Warrior Met Coal Inc (HCC) 2021 Q4 法說會逐字稿

Good afternoon. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal Fourth Quarter and Full Year 2021 Financial Results Conference Call. (Operator Instructions) This call is being recorded and will be available for replay on the company's website.

Before we begin, I have been asked to note that today's discussion may contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press release and SEC filings.

I have also been asked to note that 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 at www.warriormetcoal.com. Also, for more labor-related information, go to warriormetcoalfacts.com.

Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer; and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks.

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our fourth quarter and full year 2021 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions.

During the fourth quarter, we were pleased to deliver our most profitable quarterly results in the last 3 years on the back of strong customer demand and our ability to capitalize on a favorable pricing environment. The global supply of met coal remained tight during the fourth quarter, even with China continuing to reduce its steel production. We are well positioned from a cost-and-supply standpoint to take advantage of the current strong market for high-quality, premium met coal, which has been strengthened by robust economic growth. In addition, we capitalized on favorable conditions within the capital markets to refinance our senior notes and extend the maturity of our ABL facility in the fourth quarter, which Dale will discuss in more detail later in his prepared remarks.

As reported cases of COVID-19 rose during the fourth quarter and impacted most of the country, we continue to take the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations and regulators to protect the health and safety of our employees while maintaining our operations. I would like to thank our employees for their hard work and dedication to safety during these challenging times.

While we've continued to run the operations at lower operating rates due to the UMWA strike, we never changed our philosophy or dedication to providing a safe working environment for our employees. In fact, despite the disruptions during the year, our safety incident rate dropped significantly last year to a 1.25 rate from a 3.36 rate in 2020, which we believe is significantly better than the underground mining industry.

Global market demand and pricing over the quarter were solid, largely driven by strong ex China demand and overall supply tightness. However, we did experience a higher degree of volatility as we saw CFR China prices drop from their all-time high of $615 per metric ton on October 21 to a low of $337 per metric ton at year-end. Most of the 45% price erosion occurred over a short period of 4 weeks and was caused by the combination of government-mandated steel production cuts, a governmental focus on domestic coal production and the clearance of stranded Australian coals from bonded warehouses.

Despite the release of these coals, the ban on imported coals remains fully in place. During the quarter, we saw Chinese buyers retract from the spot markets, leaving very few transactions to support the indices. Similarly, the FOB Australian Index corrected from a high of $403 per metric ton on November 5 to a low of $315 per metric ton. Contrary to the CFR China equivalent, the FOB Australia Index managed to claw back some of the pricing erosion, closing the year at $357 per metric ton.

Supply tightness in Australia due to weather disruptions and maintenance was the primary driver for the late December uptick in the index. It is interesting to point out that for the last 10 days of the year, the CFR China index was actually at a discount to the FOB Australia Index, a situation that has persisted into 2022.

As recently reported by the World Steel Association, global pig iron production increased by 0.6% for the full year of 2021, with China's production decreasing 4.3%. The decrease in China's production was expected, given the governmental mandate to reduce production year-over-year. China was the only country among the major producing countries to experience a decline year-over-year. Excluding China, which makes up 66% of the world's pig iron market, the rest of the world's production grew at an impressive rate of 11.4%.

As for Warrior, our sales volume in the fourth quarter this year was 1.5 million short tons compared to 2.2 million short tons in the same quarter last year. This quarter was lower primarily due to the ongoing strike, which lowered total production. We are now operating near normal inventory levels as well.

Our sales by geography in the fourth quarter were 44% into Europe, 10% into South America and 46% into Asia. The higher-than-normal sales to Asia were primarily driven by Chinese demand that we capitalized upon during the fourth quarter while capturing 100% of the CFR China index price on the day of the sale.

Our spot sales in the fourth quarter were approximately 15% and were 33% year-to-date. Our normal expectation of spot sales is approximately 20%. The higher spot sales for the year were primarily attributed to the higher sales to China.

Our gross price realization for the fourth quarter of 2021 was 85% of the Platts Premium Low Vol FOB Australian Index price and was lower than the 102% achieved in the prior year period. The lower gross price realization was primarily due to a rising market this year versus a declining market last year. Also, 47% of our sales volume in the fourth quarter this year occurred in the month of October, which were based on lower met coal prices from the third quarter.

Let me say a word about the gross price realization. The metric is a point-in-time calculation that can be significantly impacted by many factors, including the timing of sales, shipments and the volatility of the indices and does not reflect the discounting of our product.

In addition, explaining the changes in our gross price realizations is a time-intensive process every quarter, which we believe provides little to no value to our business or our stakeholders. We do not place any significance on the metric internally. Therefore, this will be the last quarter we report this metric. Instead, we will focus on average net selling prices, which we believe provide a more meaningful and relevant measure.

