Alpha Metallurgical Resources, Inc. (AMR) Earnings Call Transcript & Summary

Good afternoon. Welcome to the Contura Energy Investor Update Call hosted by The Benchmark Company. [Operator Instructions] At this time, I would like to pass the conference over to your host, Mark Levin. Thank you. You may proceed, Mr. Levin.

All right. Good afternoon, and welcome. My name is Mark Levin, I'm the senior coal and rail analyst at The Benchmark Company. It is my pleasure to be hosting my first ever investment call at Benchmark, a firm that I just joined about a month ago. I think most of you on the call today I met or know. But for those of you who I do not, by way of background, I've been covering the coal space for almost 20 years. I've seen good, I've seen bad and everything in between. It's a space that's not without its challenges and issues, but also with some of the most kind-hearted and hard-working people you could ever find, and when you meet them, it's certainly not hard to root for them. As for Benchmark, I realize many of you may not be familiar with the firm by virtue of the areas in which it specializes: Internet, media, biotech, et cetera. But it's been around for about 30 years, covering equities. And through the recent hiring of 4 or 5 new analysts, Benchmark is now establishing a new vertical in industrial. So it's not every day the sell-side firm, particularly a smaller equities firm, goes out and makes a bunch of hires, so it's really an exciting time for the firm, and hope you will support us in our endeavor as we try to provide the buy side with the value-add research that it seeks. So with that very quick infomercial out of the way, it is my pleasure to be hosting a call in which we will hear from the U.S.'s largest met coal producer, Contura Energy. I don't cover the stock at this point, but I've known many of the members of the senior management team for a good while now, including their CEO, David Stetson. Today we're going to hear from David; his CFO, Andy Eidson; and his Chief Operating Officer, Jason Whitehead. The call will be a mix of Contura-specific issues, financial and operational, and also a little bit of a market outlook for met coal, where I think there are some green shoots, believe it or not, that are finally starting to emerge. But what I want to do to begin is to hand it over to David and the rest of the Contura management team, let them discuss their preliminary Q4 results, their 2020 guidance, and then I'm going to moderate some Q&A with the management team. And then at the end, we'll open it up to listener Q&A. If you don't want to ask the question yourself, shoot me an e-mail. My e-mail is mlevin@benchmarkcompany.com. And I'll do my best to work it in, although keeping in mind, we only have an hour today, so I probably won't be able to get to everything, but I will do my best. So with that out of the way, let me hand the floor over to the CEO of Contura Energy, David Stetson. David?

Thank you, Mark, appreciate hosting us today. Mark gave an intro to the team, but let me take the opportunity to give a formal discussion of everyone. Jason Whitehead's with me and he's our Chief Operating Officer, he came on board in August of 2019. He's done a phenomenal job that we'll hear about today, in bringing -- driving efficiencies and cost controls as well as making our operation one of the most efficient and productive ones in the metallurgical coal space. Andy Eidson, our CFO, is with us today. He'll be -- I told him he gets to take all the questions, so make sure all your questions are directed directly to Andy. We also have Roger Nicholson, our General Counsel. And what call goes without getting to hear from the general counsel on forward-looking statements. So Roger, this is your glory. I don't think there's probably a lot of questions for you. So don't blow it here. Do your forward-looking statement. Make it good.

Thank you, David. This presentation and yesterday's press release includes forward-looking statements. These forward-looking statements are based on Contura's expectations and beliefs concerning future events and involve risk and uncertainties that may cause actual results to differ materially from current expectations. You should review the company's filings with the Securities and Exchange Commission for information about some of the risk factors that may affect the company. These factors are difficult to predict accurately and may be beyond Contura's control. Forward-looking statements made in this presentation, in yesterday's press release or elsewhere, speak only as of the date made. Many uncertainties and risks that arise from time to time and is impossible for the company to predict these events or how they may affect Contura. Except as required by law, Contura has no duty to and does not intend to update in regards to its forward-looking statements. In light of these risks and uncertainties, investors should keep in mind that results, events or developments discussed in any forward-looking statement made in this presentation or in yesterday's press release may not occur. For a more in-depth discussion regarding forward-looking statements, please see Page 3 of our investor presentation, which is posted on our website.

