WARRIOR MET COAL, INC. The following discussion and analysis provides a narrative of our results of operations and financial condition for the three months endedMarch 31, 2022 andMarch 31, 2021 . You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Form 10-Q and the audited financial statements for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Please see "Forward-Looking Statements."
Overview
We are aU.S. based, environmentally and socially minded supplier to the global steel industry. We are dedicated entirely to mining non-thermal metallurgical ("met") coal used as a critical component of steel production by metal manufacturers inEurope ,South America andAsia . We are a large-scale, low-cost producer and exporter of premium met coal, also known as hard coking coal ("HCC"), operating highly-efficient longwall operations in our underground mines based inAlabama , Mine No. 4 and Mine No. 7. As ofDecember 31, 2021 , based on a reserve report prepared byMarshall Miller & Associates, Inc. ("Marshall Miller"), Mine No. 4 and Mine No. 7, our two operating mines, had approximately 90.2 million metric tons of recoverable reserves and our undevelopedBlue Creek mine contained 63.3 million metric tons of recoverable reserves and 44.9 million metric tons of coal resources exclusive of reserves, which total 108.2 million metric tons. As a result of our high quality coal, our realized price has historically been in line with, or at a slight discount to, the Platts Premium Low Volatility ("LV") Free On Board ("FOB") Australia Index Price ("Platts Index"). Our HCC, mined from the Southern Appalachian portion of theBlue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and LV to mid-volatility ("MV"). These qualities make our coal ideally suited as a coking coal for the manufacture of steel. We sell substantially all of our met coal production to steel producers. Met coal, which is converted to coke, is a critical input in the steel production process. Met coal is both consumed domestically in the countries where it is produced and exported by several of the largest producing countries, such asChina ,Australia ,the United States ,Canada andRussia . Therefore, demand for our coal will be highly correlated to conditions in the global steelmaking industry. The steelmaking industry's demand for met coal is affected by a number of factors, including the cyclical nature of that industry's business, technological developments in the steelmaking process and the availability of substitutes for steel such as aluminum, composites and plastics. A significant reduction in the demand for steel products would reduce the demand for met coal, which would have a material adverse effect upon our business. Similarly, if alternative ingredients are used in substitution for met coal in the integrated steel mill process, the demand for met coal would materially decrease, which could also materially adversely affect demand for our met coal. The global steelmaking industry's demand for met coal is also affected by pandemics, epidemics or other public health emergencies, such as the outbreak of the novel coronavirus ("COVID-19"). As of the filing of this Form 10-Q, we have not had to idle or temporarily idle our mines as a result of COVID-19. In addition, future governmental policy changes in foreign countries may be detrimental to the global coal market. For example, the Chinese government has from time to time implemented regulations and promulgated new laws or restrictions, such as the unofficial ban on Australian coal inNovember 2020 , on their domestic coal industry, sometimes with little advance notice, which has impacted worldwide coal demand, supply and prices. The ban on Australian coal has significantly impacted the global met coal market in recent years. During the past several years, the Chinese government has initiated a number of anti-smog measures aimed at reducing hazardous air emissions through temporary production capacity restrictions with the steel, coal and coal-fired power sectors. It is possible that policy changes from foreign countries may be detrimental to the global coal markets and, thus, impact our business, financial condition or results of operations. InFebruary 2022 , the war inUkraine pushed seaborne met coal export prices into uncharted waters. Market fundamentals before the conflict were already tight, with prices close to record levels. After the invasion began, spot cargo requests for Australian met coals could not be filled. TheU.S. ,Canada andIndonesia were also not able to step up at short notice. These supply shortages combined with the urgent purchases of non-Russian coal against a backdrop of mounting sanctions, trade finance problems and seaborne logistical constraints pushed the Queensland PLV HCC price to over$660.00 19 --------------------------------------------------------------------------------
per metric ton by mid-March. Soon after the large spike in prices, panic
subsided and prices fell