Production volume in the fourth quarter this year was 1.1 million short tons compared to 1.8 million short tons in the same quarter of last year. The tons produced in the fourth quarter resulted from running both longwalls and 4 continuous miner units at Mine 7 and one continuous miner unit at Mine 4. By running the continuous miner units, our lead days or flow times have not materially changed since April 2021 and are still several months out into the future.

The Mine 4 longwall remained idle during the fourth quarter. We finished the year running the mines with a combination of salaried and hourly employees, representing approximately 50% of the normal workforce while producing almost 75% of the normal production volume.

Capital spending in the fourth quarter was $24 million. For the full year, we spent $58 million on capital expenditures, which was the lowest amount since 2016 and 34% lower than last year. This is partly due to the idling of Mine 4 during the year. The mines have been well capitalized by a significant number of investments since 2017, which provides flexibility in managing our spending during pandemics, industry cycles and other disruptive impacts to the business.

I will now ask Dale to address our fourth quarter results in greater detail.

Thanks, Walt. As Walt noted in his remarks, the market for met coal was strong during the fourth quarter, driving prices to levels never seen before. The strength of the met coal and steel markets, a strong economic recovery from COVID and robust capital markets led us to capitalize upon favorable timing to refinance our senior notes and ABL facility. We believe the timing of the refinancing was excellent as the markets have been experiencing a significant amount of inflation, and we believe that the Federal Reserve would start raising interest rates sooner rather than later to manage it. We believe that it would have been more costly and more difficult to complete a refinancing if we waited to do it closer to the maturity of the senior notes.

Our decision to refinance our senior notes and ABL facility during the quarter accomplishes several important goals. It enhances our already strong balance sheet and financial position; takes advantage of current low borrowing rates, which are expected to start rising in the near future; modestly lowers our cash interest expense; and furthers our financial flexibility with a maturity extension as we pursue the creation of long-term shareholder value. It will also position us to resume our growth strategy and increase our return of cash to shareholders in the future.

For the fourth quarter of 2021, the company recorded its largest quarterly net income in 3 years on a GAAP basis of approximately $139 million or $2.68 per diluted share compared to a net loss of $34 million or $0.66 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the fourth quarter, excluding the nonrecurring business interruption expenses, idle mine expenses and a loss on early extinguishment of debt, was $3.17 per diluted share compared to an adjusted net loss of $0.63 per diluted share in the same quarter last year.

Adjusted EBITDA was $240 million in the fourth quarter of this year, the largest in 3 years, as compared to $9 million in the same quarter last year. The quarterly increase was primarily driven by 193% increase in average net selling prices, partially offset by a 34% decrease in sales volume. Our adjusted EBITDA margin was 58% in the fourth quarter of this year compared to 4% in the same quarter last year.

Total revenues were approximately $416 million in the fourth quarter compared to $212 million in the same quarter last year. This increase was primarily due to the 193% increase in average net selling prices, offset partially by 34% lower sales volume in the fourth quarter versus the same period last year. In addition, other revenues were positively impacted in the fourth quarter this year by 121% increase in natural gas prices plus a noncash mark-to-market gain on our gas hedges of approximately $7 million.

The Platts Premium Low Vol FOB Australian Index price averaged $260 per metric ton higher or up 241% in the fourth quarter of this year compared to the same quarter last year. The index price averaged $369 per metric ton for the fourth quarter. Demurrage and other charges reduced our gross price realization to an average net selling price of $274 per short ton in the fourth quarter of this year compared to $94 per short ton in the same quarter last year.

Cash cost of sales was $153 million or 39% of mining revenues in the fourth quarter compared to $190 million or 92% of mining revenues in the same quarter last year. The decrease in total dollars was primarily due to a $65 million impact, a 34% lower sales volume, partially offset by $28 million of higher variable cost associated with price-sensitive wages, transportation and royalty costs. This resulted in a cash margin of $168 per short ton in the fourth quarter compared to only $7 per short ton in the same period last year.

Cash cost of sales per short ton, FOB port, was approximately $106 in the fourth quarter compared to $86 in the same quarter last year. Transportation and royalty costs accounted for $22 of the increase, offset slightly by lower other production costs, which tend to be rather stable most of the time.

Cash costs on price-sensitive items such as wages, transportation and royalties that vary with met coal pricing were significantly higher in the fourth quarter this year compared to the same quarter last year. As you may remember, transportation costs lagged on a 1-quarter basis, and prices averaged $105 higher in the fourth quarter versus the third quarter of this year.

As a result of the significantly higher prices period-over-period, variable transportation and royalty costs are significantly larger components of the cost per ton than the normal approximately 1/3 percentage. Variable transportation and royalty costs were 43% of the cost per ton of $106 in the fourth quarter this year compared to only 27% in the same quarter last year, driven primarily by higher met coal pricing.