Thanks, Roger. And if anybody's still awake, we'll kick off with the call. Again, Mark, thanks for having us. I'm assuming that most people on the call, if not everyone, has seen the press release that was issued yesterday morning as well as the investor presentation, both of which are on the company's website. So if you don't have it, feel free to come to the website and grab those presentations. It is not my intention to try to walk you through slide by slide, page by page flip. But so what I want to do is spend more time on the Q&A side of this. So what I want to do is give you my takeaways on Contura Energy. As you saw from the investor deck as well as the press release, Contura is very uniquely situated to have sufficient and very adequate liquidity to manage through downturns in the market. Jason and Andy and the team have driven efficiencies, have lowered costs across the organizational structure. As you may recall from Jason's conversation on the third quarter call, costs are coming in line with our expectations. We, as part of the press release, have reiterated our costs going in for the metallurgical side of the company for 2020 at $76 to $81, and this is in spite of a reduction in our production that we'll talk about and take questions on. We believe the reduction in our production portfolio is a very disciplined and a very prudent approach to matching supply with demand. Production, I might add, that can be brought back on quickly and without any significant costs to match better markets. We also updated you in our press release and in the investor deck on our capital projects. The Kepler is a low-vol project that will start production in the first quarter of this year. We also announced that we recently completed the acquisition of a reserve we call the Indian Creek reserve out of the Mission bankruptcy. It'll add about 10 million additional tons to the new Road Fork 52 mine and provide us a longer bandwidth on our low-vol product. Our Black Eagle is coming along very well and fully within expectations. We should be hitting on thicker coal seams in the fourth quarter of this year with full production in the 2021 time frame. Lynn Branch is still scheduled to go into production in the third quarter. The Black Eagle, by the way is a high-vol A project, and Lynn Branch is a high-vol B-plus type project. So all the capital projects are coming on. As you recall from the third quarter conversation we had, not only do they all expand our product offerings, but they're all -- those projects we identified are in the $65 to $70 cost horizon and as part of our overall goal to continue to drive down our net cost. Through all the cultural changes we've made to create a flat, nimble operating and corporate culture, we've lowered our cost horizons. We've implemented changes at all levels to make quicker decisions, and we believe that Contura is well positioned to take advantage of improving markets. So those are the takeaways I had from the press release as well as the investor presentation. And instead of me chatting a lot, I thought we would -- Mark, go ahead and open the call up to questions so that we can attempt to answer any questions of our existing shareholders, analysts or others may have of Contura Energy.

That's perfect. So what I will do now, David, is, I'll throw some questions down to you, and then in the end, we'll open it up to investor Q&A. As I mentioned, if anybody on the call does not want to ask the question themselves, please feel free to shoot me an e-mail at mlevin@benchmarkcompany.com. So let me start on the -- let's start for a second on the 2020 guidance. You guys took about 700,000 tons, I think, of met out of your volume for 2020. What's the quality breakdown? How are you doing it? Are the mines idled or are they simply -- are you simply reducing shifts? How are you -- maybe you can give us a little bit more color on the tons that are coming out of the market.

Well, I mean I think -- this is Jason, by the way, Mark. I think in large, it's pretty well an even quality split across the company. I think largely, the focus was on the higher cost, higher -- the mines that are on the higher end of our cost curve. And then also the coals that are -- they aren't captive to our operation, the foreign-sourced coals and things like that, with the goal being that the higher end of the cost curve more than offsets the fixed costs that are rising on the other mines.

And are the mines -- Jason, are the mines idled or are you just simply reducing shifts?

Mostly in scheduling. There were some -- like again, there were some nonconformed mines that have been severed, but there is -- all that capacity still remains at our captive operations.

Got it. And just more of a market-based question, but how long does it take if the return decision is made? And then maybe as a sort of follow-on to that, at what price level do you think this production might return?

Well, as far as timing, I mean I think near immediate. This could literally be turned on from week-to-week and turned back off to say -- I'll let Andy comment on what price environment that we see these coals coming back online, but it's not something that's hard to switch on and off.

Yes. And Mark, I think something that we're looking for is some further confirmation of the market turning at some point of inflection. If we start seeing some collapse of the gap between Aussie low vol pricing and the East Coast high-vol A, I think that'll be certainly a point in the right direction. But as long as this large disconnect remains along with what a lot of people are seeing in the market where the index isn't really the index, and there's a lot of battle going on at a discount to the index, some of that stuff probably needs to clear its way out of the system to help us see that supply and demand are starting to reach -- at least they're pointing toward an equilibrium. So I think we're going to -- I don't want to put an actual number out there, but I think we need to see some collapse on all of these decouplings between East Coast realized prices and international Aussie low-vol prices.