U.S. inflation surged to a new four decade record high of 8.5% inMarch 2022 , driven by increased energy and food costs, supply constraints and strong consumer demand. High inflation has been driven by growth in the economy as it bounces back from COVID-19, powered in part by low interest rates and government stimulus to counter the pandemic's impact. We expect COVID-19 to continue to impact global supply markets and supply chains, resulting in shortages, extended lead times and increased inflation impacting our operations and profitability. We are applying a number of different strategies to mitigate the impact of these challenges on our operations, including placing purchase orders earlier, utilizing short term contracts and leveraging our supplier relationships. While inflation did not have a significant impact to our profitability in the first quarter of 2022, we do expect ongoing inflation to have a larger impact for the remainder of the year. In 2022, we expect inflation to have a larger negative impact on our profitability, as we expect increases in steel prices, freight rates, labor and other materials and supplies. These increases affect, among others, the costs of belt structure, roof bolts, cable, magnetite, rock dust and machinery and equipment purchases. The Chinese ban on Australian coal, the ongoing war inUkraine , additional sanctions againstRussia and a broader economic weakening as inflation rises and stimulus falls are all likely to continue to impact the global met coal market and impact our business, financial condition or results of operations. Our primary business, the mining and exporting of met coal for the steel industry, is conducted in one reportable business segment: mining. All other operations and results are reported under the "All Other" category as a reconciling item to consolidated amounts, which includes the business results from our sale of natural gas extracted as a byproduct from our underground coal mines and royalties from our leased properties. Our natural gas and royalty businesses do not meet the criteria in ASC 280, Segment Reporting, to be considered as operating or reportable segments. Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) Segment Adjusted EBITDA (as defined below), a non-GAAP financial measure; (ii) sales volumes and average selling price, which drive coal sales revenue; (iii) cash cost of sales, a non-GAAP financial measure; and (iv) Adjusted EBITDA, a non-GAAP financial measure. For the three months ended March 31, 2022 2021 (in thousands) Segment Adjusted EBITDA$ 247,092 $ 52,639 Metric tons sold 1,022 1,771 Metric tons produced 1,395 1,970 Average selling price per metric ton$ 374.20 $
116.88
Cash cost of sales per metric ton$ 131.48 $ 86.67 Adjusted EBITDA$ 243,823 $ 47,137 Segment Adjusted EBITDA We define Segment Adjusted EBITDA as net income (loss) adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, business interruption, idle mine, net interest expense, income tax benefit, other income (expense) and certain transactions or adjustments that the Chief Executive Officer, our Chief Operating Decision Maker, does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: •our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;
•the ability of our assets to generate sufficient cash flow to pay dividends;
•our ability to incur and service debt and fund capital expenditures; and
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--------------------------------------------------------------------------------•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Sales Volumes and Average
We evaluate our operations based on the volume of coal we can safely produce and sell in compliance with regulatory standards, and the prices we receive for our coal. Our sales volume and sales prices are largely dependent upon the terms of our annual coal sales contracts, for which prices generally are set on daily index averages. The volume of coal we sell is also a function of the pricing environment in the international met coal markets and the amounts of LV and MV coal that we sell. We evaluate the price we receive for our coal based on our average net selling price per metric ton. Our average net selling price per metric ton represents our coal net sales revenue divided by total metric tons of coal sold. In addition, our average net selling price per metric ton is net of the previously mentioned demurrage and quality specification adjustments.
Cash Cost of Sales
We evaluate our cash cost of sales on a cost per metric ton basis. Cash cost of sales is based on reported cost of sales and includes items such as freight, royalties, manpower, fuel and other similar production and sales cost items, and may be adjusted for other items that, pursuant to accounting principles generally accepted inthe United States ("GAAP"), are classified in the Condensed Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it FOB at thePort of Mobile, Alabama . Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold. Cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: •our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that this non-GAAP financial measure provides additional insight into our operating performance, and reflects how management analyzes our operating performance and compares that performance against other companies for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance. We believe that cash cost of sales presents a useful measure of our controllable costs and our operational results by including all costs incurred to produce met coal and sell it FOB at thePort of Mobile, Alabama . Period-to-period comparisons of cash cost of sales are intended to help management identify and assess additional trends that potentially impact us and that may not be shown solely by period-to-period comparisons of cost of sales. Cash cost of sales should not be considered an alternative to cost of sales or any other measure of financial performance or liquidity presented in accordance with GAAP. Cash cost of sales excludes some, but not all, items that affect cost of sales, and our presentation may vary from the presentations of other companies. As a result, cash cost of sales as presented below may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of cash cost of sales to total cost of sales, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.