As we look forward into the first quarter, we expect our cash cost per ton to increase over the fourth quarter as transportation rates reset in the first quarter based on the average of higher met coal prices in the fourth quarter. Keep in mind that index prices averaged $105 per metric ton higher in the fourth quarter than the third quarter of 2021.

Also, we expect the variable cost of royalties to increase in the first quarter based on the higher met coal prices. Combined, transportation and royalties per short ton will be a higher percentage of our cash cost per short ton in the first quarter than the fourth quarter of 2021 because our production or mining costs remain fairly stable except for the smaller variable labor cost. Also, we expect to see increases in labor costs next quarter as we increase our hourly headcount at the mines plus the impact of expected inflation on material and supply costs.

Depreciation and depletion expenses for the fourth quarter this year were $39 million and flat compared to last year's fourth quarter. However, the fourth quarter this year includes the immediate recognition of $8 million of expense related to Mine 4 depreciation that would have normally been capitalized as inventory as it was produced. However, since Mine 4 was idled in the fourth quarter, it was instead directly expensed. This increase in expenses was offset by $8 million due to the 34% decrease in sales volume. SG&A expenses were about $9 million or 2.3% of total revenues in the fourth quarter this year and were higher than the same quarter last year primarily due to higher employee-related expenses, partially offset by lower audit and legal expenses.

During the fourth quarter, we incurred incremental nonrecurring business interruption expenses of $7 million directly related to the ongoing UMWA strike. These nonrecurring expenses were primarily for incremental safety and security, legal and labor negotiations and other expenses.

As Mine 4 remained idle during the fourth quarter, except for the one continuous miner unit that was running, and as Mine 7 ran at a reduced rate of production, we incurred $14 million of idle expenses. These expenses were for electricity, insurance, maintenance, labor, taxes and are primarily fixed in nature. The amounts were higher than the second and third quarters as we incurred more labor from higher headcount at Mine 4, costs associated with restarting one continuous miner unit at Mine 4 and preparation work in anticipating restarting the longwall at Mine 4 in the first quarter of 2022.

Net interest expense was about $9 million in the fourth quarter and included interest on our outstanding debt, interest on equipment financing leases plus amortization of our debt issuance costs associated with our credit facilities, partially offset by interest income. The slight increase quarter-over-quarter was primarily related to new equipment financing leases. The loss on early extinguishment of debt represents the write-off of debt issuance costs and premiums paid in connection with the refinancing of our senior notes during the fourth quarter.

We recorded income tax expense of $27 million during the fourth quarter of this year on pretax income of $165 million compared to a benefit of $11 million in the same quarter last year on a pretax loss of $45 million. The fourth quarter tax expense was primarily due to pretax income, partially offset by benefits for depletion and additional marginal gas well credits. The fourth quarter expense primarily represents the utilization of our NOLs and, therefore, we paid no cash income taxes.

Turning to cash flow. During the fourth quarter this year, we generated $151 million of free cash flow, which resulted from cash flows provided by operating activities of $175 million plus cash used for capital expenditures and mine development cost of $24 million. This resulted in free cash flow conversion of 63% this year versus last year's fourth quarter of 13%.

Free cash flow in the fourth quarter of this year was negatively impacted by a $34 million increase in net working capital. Increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing, offset partially by lower inventories due to higher sales volume.

Cash used in investing activities for capital expenditures and mine development costs were $24 million during the fourth quarter of this year compared to $29 million in the same quarter last year. Cash flows used by financing activities were $24 million in the fourth quarter of this year and consisted primarily of payments related to the refinancing of our senior notes of $14 million, capital lease payments of $7 million and payment of the quarterly dividend of $3 million.

Our total available liquidity at the end of the fourth quarter was $479 million, representing an increase of $123 million or 35% over the third quarter and consisted of cash and cash equivalents of $396 million and $83 million available under our ABL facility. This is net of outstanding letters of credit of approximately $9 million.

With the refinancing in the fourth quarter, we have no near-term funding debt maturities. We believe our total liquidity position, strong balance sheet and low and variable cost structure are strengths of the company that will allow the company to navigate volatile markets and challenging business conditions.

As a result of the uncertainties facing the business these past 2 years, the company has been stockpiling cash, resulting in net debt of less than 0, further strengthening the balance sheet and providing the company a significant amount of flexibility to navigate challenging markets. We continue to appropriately adjust our operational needs, including managing our expenses, capital expenditures, working capital, liquidity and cash flows. In addition, we have delayed the development of the Blue Creek project, and our stock repurchase program also remains temporarily suspended while we accumulate and preserve cash and liquidity.

