve or deteriorate during the next few quarters. We believe that steelmaking coal pricing will remain bifurcated as the availability of premium low vol steelmaking coals should stay tighter than the availability of 2nd tier making coals. As such, we believe the lower price relativities of the 2nd tier still making coals will continue for the near future and also depend upon the geography of spot volumes. While we are well prepared to address a variety of market conditions, we are also extremely excited and laser focused on the disciplined development of our world class Blue Creek reserves.

Speaker 1

We expect another year of high capital spending on the project ranging from $325,000,000 to $375,000,000 which can be funded out of cash on our balance sheet if the market should turn unfavorable in 2024. As mentioned earlier, we continue to make excellent progress in developing Blue Creek. We are on track for the 1st development tons from continuous miner units in the Q3 of 2024 with a longwall scheduled start up in the Q2 of 2026. We expect approximately 200,000 short tons of production of High Vol A product from the continuous minor units in 2024. Mishrahar coal production has been included in our production guidance.

Speaker 1

In conclusion, our full year outlook encompasses a favorable landscape and we see 2024 representing another strong year of operational success and growth capital deployment, driven by expected higher steelmaking coal production and sales. With that, we'd like to open the call for questions. Operator?

Operator

And our first question comes from Lucas Phipps of B. Riley Securities. Please go ahead.

Speaker 3

Hi. Thank you very much, operator. Good afternoon, everyone. My first question, Walt and Dale, is On the sales mix for 2024, I wondered if you could maybe provide a rough breakdown of anticipated sales kind of on a percentage proportional basis, high vol A, FOB port, PLV, FOB port and then also Hi Valet, PLV, kind of CFR China, so we can get a better sense of how these higher freight costs impact realizations? Thank you very much.

Speaker 1

Well, generally, I'll start with the Our expectation is with Mine 7, we're probably 70% to 80% contracted. And And those will all be sold FOB, Port. The remaining 20% to 30% will be spot tons. And those could go either into our traditional markets to those customers or end up going into some of the markets where we have the CFR issue going into Asia. For Mine 4, we are, I think, about 55% contracted this year, some of it into traditional markets.

Speaker 1

But I would say for mine, you're probably going to look at least 50% of that coal going into CFR sales. I think in total, you're probably 70% Mine 7, 30% Mine 4 tons. If all that if I've answered your question, I hope so.

Speaker 3

There were a lot of helpful tidbits in there. I may follow-up on some of it. But I want to circle back on my number 4. It sounds like a high vol A product today. Does that cover does that description cover all of the output of my number 4 and should we kind of think of, call it a Platts or index as the best approximation for FOB pricing for my number 4 today?

Speaker 2

Yes. Lux, this is Dale. Yes, that is pretty much a high vol A product now and it transitioned in the second half. And I think it's about 30% of our volume and We typically target the East Coast High Vol A Index for our traditional markets. Now, When you go into the spot markets, it could be a combination of those different indices outlined in my March, which is it just depends on where it's going geography wise these days.

Speaker 2

So, the markets have really changed with a lot of demand combined in the Pacific basins this time over the last 6 months and we see that as kind of the future is where a lot of demand is going to continue to come. So we're probably looking at about 65% of our volume going into the Pacific Basin in 'twenty four and about 35% into our traditional Atlantic markets, just in total.

Speaker 3

Very helpful. Thank you for that. I'll squeeze one in here on the sales side. In terms of the cadence of shipments in 2024. Could you provide a little bit of color?

Speaker 3

It sounded like you had some tons delayed here at the end of Q4. I'd assume they come through in Q1, so maybe Q1 is a bit of a stronger shipment quarter, but would appreciate if you could frame that up. And when I think or when we think more high level about The production output in Q4 versus tons sold, is that a reflection of weakness in your traditional markets? Or were there any other complications moving those tons? Thank you very much.