For the three months ended
March 31,
2022 2021
(in thousands)
Cost of sales $ 135,341 $ 154,350
Asset retirement obligation accretion (493) (432)
Stock compensation expense (475) (422)
Cash cost of sales $ 134,373 $
153,496
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Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense, depreciation and depletion, non-cash stock compensation expense, non-cash asset retirement obligation accretion, other non-cash accretion, non-cash mark-to-market loss on gas hedges, business interruption, idle mine and other (income) expense. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: •our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that the presentation of Adjusted EBITDA in this report provides
information useful to investors in assessing our financial condition and results
of operations. The GAAP measure most directly comparable to Adjusted EBITDA is
net income (loss). Adjusted EBITDA should not be considered an alternative to
net income (loss) or any other measure of financial performance or liquidity
presented in accordance with GAAP. Adjustments exclude some, but not all, items
that affect net income (loss) and our presentation of Adjusted EBITDA may vary
from that presented by other companies.
The following table presents a reconciliation of Adjusted EBITDA to net income
(loss), the most directly comparable GAAP financial measure, on a historical
basis for each of the periods indicated.
For the three months ended
March 31,
2022 2021
Net income (loss) 146,249 $ (21,355)
Interest expense, net 7,822 8,693
Income tax expense 33,453 23,632
Depreciation and depletion 25,797 32,903
Asset retirement obligation accretion (1) 867
805
Stock compensation expense (2) 7,218
1,696
Other non-cash accretion (3) 231
361
Mark-to-market loss on gas hedges (4) 13,165 - Business interruption (5) 6,688 - Idle mine costs (6) 3,008 - Other (income) expense (7) (675) 402 Adjusted EBITDA$ 243,823 $ 47,137 (1)Represents non-cash accretion expense associated with our asset retirement obligations. (2)Represents non-cash stock compensation expense associated with equity awards. (3)Represents non-cash accretion expense associated with our black lung obligations. (4)Represents mark-to-market loss recognized on gas hedges. (5)Represents business interruption expenses associated with the ongoingUnited Mine Workers of America's (the "UMWA") strike. (6)Represents idle mine expenses incurred in connection with reduced operations at Mine No. 4 and Mine No. 7. (7)Represents proceeds received from the Chapter 11 Cases from Walter Energy, Inc., and COVID-19 pandemic related expenses.
Results of Operations
Three Months Ended
The following table summarizes certain unaudited financial information for the
three months ended
22
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For the three months ended
March 31,
% of Total % of Total
(in thousands) 2022 Revenues 2021 Revenues
Revenues:
Sales $ 382,433 101.0 % $ 206,989 96.8 %
Other revenues (3,781) (1.0) % 6,775 3.2 %
Total revenues 378,652 100.0 % 213,764 100.0 %Costs and expenses: Cost of sales (exclusive of items shown separately below)
135,341 35.7 % 154,350 72.2 %
Cost of other revenues (exclusive of items shown
separately below) 7,040 1.9 % 7,795 3.6 %
Depreciation and depletion 25,797 6.8 % 32,903 15.4 %
Selling, general and administrative 13,929 3.7 % 7,637 3.6 %
Business interruption 6,688 1.8 % - - %
Idle mine 3,008 0.8 % - - %
Total costs and expenses 191,803 50.7 % 202,685 94.8 %
Operating income 186,849 49.3 % 11,079 5.2 %
Interest expense, net (7,822) (2.1) % (8,693) (4.1) %
Other income (expenses) 675 0.2 % (109) (0.1) %
Income before income tax expense 179,702 47.5 % 2,277 1.1 %
Income tax expense 33,453 8.8 % 23,632 11.1 %
Net income (loss) $ 146,249 38.6 % $ (21,355) (10.0) %
Sales and cost of sales components on a per unit basis for the three months
ended
For the three months ended
March 31,
2022 2021
Met Coal (metric tons in thousands) Metric tons sold 1,022
1,771
Metric tons produced 1,395
1,970
Average selling price per metric ton$ 374.20 $
116.88
Cash cost of sales per metric ton$ 131.48 $
86.67
We produced 1.4 million metric tons of met coal for the three months endedMarch 31, 2022 compared to 2.0 million metric tons for the three months endedMarch 31, 2021 . The tons produced in the first quarter of 2022 resulted from us running both longwalls and four continuous miner units at Mine No. 7 and the longwall and two continuous miner units at Mine No. 4. Sales for the three months endedMarch 31, 2022 were$382.4 million compared to$207.0 million for the three months endedMarch 31, 2021 . The$175.4 million increase in sales was primarily driven by a$263.0 million increase in sales related to a$257.32 increase in the average selling price per metric ton of met coal offset partially by$87.5 million decrease in sales due to a 749 thousand metric ton decrease in met coal sales volume. In addition, approximately one hundred thousand metric tons of expected shipments were delayed and moved into the second quarter of 2022 due to port congestion, maintenance and equipment failures which lowered our first quarter of 2022 sales volumes. For the three months endedMarch 31, 2022 , our geographic customer mix was 66% inEurope , 22% inAsia , and 12% inSouth America . For the three months endedMarch 31, 2021 , our geographic customer mix was 54% inEurope , 26% inAsia and 20% inSouth America . Our geographic customer mix typically varies each period based on the timing of customer orders and shipments. 