A combination of strong met coal markets with high prices and the refinancing of our indebtedness pushing out the maturities has resulted in a stronger balance sheet and positions us to resume our growth strategy and increase returns of cash to stockholders in the future. However, at this time, we are taking a patient, wait-and-see approach to capital allocation and have not made any other significant changes to our capital allocation policy except for the recent announcement to increase the fixed quarterly dividend by 20%.

We continue to evaluate market conditions for 2022, while expecting a met coal pricing reset to lower levels and continue to negotiate with the union on a new contract to resolve the ongoing strike. And we continue to monitor changing Chinese policies that may significantly impact the met coal and global steel markets. And finally, we expect to reevaluate the prospect of developing our Blue Creek reserves in the coming months.

Now turning to our outlook and guidance for 2022. We believe we are well positioned to fulfill anticipated customer commitments for 2022. In the current operating environment and without a new union contract, we believe that our production and sales volumes will be as outlined in the outlook section of our earnings release. The volumes outlined include the restart of Mine 4, although at lower production rates, and running Mine 7 at lower operating rates than normalized production.

I will now turn it back to Walt for his final comments.

Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments on our outlook for the first quarter and full year 2022. As Dale noted earlier in his remarks, our cash cost per short ton in the first quarter of 2022 is expected to be higher than last quarter and possibly the highest we've ever seen in our business as a result of met coal prices at all-time highs. This is not necessarily a bad thing because our margins are expected to be higher as a result of the higher met coal prices. However, this negatively impacts our variable costs for wages, transportation and royalties.

We expect transportation and royalty costs, which are normally about 1/3 of our cash costs to sales, to be a significantly larger portion of our total cash cost in the first quarter than previous quarters.

Another factor that may negatively affect our cash cost is the impact of inflation. U.S. inflation hit its fastest pace in nearly 4 decades in 2021 as pandemic-related supply-and-demand imbalances, along with stimulus measures intended to shore up the economy, pushed the consumer price index up to a 7% annual rate. That rate of inflation continued to rise at the end of January to 7.5%, a 40-year high.

We expect COVID-19 to continue to impact global supply chains, resulting in shortages, extended lead times and increased inflation, thereby impacting our operations and profitability in 2022. While we did not experience any material inflation in 2021, we are expecting anywhere from 10% to 25% increases in steel prices, freight rates, labor and other materials and supplies in 2022. These increases affect, among other things, the cost of belt structure, roof bolts, cable, magnetite, rock dust and machinery and equipment purchases. We're applying a number of different strategies to mitigate the impact of these challenges on our operations, including extending our demand planning, placing purchase orders earlier, utilizing short-term contracts and leveraging our supplier relationships.

Looking ahead, we understand that there are questions about the status of the UMWA negotiations, estimates of potential outcomes and possible time lines. Unfortunately, we cannot speculate at this time on any of those topics for various reasons.

Let me just say we value and appreciate the hard work of our hourly employees. Our priorities have always been keeping people employed and working safely with long-lasting careers and ensuring the company remains financially stable in a particularly volatile met coal market. While we are disappointed the union continues with the strike, we continue to negotiate in good faith to reach a resolution.

Since the beginning of 2022, we've seen a renewed interest from Chinese customers, albeit with limited transactions, and expect the country will reestablish its normal purchases of seaborne coals to supply their steel mills once the Chinese New Year holiday and Olympics are well behind them. The new year has also exposed the well-known vulnerabilities of the global met coal supply chain for both mining and logistical operations with extreme rain in Australia, winter storms in North America, disruptions in Russia as well as the upsetting force that the new corona variant had on labor.

As such, we expect pricing to remain strong throughout the first quarter. However, we do acknowledge that the risk of a pricing correction is high, given the extreme levels we are currently experiencing. But we also know that predicting the timing and magnitude of such a correction is difficult, if not impossible.

For that reason, we expect relative strength in prices for the short term. And we hope that when a pricing correction does start, that it will be a slow and steady decline back towards historical levels. We remain prepared for a quick and steep correction, however, should it come. As a reminder, if we encounter steep downward correction in a quarter, our cash costs will lag to the price decrease, as we previously indicated, by about 1 quarter.

You may have noted in our earnings release that we began providing our annual guidance again for the company. We believe we are well positioned to fulfill our customer volume commitments for 2022 of approximately 5.5 million to 6.5 million short tons. This range assumes we are unable to reach a new contract with the union in the near term. We expect this range of production from operating both longwalls and Mine 7 at lower operating rates and restarting the longwall in Mine 4 on a limited schedule at about 50% capacity.

We will continue to ramp up our continuous miner units and the longwalls of both mines as we expect our headcount to increase during the year. By continuing to run the miner units, our lead days are still months into the future and have not deteriorated significantly since April of 2021. If we are able to reach an agreement soon with the union, we believe that we could ramp up to a run rate of production of approximately 7.5 million short tons in about 3 to 4 months.