Speaker 1

No. All the contracted tons moved to those customers as What we did is we said, in the Q3, we moved more into the spot market and we decided in the 4th quarter to take a little more strategic approach and maximize margins. So, we held off on any business that we felt that would hinder that. So that's how we ended up there. In terms of cadence for sales, Lucas, the problem with that is In any given quarter, you can have something happen in 1 week at the end of the quarter that can adjust that downward by as much as 200,000 tons.

Speaker 1

I think the best We try to match production and sales, but that's about I can't give you much more guidance than that. And if you look for the year, We kind of give you what we think for the year, but I can't tell you which quarter any reduction in inventories will come in.

Speaker 2

Yes, we're just we're really focused on just what the year is and the quarters just kind of fall as the ships arrive and as Complications arise with bad weather to port and everything, that's less important to us than our full year targets. We really don't manage to the quarter results. We manage long term.

Speaker 3

Understood. Understood. No, that's helpful. So Maybe to just put it a little differently to help me with the modeling. You have one long, long move in Q1.

Speaker 3

So kind of fair to assume that production may be touch lighter than in Q4. And then you mentioned You're looking to match sales with production. Has that occurred for Q1? Are you currently matched?

Speaker 1

We're right on target for where we wanted to be year to date.

Speaker 3

And with the longwall move kind of Slightly less than Q4 and production makes sense?

Speaker 1

It does make sense.

Speaker 3

All right. Well, this is helpful. Thank you. I'll turn it over.

Speaker 1

Thank you.

Speaker 4

Thanks, folks.

Operator

Thank you. Our next question comes from Nathan Martin with The Benchmark Company. Apologies there. Our next question comes from Katja Janek with BMO Capital Markets.

Speaker 5

Hi, thank you for taking my questions. First, starting on the Blue Creek CapEx. The original project CapEx cost is about $700,000,000 and then adding the scope gets you to $820,000,000 to $830,000,000 Now on top of that, there's inflationary pressure. So I get up to about $1,000,000,000 Are my calculations correct?

Speaker 2

That's a general trend and there's really been no update or change to those initial updates that we had back in the summer. Yes, target inflation, we haven't seen any reduction in labor, material supplies, equipment purchases, is that inflation is pretty much stuck in this sector. It depends on what particular item, but a range of 25% to 35%. So if you just take the midpoint, 30% on your $700,000,000 plus 130 $1,000,000,000 scope change, yes, you're right around $1,000,000,000

Speaker 5

Okay. And I think, Dale, you said you're going to be hiring more miners later in the year for Blue Creek. Is that already included in your cost guide?

Speaker 1

Yes.

Speaker 5

And how many miners do you have to add this year?

Speaker 2

We're adding in total 250 to company and somewhere around 100 ish for Blue Creek of that.

Operator

And our next question comes from Nathan Martin with The Benchmark Company.

Speaker 4

Thanks, operator. Guys, can you hear me okay now?

Speaker 2

Yes.

Speaker 4

Okay, perfect. What I was trying to say is, Dale, I think you were talking again to Lucas' questions around logistics and Obviously, you guys pointed out the 2 late vessels in the 4th quarter affecting shipments there. You mentioned, I think, low water in the Panama Canal, Red Sea issues. We also have the Demopolis lock outage right now. So I guess it would be great to hear how these are or not affecting Warrior.

Speaker 4

Obviously, Sounds like transportation costs are elevated, but how you guys are working through around some of these issues? Thanks.

Speaker 1

The issue around Demopolis has not impacted us to date. We have our rail service has been very, very strong. We hope that continues. And we have other options to get the coal to market if we start to run into issues with the rail. Our expectation at Demopolis, right now, the core of engineers has been down there, looked at the problem.

Speaker 1

They're estimating May start up In Demopolis, I don't know if that's reasonable or not, but we're making sure that we have options to get our coal to market otherwise. In terms of the increased costs that we were talking about for if we are talking about CFR, it's just the with the additional distances coal has to travel, transportation costs are just up. And it's also with the issues in the Red Sea, it's caused freight costs to go up considerably.

Speaker 4

Appreciate that, Walt. And then Maybe sticking with the cost for a second, again, you just mentioned obviously that the $1.25 to $135 cost per ton guidance for the year include some of that additional labor. Just curious, is there a met price or met price range that you guys are assuming in that full year cost guidance range?