23 -------------------------------------------------------------------------------- Other revenues for the three months endedMarch 31, 2022 were$(3.8) million compared to$6.8 million for the three months endedMarch 31, 2021 . Other revenues are comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, changes in the fair value of our natural gas swap contracts, as well as earned royalty revenue. The$10.6 million decrease in other revenues is primarily due to a$13.2 million loss recognized on the fair value adjustment related to our natural gas swap contracts due to an increase in natural gas futures offset partially by a$2.6 million increase in gas revenues due to a$2.28 , or 86.0%, increase in average gas selling prices. Cost of other revenues for the period was consistent with the prior year period. Cost of sales (exclusive of items shown separately below) was$135.3 million , or 35.7% of total revenues, for the three months endedMarch 31, 2022 , compared to$154.4 million , or 72.2% of total revenues for the three months endedMarch 31, 2021 . The$19.1 million decrease is primarily driven by a$64.9 million decrease due to a 749 thousand metric ton decrease in met coal sales volumes offset partially by a$45.8 million increase due to higher costs on price sensitive transportation and royalty costs, as well as the impact of inflation. Inflation accounted for an approximate$3.00 per metric ton impact due to increases in the costs of belt structure, roof bolts, cable, magnetite, rock dust and other materials and supplies. While the impact to the current quarter is not considered to be material, the continued rise of inflation may materially impact our results of operations and financial condition in the future. Depreciation and depletion expenses were$25.8 million , or 6.8% of total revenues, for the three months endedMarch 31, 2022 , compared to$32.9 million , or 15.4% for the three months endedMarch 31, 2021 . The$7.1 million decrease in depreciation and depletion is primarily driven by a 749 thousand metric ton decrease in met coal sales volume as depreciation and depletion is first capitalized into coal inventory and relieved when the tons are sold. Selling, general and administrative expenses were$13.9 million , or 3.7% of total revenues, for the three months endedMarch 31, 2022 , compared to$7.6 million , or 3.6% of total revenues, for the three months endedMarch 31, 2021 . The$6.3 million increase in selling, general and administrative expenses for the period is primarily due to the acceleration of stock compensation expense for awards granted to certain employees who qualify as retirement eligible combined with an increase in awards granted and an increase in the grant date fair value of the awards.
Business interruption expenses were
Idle mine expenses were
Interest expense, net was$7.8 million , or 2.1% of total revenues, for the three months endedMarch 31, 2022 , compared to$8.7 million , or 4.1% of total revenues, for the three months endedMarch 31, 2021 . The$0.9 million decrease is primarily driven by a decrease in interest on our outstanding senior secured notes.
Other income of
For the three months endedMarch 31, 2022 , we recognized income tax expense of$33.5 million , which was principally offset by the utilization of federal NOLs for cash tax purposes. We estimated our annual effective tax rate and applied this effective tax rate to our year-to-date pretax income at the end of the interim reporting period. For the three months endedMarch 31, 2021 , we utilized a discrete period method to calculate taxes, as we did not believe that the annual effective tax rate method represented a reliable estimate given the uncertainty surrounding the outbreak of COVID-19 and its impact on our annual guidance at that time. The income tax expense of$23.6 million was due to the establishment of a non-cash$47.8 million state deferred income tax asset valuation allowance, offset partially by a non-cash net income tax benefit of$22.9 million due to the remeasurement of state deferred income tax assets and liabilities and$1.3 million of net income tax benefit from the Internal Revenue Code ("IRC") Section 45I Marginal Well Credit, depletion and other adjustments. The Marginal Well Credit is a production-based tax credit that provides a credit for qualified natural gas production. The credit is phased out when natural gas prices exceed certain levels. 24
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Liquidity and Capital Resources
Overview
Our sources of cash have been met coal and natural gas sales to customers,
proceeds received from the issuance of the Notes (as defined below) and access
to our ABL Facility. Historically, our primary uses of cash have been for
funding the operations of our met coal and natural gas production operations,
our capital expenditures, our reclamation obligations, payment of principal and
interest on our Notes, professional fees and other non-recurring transaction
expenses. In addition, we have used available cash on hand to repurchase shares
of our common stock, pay quarterly dividends, and pay special dividends, each of
which reduces cash and cash equivalents.