Before I close, I want to take a moment at the end of our fiscal year to reflect on what has been an extraordinary journey for our company over the past 2 years. Between the impact of COVID-19 pandemic and the ongoing UMWA strike, Warrior has had to manage through significant headwinds and market volatility.

But when adversity appears, we have the opportunity to show our true strengths, and Warrior has shown these true strengths across the company. The resiliency of our business model has been tested time and again over the past 2 years. And our financial results show our ability, not only to endure persistent challenges, but also to overcome them with significant outperformance.

I encourage our stakeholders to look at our strengths and acknowledge our achievements as our resilience, in particular, is a tribute to the dedicated employees who come to work every day. They are the real heroes of this story.

Moreover, their efforts built on the foundational, and in some cases, unique building blocks of our company, which are: a dedicated and high-performing workforce maintaining a safe work environment, premium products in high demand that achieve the highest prices even in adverse price environments, a variable cost structure that flexes with prices that delivers profitability through the cycle, a logistical cost advantage to the global seaborne markets, a strong balance sheet with low leverage and their significant legacy liabilities, and disciplined financial policies to ensure sustainable performance.

Finally, after achieving what we have in the past 2 years, we enter 2022 with great optimism for our business and the confidence that we can weather any new storm that tries to disrupt our momentum. We're proud to have proven ourselves in the most difficult of times.

With that, we'd like to open the call for questions. Operator?

(Operator Instructions) The first question today comes from David Gagliano with BMO.

I just wanted to ask about the capital allocation policy considering the cash generation. So Warrior generated about -- it's like equivalent of about a 40% annualized free cash flow yield in the quarter, and that was on lower than current prices and higher than 2022 targeted cash costs. Balance sheet is in great shape. And I understand the ongoing strike and concerns about prices falling. However, my question is, will Warrior pay out special dividends even in the midst of the ongoing strike?

Thanks, Dave, for your questions. This is Dale. It's a possibility. We named a few factors that we want to get a little more clarity on, such as what we think the market will look like for the rest of the year.

As we said, look, with the Chinese coming back after the new year and Olympics, we'll see exactly what kind of policies and impact on the markets they may have, the strike as well and taking another look at developing Blue Creek. That data is about 2 years old on Blue Creek, and we want to pull together a refresh on the total cost of that project and the metrics and everything and see if that still makes sense.

And so once we get a little clarity on those things, I think we will -- we may have a change or an update on our capital allocation policy. We did up -- or increase the quarterly dividend 20%, which was a small change, but still very good for us.

Okay. And what's a reasonable time line to expect those updates to be completed and have a more definitive capital allocation policy plan in place?

Well, there's really nothing changed in our policy and -- but maybe in the next few months.

Okay. That's helpful. And as you think about Blue Creek versus returning cash to shareholders, as Warrior thinks about those 2 options, what's the preference at this point?

Well, as we've said, we don't have a particular preference. We're going to try to balance both. We've said that in the past. We'll just have to see how Blue Creek rolls up and what the capital construction costs are there. And with the inflation that you're seeing in the current business, how is that going to impact the project? And will it allow us to balance both the way we want to? So we don't have a one or the other kind of decision point. We're looking at how we do both.

Okay. Great. And my last question, the $95 to $100 cash cost range, you mentioned that was on lower than current prices, obviously. What's sort of the -- not sort of. What's the reference price embedded in that $95 to $100 assumption for the full year? And what would those cash costs be if magically, prices happen to stay where they are now for the full year?

Well, if they stay where they are now, you're still going to see an increase till we get up because of the 1 quarter lag for transportation. So you could see a first quarter cash cost per ton 10% to 15% higher than the fourth quarter, which may include some inflation there.

And there's a lot of factors you got to think about on that cash cost guidance. We are building in a steep correction starting second quarter through the rest of the year. So you got that, but you get the benefit of the higher volumes we expect over the year offsetting that.

And then the same thing happens with transportation lagging the quarter. The royalties correct sooner than later. So the guidance might -- the cash cost guidance might be a little low, a little conservative. But when you factor in all those different puts and takes, we think prices are going to correct pretty steeply the rest of this year as some of the supply chain issues get worked out.

Okay. Just so I can help -- sort of help me level set what's embedded in that steep decline. Again, what's a reasonable -- like what assumption was made on the benchmark price for the full year to get to that $95 to $100? So I can calibrate the assumptions we're making in our model.

We're still working on somewhere near a $200 number.

The next question comes from Lucas Pipes with B. Riley Securities.

Nice job on the quarter. I wanted to follow up a little bit on Blue Creek, and I think you used the word reevaluation. Is it -- can you share or update us on how broad this reevaluation is? Is it the CapEx cost component of this project? Or strategically also, how this project just fits into your longer-term vision of the coking coal market? Would really appreciate your thoughts on that.