Speaker 2

Yes, we're around between 250, 260 gross index, PLV index.

Speaker 4

Very helpful, Dale. I appreciate that. And then maybe just one more, kind of going back to the capture rate and you guys did a good idea and You guys did a great job of kind of explaining the shifts you've seen contract to spot and you're back to maybe a normal higher level of contract coal this year versus 23, also talked about obviously the high vol A shift at Mine 4. But with the increase in Pacific basin sales you guys Called out versus typical Atlantic markets. How should we think about your capture rate going forward as the last quarters has lagged and been below your kind of historical level, let's call it 90% plus or minus?

Speaker 2

Yes. I think, Nathan, it's a little hard to predict, just given all the different things that are happening. But What we're targeting is, call it, 85% to 90% of the PLV Index. It's to do something simple because obviously with Mine four pricing at all these other indices, you get a different result than it doesn't price off the PLB anymore. So and that's been exacerbated by those price relativities that we talked about earlier, where they were closer to the 90s, mid-90s.

Speaker 2

Now they were more like in the 80s this past year. So some of that has been the demand imbalances, some of the supply issues. But we think those relativities will come back. It just might take a little time. But think of it as 85% to 90% when we try to maximize our margins like we did in the Q4 where we increased our margins 63% from Q3.

Speaker 4

Got it, Dale. Appreciate that. I'll leave it there. Best of luck to you guys in 2024. Thank

Speaker 2

you. Thanks.

Operator

Our next question comes from Chris Lefebvre with Jefferies.

Speaker 6

Hey, thanks guys. Thanks for taking my question. So I wanted to ask about my number 7, but first on the CapEx profile. So if we have $1,000,000,000 Total CapEx of Blue Creek, based on your 2024 guidance, by the end of this year, you'll have spent a little more than $700,000,000 Does that mean $100,000,000 more in 2025. And then in addition to kind of general sustaining CapEx, we're looking at a 2025 CapEx budget of between $400,000,000 500,000,000 Is that roughly correct?

Speaker 1

That's probably a little aggressive in 2025. I think you'll have some of that spending will play out in 'twenty six and completion of the project. But you're right, we'll be up over $700,000,000 by year end and Probably north of $200,000,000 or so next year and finishing up in 'twenty six.

Speaker 6

And is there a reason why you haven't explicitly changed the CapEx guidance for Blue Creek? And you've talked about the 25% inflation, but you haven't actually formally adjusted the numbers. Are you working on specific contracts around that? Or are there other reasons why you might not have formally change that number yet?

Speaker 2

Well, that is the number pretty much, Chris. So I mean, that's the math. But there are, gosh, dozens of contracts that are yet to be signed to finish grading work and all kinds of different things. I mean, we're only Just barely two and a half years into this thing. So we've got a long way to go and there's hundreds of contracts on this thing.

Speaker 2

So Right now, we're just that's the trend and that's where we're headed.

Speaker 1

And I think that's based on a current Expectation in terms of inflation. And I think one of the reasons we haven't given a real update is because we don't we can't determine exactly what the inflationary pressures will be. So we've kind of left that we recognize that could change in either direction right now.

Speaker 6

Understood. So my question on mine number 7. So at what point does the depletion of reserves there start to impact your production volume and unit costs. You have 7 or 8 more years of production there. Is it later this decade where you start to see more cost pressures there and potentially lower volumes as a result of depletion or is it possible to even extend the life beyond that timeframe?

Speaker 1

Yes. Our life actually, what we have right now is just in reserves. We're probably at 13 years, I believe it is. I mean, resources goes beyond that. And we Look at what we have and what we can get to continue The total reserve for that coal mine.

Speaker 6

Okay, great. Thank you very much. Good luck.

Operator

Our next question comes from Lucas Pipes B. Riley Securities.

Speaker 3

Thank you very much, operator. Thank you for the follow-up question. I wanted to ask kind of on capital returns and How you think about that? Why not maybe do a little bit on the buyback side versus a special would be kind of Interested how you think about that? Thank you.