Yes. And that's a great segue, Andy, because I was going to ask the, discounting that you may have to take to the indexes. When you look maybe at the Q4 realization, I'd gotten a couple of inbounds, people saying it looks like there was some bigger discounting than people expected, maybe with regard to the met price realizations. What kind of a discount are you guys taking on -- if we're looking, like many of us look at like the Platts high vol A and B and U.S. low vol, and we look at that, what kind of a discount is in the market right now for those various qualities?

I think I'd probably have to speak more anecdotally on this just because some people's opinions may vary here, and they may be experiencing different things. But our sales team sees anything from just a tiny couple of dollar discount upwards of 8% to 10% requests from customers, and it is very customer- and location-specific, but it's a pretty wide range right now. And I think it just signals that the customers, they still sense some confusion as far as a disconnect between supply and demand, and they're going to keep pushing the envelope until there is some confirmation in the other direction. So again, there's really no hard and fast number to put out there right now, but it can reach into -- scraping into double digits.

Got it. And have you seen it get -- has it gotten any better of late? Or has it still just kind of continued on into January and February?

Again, anecdotally, I think we're still seeing the requests for the discounts. I think we might be seeing a little bit of timing just as far as some customers wanting possibly to accelerate a cargo or 2. And to do so, they relax on their request for a discount. So it's hard to get too excited on just a couple data points, but the most recent ones do seem to be at least in the right direction.

Yes. And that kind of dovetails with what I've been hearing recently, which is there has been a little bit more activity, particularly on the heels of what's going on in China. One question, too, and it's interesting because I cover the rails as well. And have you seen rail rates come down with met prices proportionally? And I'm speaking specifically on the export met side. Have you got -- what do rail rates look like into 2020? Is there any change in terms of what those rail rates look like this year versus maybe when met prices were higher last year? How much are you picking up there, if anything?

I wouldn't say, at this point, it's anything terribly material. I mean there's always going to be $5 of flex one way or the other, just depending on where the market goes, as most of our investors are aware. And I think we've talked about this publicly before, we do have a -- kind of a tiered structure in place with one of our rail service providers that kind of adjusts, and it helps smooth and -- when there's points of market fluctuation. But I think if you're just ballparking it, you could probably expect something in the low to mid-20s in challenging markets. And then it always likes to creep up into the low 30s when markets are really good. So really not seeing too much variation from that kind of relationship right now.

Got it. And those numbers, do they include the port charge or those excluding the port charge?

Well, again, through our 67% ownership of DTA, we don't necessarily have to worry about the port charge, but folks who are -- yes, folks who are using third-party port services, they're probably seeing the -- I don't -- it's interesting, we still see at least a degree of demand, I guess you'd call it, some -- a little bit of clogging of the system, just to clear out some inventory. So I think it's probably safe to say that you've always got a couple of dollars of flex. In good markets you'll see charges of $4 to $5 a ton for transloading through a port, DTA being one of those. More challenging markets, you could see it drop to $2 or $3, but I haven't really heard of a whole type of a lot of variation. So many people now have contracts in place that may or may not be tied to pricing, but aren't -- doesn't seem to be that much spot activity from -- at least from DTA's perspective.

Yes. No, that makes sense. I just got a question, just said basically East Coast coking coals have to lag the Aussie benchmark. Are you seeing any improvement in buying interest lately? Or should we expect the Asian market to continue to be a bit stronger than the Atlantic one going forward? Do you guys have an opinion on that?

Volume-wise, I would say it has looked better. But again, I don't think we've seen enough to really drive a point that the prices are moving as quickly as anyone would want, just yet.

Right. Yes, that makes sense. And when you think about the production cuts, someone just kind of shot an e-mail and said, you cut some higher-cost mines, as Jason was just alluding to, but the cost guidance didn't come down much at all. Is there any reason why? Or is there just increased conviction in that cost guidance, even after taking out some of the higher cost operations?

Well, I mean I think in large, the higher cost operations are offset by increased fixed costs across the remaining tons. That was kind of the initiative there, was to keep ourselves whole while taking 750,000 tons of met production out.

Yes, that makes sense. It -- I'm sorry, go ahead.