I think we're pretty settled on where this fits in from a long-term standpoint in the company's portfolio. For us, the issue is, especially with the changes in steel prices and labor shortages and things like that, what's the impact going to be on construction and capital spending and time line for development. So we're redoing that work to make sure we're confident about where those sit today.

That's very helpful. And what's the timing? When should we expect an update on that reevaluation?

The same is the capital allocation policy. We're looking at both right now. And our expectation is over the next few months, we'll have more clarity around those topics.

That's very helpful. And on the volume cadence for the year, I may have missed it, but in Q1, should we expect higher volumes because you don't have a longwall move? Or how should we kind of split the volume, call it, midpoint 6 million tons currently between the 4 quarters?

The real uptick in the first quarter is going to be the fact that we are now running the longwall at Mine 4. So we just started that longwall up, so it won't be -- our expectations were that it will take a little while to ramp. But the additional tons, as we go out through the year, we said we expect Mine 4 to be at about 1 million tons for the year. So you can expect that -- it won't be 0.25 million quarter-by-quarter. It should ramp a little bit. But it's not going to be far off from that. So that's the real additional -- that's where the additional tonnage is coming out of.

Yes. Lucas, this is Dale. So we've been like the last 2 quarters, about 1.1 million tons produced with Mine 7 running at lower rates. So annualized that, 4.4 million. Add 1 million tons for the Mine 4 longwall, 5.4 million. And then we have the continuous miner units that are running in Mine 4, too. So that just kind of rounds you to the bottom end of that range.

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

Congrats on the quarter. I think some of my bigger questions were already addressed. So maybe just some more modeling-related questions. I think you guys mentioned about 46% of sales in the quarter were CFR China prices. Any comments on how many sales you might expect to sell to Asia at CFR China prices within your '22 guidance?

It's much more difficult to look at '22 because as we've said, the -- it's kind of flipped in terms of CFR versus FOB Australia right now. And it doesn't make a lot of sense with where the market is today to be moving coal into China from our standpoint.

But we don't expect that dynamic to stay long term. So we could still see -- we still see tons moving into China. We always move tons also into Japan and Korea as well. But as far as specifically into China, that's just going to be a wait and see what happens with the market in China.

Can I just clarify something there in actually your question? The 47% was the amount of volume that went in -- went out in the month of October, total volumes, so not just China. The other -- maybe where you got that confused is the other comment was during the fourth quarter, we did sell all of our CFR China at the 100% of the index during the quarter. And I think that's a very similar language, very close by to each other, so maybe that was what was confusing.

Right. I clearly misunderstood, Dale. I appreciate that. Yes, I thought it was 46% sales to Asia, like you guys usually break down Europe and South America, et cetera, but thanks for clearing that up.

I guess maybe I'll just shift over real quickly to inventories. Obviously, you guys exceeded your full year '21 sales guidance by a pretty good amount, which you said was possible on the last call. But your inventory got down about 243,000 tons, it looks like. Previously, I think you referenced maybe a 400,000 ton level was kind of a good comfort level. Does your '22 guidance kind of assume staying at these new levels? Or are you looking to kind of build inventories back up a little bit to that prior level, 400,000?

I would expect us to build a bit. That's running down at that 240,000 level. It gets pretty lean down at the port in terms of being able to load vessels, so we'd like to have it a little higher than that. But that doesn't mean at the end of the year, we don't try to push an extra vessel or 2 out quickly and get that number back down where -- in that 250,000 to 300,000 range. But what's comfortable with us is closer to that 400,000 level.

Got it. And then maybe speaking of pushing an extra vessel or 2, Walt, I think I asked this last quarter. And I know transportation doesn't always work exactly how you want. But maybe just some updated thoughts on your rail and barge service currently.

We've been very -- we have hiccups just like everyone does with rail. But by and large, we've been very satisfied with both barge and rail service, and we're able to get our coal down to the port in a timely fashion. So it has not been a major issue for us.

Great. And then maybe just one more. I think I heard in your prepared remarks you guys were adding hourly employees. I think that was part of the discussion of labor costs. Can maybe we get a little more color there? Is this specifically just for the Mine 4 ramp? Any thoughts?

No. We continue to have hourly employees from the Mine 4 and 7 workforces that continued across the picket line and join the workforce. And we're also having new hires as well. And our intention is to continue to see that occur throughout the year and to grow month-by-month additional employees.

And as we get to the point where we can add a CM unit, we'll add a CM unit. When we get to the point we've got enough CM units to add another shift of longwall operations at Mine 4, we'll do that. So it's just a matter of how quickly we're able to get people in here. We're up to over 300 hourly employees at this point and continuing to grow.

The next question comes from Matthew Fields with Bank of America.