Going forward, we will use cash to fund debt service payments on our Notes, the
ABL Facility and our other indebtedness, to fund operating activities, working
capital, capital expenditures, and strategic investments, and, if declared, to
pay our quarterly and/or special dividends. Our ability to fund our capital
needs going forward will depend on our ongoing ability to generate cash from
operations and borrowing availability under the ABL Facility, and, in the case
of any future strategic investments, capital expenditures, or special dividends
financed partially or wholly with debt financing, our ability to access the
capital markets to raise additional capital.
Our ability to generate positive cash flow from operations in the future will
be, at least in part, dependent on continued stable global economic conditions
and a resolution of negotiations regarding the Company's Collective Bargaining
Agreement ("CBA") with the UMWA. There remains significant uncertainty as to the
effects of new COVID-19 variants on the global economy, which in turn may, among
other things, impact our ability to generate positive cash flows from
operations, fund capital expenditure needs and successfully execute and fund key
initiatives, such as the development of Blue Creek .
Our total liquidity as of March 31, 2022 was $556.7 million , consisting of cash
and cash equivalents of $434.0 million and $122.7 million available under our
ABL Facility. As of March 31, 2022 , no loans were outstanding under the ABL
Facility and there were $9.4 million of letters of credit issued and outstanding
under the ABL Facility.
In the ordinary course of our business, we are required to provide surety bonds
and letters of credit to provide financial assurance for certain transactions
and business activities. Federal and state laws require us to obtain surety
bonds or other acceptable security to secure payment of certain long-term
obligations including mine closure or reclamation costs and other miscellaneous
obligations. As of March 31, 2022 , we had outstanding surety bonds and letters
of credit with parties for post-mining reclamation at all of our mining
operations totaling $40.9 million , $17.0 million as collateral for self-insured
black lung related claims and $3.6 million for miscellaneous purposes.
We believe that our future cash flows from operations, together with cash on our
balance sheet, will provide adequate resources to fund our debt service payments
and planned operating and capital expenditure needs for at least the next twelve
months. However, we will continue to assess our liquidity needs in light of the
ongoing CBA contract negotiations with the UMWA and the ongoing impact of
COVID-19.
The Company's principal contractual commitments include repayments of long-term
debt and related interest, potential minimum throughput payments associated with
our rail and port providers, asset retirement obligation payments, black lung
obligation payments, payments on various coal and land leases, payments under
financing lease obligations and payments associated with our natural gas swap
contracts. Currently, there are no known trends or expected changes anticipated
in future periods that would not be indicative of past results for our
contractual commitments.
Refer to the respective notes in our audited financial statements for the year
ended December 31, 2021 included in our 2021 Annual Report for further
information about our credit facilities and long-term debt (Note 13),
commitments and contingencies (Note 16), asset retirement obligations (Note 8),
black lung obligations (Note 10), lease payment obligations (Note 14), share
repurchase programs (Note 17) and derivative instruments (Note 18).
If our cash flows from operations are less than we require, we may need to incur
additional debt or issue additional equity. From time to time we may need to
access the long-term and short-term capital markets to obtain financing. Our
access to, and the availability of, financing on acceptable terms and conditions
in the future will be affected by many factors, including: (i) our credit
ratings, (ii) the liquidity of the overall capital markets, (iii) the current
state of the global economy and (iv) restrictions in our ABL Facility, the
Indenture (as defined below), and any other existing or future debt agreements.
There can be no assurance that we will have or continue to have access to the
capital markets on terms acceptable to us or at all.
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