Yes, I was going to say, Mark, that Jason hesitates to toot his own horn here, but the entire team did such a great job. And anytime you try to think about taking 700,000 tons from the midpoint out of operation, you would normally expect, even if it is heavily weighted toward higher-cost mines, unless these mines are $40 above your current weighted average, you're going to expect to see some cost degradation just to the point of the fixed costs that Jason just mentioned. So I don't want it to be lost on people how challenging it is to keep costs flat when taking that kind of volume out, both on the thermal and the met side.

Yes, that makes sense. And you guys, you did see a really nice improvement in productivity in Q4, so kudos to Jason and everybody else there. On the met cost guidance, Andy, what's the export price or what's the realized price range, does it assume from a met perspective? Because you obviously have a royalty component that's baked in. I'm just curious, if we do get a big volatile move in met, what you guys are assuming in that guidance from a met price perspective?

It's roughly a $1.50 [ since the close ]. When we -- typically when we go through this exercise, our annual budget, we just go with whatever the forward strip looks like. And even though the forward strip is a little bit disconnected, Aussie low vol versus East Coast high vol A, we decided we would just go ahead and stick with that. So that's kind of the genesis for what the sales-related costs are tied to.

Got it. Got it. Got it. And one of the things you guys have -- we've talked a little bit about -- or haven't spoken at all, I guess at this point, about the thermal piece. Cumberland, maybe you can give us an update of what's going on there. Is there any opportunity to see materially lower cost once you move into the new district in 2021? What's the outlook for Cumberland in '20 and beyond? And I know you guys have talked about divesting thermal assets. Do you think that there's a market for -- or an opportunity to divest an asset like Cumberland?

Well, this is David. I'll take the first shot at that and then let Andy kind of fill in the gaps. During our third quarter call, we talked about Cumberland. Cumberland is going to require that we raise and spend a significant amount of capital in the 2020 regions as a result of impoundment. In fact, this amount of capital, Mark, that we'll be deploying is larger for this 1 thermal mine than it is for the 3 current metallurgical capital projects. So as I look at the decision to deploy capital moving forward at Cumberland, it's complicated by the fact that we still haven't received final permits to commence the impoundment, and our CBA is coming up for renewal this summer. When I look at historic information that Andy and Jason provided me on Cumberland, it has provided limited free cash flow. And then with this new expenditure, free cash flow will be repressed over the next 2 years at least, which makes a decision on Cumberland very difficult from my perspective. I have always established a philosophy that each mine complex should stand on its own merits. And so we're analyzing every scenario in regards to Cumberland. We've begun discussions with the UMWA concerning a contract renewal. We're trying to -- in an effort to seek greater safety and productivity improvements, as well as remain competitive with that mine with everyone else in the region, all this is going to influence our decision on the capital expenditure. So we're in the early stages right now on that. In the meantime, we'll explore all of our options as it comes to Cumberland. Andy, did you want to -- or Jason on the ops side, they asked a question about moving to the -- into the northern district, you're welcome to get that one, if you [indiscernible].

Yes, I mean I think, David, assuming that the decisions are made and the investment is put into the impoundment and the other infrastructures, then the answer is yes. I think in 2021, we migrate into a better district, with longer panels, fewer longwall moves, more production, less cost. And I think that continues on past 2021 into the out years as we move further to the west there in Cumberland.

Yes, Jason, and related to that, I know -- I mean I look at, I guess the $34 to $38 cash cost guidance might be a little high by historical standards. Where do you think we exit 2020 from a cash cost perspective at Cumberland? And then what do you think the cost upside is based on the -- moving into the new district?

Yes, Mark, this is Andy, I'll jump in on that one. I think -- so when you look at the volume guidance, so this is another, I guess another picture of what happens when you take some tons out of the system. Again, the Northern App thermal market remains pretty challenged. The API 2 being where it is, it's really blocked off most export opportunities, and so a lot of tons coming back domestic just continues to put pressure on that market. But dialing back production from more historical target levels of 7.5 million tons or so at a sub-7 million tons, it's going to push our cost up into that -- the $34 to $38 range, I think. Coming out the other side, you could probably see a path just because of reduction of longwall moves, which will increase productivity a bit, you could probably see us walking back toward more historical levels of $32 to $34 a ton. And again that's a bit out in the future and a lot can change between now and then, but for a longwall, there's a lot less variability than there would be for a continuous miner section, mine to be talking about right now. So I think I really don't expect us to vary much during '20 from guidance, but as we get into late '21 and then further into '22 for full realization of all the benefits of the better district.