Not to keep beating the Blue Creek horse here, but it was -- I think the CapEx for construction was $550 million to $600 million. That was way back in February 2020 before everything started costing a lot more. When you gave that presentation, you had some discussion about the flexibility in which you had to fund it through cash balances, equipment leases, cash flow and capital markets.

Assuming we're looking at a higher overall price tag here, how do you plan on -- obviously, there's levers you have. But like what's the philosophy on how to fund a big capital project like that? And kind of what's the sort of overall balance sheet? What should that look like through a construction? And then like on the other end, like how -- what's the right level of debt for Warrior kind of to fund this, and then maybe on the other side?

Well, some of that, we don't have the answers to, but we still have all the options available to finance it. And we're going to look at the best optimal capital structure we can during a construction period of roughly 5 years.

So things will change. There will be periods when prices will be low. There are times when prices are high. So we'll have to manage through that as we pull together the updated cost and see how that -- again, what's the cadence of that.

And obviously, we have a better starting point now than we did in 2019 with almost $400 million of cash at the end of the first -- the fourth quarter. And with prices where they are, we should be generating some more in the coming quarters. So gives us a lot of flexibility to pick and choose options rather than be forced into a certain path.

So we're keeping all of our options open. We don't -- we're not looking at a single path either way here. So -- and how much debt, look, we're net 0 today. I would imagine that if we did start Blue Creek, we would increase our minimum liquidity targets just to make sure we protect that balance sheet.

We've always said in the past before Blue Creek, $100 million should be safe during these pandemics and things like that so -- and 2020 pretty much proved that. So I think, yes, we would increase some minimum amounts like that to work through the construction period. I just don't know what that is now. This is going to largely depend on what the project looks like now versus before.

Okay. And then I know you're still kind of reevaluating things, like you said, for the next couple of months. But what do you think about kind of maybe at this stage as a growth strategy, building something like this over a series of 5 years versus being able to take a minority stake in maybe a peer's kind of large-scale met coal operations. I think one of your peers was on the news today saying maybe 10% of their stake might be in the market for a buyer. What's your kind of take on build versus buy or something like that?

Well, we look at any -- and I'll talk about them as acquisition opportunities. We compare everything to Blue Creek. And it's going to have to be a darn good project for us to look at it. Even though you're right. It's a 5-year project, and it takes time to get it up and get it productive.

But we're very confident in the quality of the coal and the demand for what this coal will be. And as a result of that, we'll look at anything, and we'll consider other options. But this is just an outstanding project and one that deserves and needs to be built.

The next question comes from Jon Ogden with Eastern Value Ltd.

I do have a few. I'll just run them past you quickly. First of all, China, what percent of sales was that last year and versus previously? I'm just wondering if you have any business with China at all in previous years. And then if the market changes, Australia comes back in, would that mean you would go back to minimal China sales?

And then widening that question out to see the sort of market as a whole, some commentators have said that if Mongolia, the borders reopened, plus Australia ban is removed, then met coal prices will be sort of tumbling very fast. That's one view.

Now my view will be different because I think climate change concerns have constrained supply globally of coal and met coal as well. And also, we've got a sort of a big ramp-up in the car industry this year, the full reopening of most economies. So still, demand is going to be actually going up. So there is a case to be made, a bull case for supply and demand so we could have a strong year this year. So it would be interesting to get your thoughts on that.

The other sort of nuts and bolts, what's the amount of tonnage you have committed this year? And is that fixed price? Or is that based on a benchmark? Then what's your formula for royalties and transport? Is it fixed percent? Or is there a sort of ratcheting up a percent? Or say we transport a base number and then -- I don't know if you can give us a bit more detail on that.

And then finally is your ASP. Is that -- for the CFR, you just strip out the transport, so you just take everything back to FOB so that you can just kind of compare apples to apples. It's just a kind of nuts and bolts, I guess.

Man, you loaded this up there. We've got so many questions in that. I'll try to start where I can and work through a few things.

First of all, let's start with transportation and royalties. Our transportation cost is -- and royalties. Our royalties are based on the percentage of coal sales price, whatever the price is of coal tons. So that varies on a percentage basis. When the prices are higher, naturally, the royalty value per ton is much higher.

In terms of our transportation costs, we have a formula through which we work with the railroad that adjusts based on coal prices in the previous quarter. So we see that, that's completely variable as well. So that's kind of where we go with that.

On the CFR and FOB, we had that occur last year where the delta between the FOB Australia and the CFR China got to the point where it made sense, even though we are normally at a transportation disadvantage, for us to go ahead and ship to China, CFR China. And we saw that, that clearly reversed itself, more than reversed itself because the CFR price is actually below the FOB Australia price.

So for us to move coal into China, we're going to have to see a situation where it makes sense for us. Because the majority of our coal, the vast majority of our coal in normal years is sold on contract based on formulas that follows the market.