Speaker 2

Yes, Lucas, really nothing's changed there. Capital allocation priority is Blue Creek. And to the extent we have excess cash, we'll continue to do it in the manner we have. I don't see that changing until Blue Creek is up and running at Earliest, again, we have significant state NOLs and all the rules and restrictions that I've talked about for the last 7 years still apply to those rule to the state NOLs and we have about $900,000,000 of stayed in the wells less. So, we still got plenty of runway on some of these in the wells to utilize them.

Speaker 2

So again, right now, Blue Creek is the focus.

Speaker 1

To the extent we have a

Speaker 2

little extra cash, we'll spend that. So And most likely, it will be in more like specials until we get further along with Blue Creek.

Speaker 3

That's very helpful. And Dale, just to make sure I understood you right, you have about $900,000,000 of state NOLs and At the current level of profitability, call it, Q4, How long would you expect those NOLs to kind of last?

Speaker 2

Well, that's the $64,000 question there, Lucas. It depends on what And profitability over the next several years. So, I mean, those NOLs go out until like 2,034, something like that is when they start expiring. So, they have a long life on them right now. But if we have more profitable years like the last 2 years, we'll burn through them really fast potentially with BlueCrate up and running.

Speaker 3

Got you. And so in terms of like when I think about, call it, 2020 for cash flow impact from the NOLs. Like what is the kind of net impact on your effective tax rate? Like how much cash Are you seeing from the NOLs this year 2024 versus not having them?

Speaker 2

Well, I mean, the benefit is basically what your state tax rate is 5%, 6%. So that's your benefit on the state side.

Speaker 3

Got it. Got it. That's very helpful. Thank you. Thank you for that.

Speaker 3

And then maybe just one Quick follow-up on the Blue Creek CapEx front. You mentioned earlier that A lot of things are kind of still to be finalized. You have that range out of 25% to 30%. What gives you the confidence in that number Given that you still have to finalize contractors and such, would appreciate the additional color. Thank you.

Speaker 2

Yes. I think if you go out there and look at any Index, you'll see that labor, supplies and materials pretty much been averaging that and that's what's stuck in the It's easy to read the Wall Street Journal and say, well, it's come down to 3.4%. Well, that has nothing to do with The mining sector where there's been a tremendous increase in labor and supplies and materials and just we've talked about it over the last 3 years just quarter after quarter of the inflation in this sector. So, don't see that changing. And it's possible that we go through a period where there's a little less inflation or there's a little more.

Speaker 2

We just can't predict it at this point. We're only halfway into this thing barely and we still got a lot of runway to go. This is not A handful of fixed price contracts, that's just not the way these contracts are developed. No contractors are going to sit there and say, well, I'm going to fix my steel prices at X. And then they go wildly higher and he's just not going to do that.

Speaker 2

So you have those pass throughs. And we try to limit that and work with them on those contracts. But there's just a whole lot of Things going on here to manage a project of this size and it's and quite frankly, it'd be kind of unwise of us to go say as Well, it's going to be $968,538,000 I mean, If anybody can predict that, then you're a little bit of a fool. So, yes, I think you've got to be reasonable as to what can happen over the next 2.5, 3 years

Speaker 1

and know that there's going

Speaker 2

to be some changes, but to the extent there is an update, we'll give people an update. But we said, look, there is no update at this like that's the trend and that trend continues.

Speaker 3

Well noted. I appreciate that. And Maybe just to put a bow on it, with all of that, you feel 25% to 35% is the right range?

Speaker 2

For now, yes.

Speaker 3

All right. Well, I appreciate it. Good luck. Thank you.

Speaker 2

All right. Thanks.

Operator

At this time, there are no further questions. I would like to turn the call back over to Mr. Scheller for any closing comments.

Speaker 1

That concludes our call this afternoon. Thank you again for joining us today and we appreciate your interest in Warrior.

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Earnings Conference Call
Warrior Met Coal Q4 2023
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