No, that's helpful. And then getting some questions about inventories, maybe you can provide some color on your inventories over the course of the quarter, where are they now? How -- are you aggressively trying to move them? Or are you just kind of waiting for the market to get better? Maybe just some commentary and some color about the inventories, and I'm thinking more specifically on the met side.

Yes, I don't want to jump in too deep on inventory as far as quoting numbers simply because again, the numbers we presented for Q4 were preliminary unaudited, and some of the balance sheet items are still subject to certain adjustments. But just from a dollar impact, throughout the year, we've seen between $40 million and $50 million of inventory value trapped on the balance sheet. And so that -- with probably 2/3 of that to 3/4 of that being met, that's been a big challenge just for managing the balance sheet. So going into '20, we've been hopeful that we would see some ramping of demand. Hopefully, we are seeing the early signs of that. That's really what it's going to take, Mark, for us to start pulling some of this off and monetizing it, because as it stands, it still feels like from Contura's perspective, our production and our sales are pretty evenly matched. So I don't know that we'll have a huge opportunity as the market stands to dig into inventory levels much. But it doesn't take that much of a blip for us to be able to start working those down. Then again, our sales team does a fantastic job of being very opportunistic and finding places to put these tons when possible. But the fourth quarter was really challenging from that perspective. And hopefully, we're starting to see some improvement in that regard.

Yes, that's very helpful. And I want to -- you guys are bringing on some new mines. David alluded to that at the beginning. What's the longer-term opportunity on the cost structure on the met portfolio? Can Contura run at a $70 long-term post new mines coming online rate? I know some of that depends on what met prices are, obviously, given the given the royalty component to it. But what's the upside to the cost? How low can it go, in let's just say a $150 in environment?

Well, I think, Mark -- it's Jason. I think we're confident that we can – well, we have achieved and will continue to achieve our cost guidance and the reductions that we've made with productivity improvements. I guess the upside, David spoke to the 3 capital projects, which nominally represent about 27% of our metallurgical output, and they're all coming in with cost expectations in the $65 to $70 range. So I think that's a big upside.

And how soon, Jason? Is that something that -- is that sort of a 2021 or a 2022? Or when do we get to see the full benefits of those 3 projects in terms of how they flow through to the cost line?

Well, the slope at Road Fork is now fully excavated. We're installing infrastructures. The first production section will go in at the end of Q1. And the third and final production section will be in by year's end. So it's going to be kind of a steady ramp-up there from 1 section, 2 section, 3 section throughout 2020. So about Q4 of 2020, we've reached that annualized run rate. Black Eagle high-vol A operation that David spoke to, it's currently producing today. It's mining corridor into the thicker, better, cheaper, lower-cost reserves. We anticipate on reaching that mark by Q4 of this year, with the second and final section coming on early in 2021. So it's kind of a gradual increase throughout calendar '20. Lynn Branch will be the last that will be, let's call it midyear 2021 before it's actually running at full capacity.

Got it. And Jason, you're probably attuned to this as much as anybody because you're out there, but what are you seeing from competitors in terms of additional production cuts on the met side? Do you think other mines are on the verge of coming out of the market given -- just given the environment?

Well, yes, a lot of the smaller operators that you don't hear of, some of those were maybe former sources for Contura. I think a lot of those guys are dropping off. And then if you look at our bigger competitors in our neighborhood, I'm not hearing of anything new, but we've heard of -- or we know of several recent closures, basically our neighbors in Central West Virginia.

Yes. So it does feel like tons are coming out of the market. I know we're modeling a nice decline, but I was just curious if just kind of out in the field, you're hearing more smaller producers kind of falling off.

Yes. No, I think that's accurate. But it's -- a lot of it's the small guys, there's been fewer and fewer, I think of the -- our bigger competitors that have actually cut a lot of production.

Yes, that makes a lot of sense. Let's talk about CapEx over the long term, Andy. I mean how do you feel, if you look at just sort of maintenance CapEx, you kind of take out the spending that you're going to have to do in Northern App. But just kind of look at it on a maintenance level, what are the trends there, $1 per ton absolute, however you want to characterize it? How do you expect those to trend over the next several years?