But last year -- so we only normally have about 20% available for spot sales. Last year, we sold far more on the spot market because we were able to because of this CFR spread versus the FOB Australia price. So we -- I don't think it's reasonable to assume that our sales to China will remain in 2022 what they were in 2021, again, unless this thing flips back over and there's a huge draw there again this year.

So we'll look at that. Again, the vast majority of our tons are contracted and are simply priced based on what the market is. From there, Dale, what do you remember? What am I miss -- what did I forget here?

Well, in the past, I think we had a very, very, very small amount of volume into China in 2020. And before that, because the price differential for freight, we really never had any sales to China. So it was all become an issue this year primarily because of the difference in those 2 indexes.

So when you net them down on a comparable basis, it was still more profitable to sell to China during this year than it was in the past. And if that reverses and stays -- reverses to where it's no longer profitable for us to sell into China, we won't probably be sending any volume there.

I think from a demand-and-supply standpoint, from what I'm looking at, I think things are slightly -- were slightly negative on the supply side compared to demand. So I think we'll remain having a strong market this year. But a strong market, if we're -- we are not expecting prices to stay anywhere near where they are today, and we're not dependent on that.

But I think right now, with what we see out of all of our customers -- and steel prices have come off some, but what we see is a real strong demand for products. So I don't see that being the reason that pricing crashes.

I agree with you that I think what happens in China will have a huge impact on what happens to global pricing. But we -- as we've said, we hope that it returns to normal levels in a slow measured pace. But we're prepared if it's kind of a very rapid decline as well.

Just a quick couple of small follow-ups. So what you're saying is that all the Chinese clients will only work CFR. Whereas your clients, your traditional clients in say, places like Japan and Korea, will always work FOB? Is that right? And then it's just looking at the 2 benchmark prices and seeing if it makes sense or not?

That's correct.

Okay. Any thoughts on Chinese met coal production? Basically, their big hub is Shanxi, and that is a very mature area. So would you expect that in the coming years, China structurally will need to import more coal and, therefore, that could be a support for the seaborne market?

I think China will be -- continue to support the seaborne market. And I think that's evidenced by where they put their newer steel mills, close to the coastal areas. I think they'll always try to supply at least some of that with domestic coal. But I think they will always be a big importer of metallurgical coal as well.

(Operator Instructions) The next question is a follow-up from David Gagliano with BMO.

Sure. I just have a really quick follow-up on Blue Creek. In the past, there was also talk of perhaps bringing in a joint venture partner. Would that also be under consideration?

Yes. I mean everything, all these options are still on the table, David. But if we're in a position to do this ourselves, I mean, why would I give away the project? I mean -- so it's all going to depend on what kind of terms and if anyone can afford to do it. So there's some other peers that are in some pretty challenging position. So I'm not sure if they have the wherewithal to do it. But it's still an option, as well as traders, marketers, customers, all those that have expressed interest.

I think be looking at possibly trying to do an offtake agreement or something like that to lower your risk. But we think given the feedback from our customers, we can sell the whole volume and not have -- not be in a position where we have to do that. So we'll have plenty of options available.

Right. So -- and considering that you're going to have more cash than the total CapEx of the project in a pretty short period of time here, would the preference be to just go it alone? Is that the preference? Or is it more complicated than that?

I don't want to say that right now until we see how this thing rolls back up again, the cost and everything. I think we want to kind of wait and keep our options open until we see what that looks like now.

The next question is from Jon Ogden with Eastern Value Ltd.

Yes. Sorry, guys. A quick follow-up to one of your previous answers. Just on -- you mentioned that in normal times, you would have 80% tonnage for the year committed and 20% on spot. Just want to clarify that, that 80% is completely variable pricing. And based on as of quite recent benchmark prices, you would take 100% of the benchmark of the price because your coal is in line with that quality.

I just wanted to sort of clarify that because obviously, some of your peers will be locking in actual dollar prices rather than volumes, which will be priced later on the benchmark. And if that is your strategy, which I agree with, that would explain why traditionally, your prices will be in line with the Aussie benchmark. And then, as we've seen last quarter, it's very volatile, and you can't sort of keep up with it.

Sure. The vast majority of our tons in our contracts, we have formulas that are built around the benchmark pricing and quality that determine what the price will be. And it may be based on the previous 2 to 4 weeks prior to loading of what the average -- of what the spot price was through that period.

Occasionally, we will have a customer that will want to lock in a little -- some of their tons for a longer period of time at a fixed price, and we certainly consider that. And if we think that we can come to a reasonable deal on what we both look at for pricing, we'll do that. That doesn't happen very often. But once in a while, we'll reach those types of agreements. And -- but by and large, we're floating right along with the market.

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

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.