Warrior Met Coal, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter report. Warrior Met Coal (NYSE: HCC) is a U.S. producer and exporter of premium metallurgical coal used in steelmaking, operating Mine No. 4 and Mine No. 7 in Alabama. Its undeveloped Blue Creek project is a planned growth asset.
Key financial and operating metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $1.059 billion | $782.7 million |
| Net income (loss) | $150.9 million | $(35.8) million |
| Diluted earnings (loss) per share | $2.93 | $(0.70) |
| Operating income (loss) | $243.8 million; 23.0% margin | $(27.1) million; (3.5)% margin |
| Adjusted EBITDA | $457.0 million | $108.3 million |
| Cash from operating activities | $351.5 million | $112.6 million |
| Capital expenditures and mine development | $71.4 million | $114.6 million |
| Cash and cash equivalents at year-end | $395.8 million | $211.9 million |
| Available ABL borrowing capacity | $83.2 million | Not stated here on a comparable basis |
| Coal sold / produced | 5.7 / 5.1 million metric tons | 6.7 / 7.1 million metric tons |
| Average net selling price per metric ton | $180.43 | $113.12 |
| Cash cost of sales per metric ton | $96.43 | $92.31 |
Year-end liquidity was $479.0 million, comprising cash and cash equivalents and ABL availability. Reported long-term debt, net of discount and issuance costs, was $339.8 million; financing lease obligations were $52.1 million. The company described total indebtedness as approximately $391.9 million. It had no ABL loans outstanding and was in compliance with applicable ABL covenants at year-end. The 2021 effective tax rate was 24.6%, including a $46.0 million state deferred-tax valuation allowance and a $22.4 million non-cash tax benefit from Alabama tax-law changes.
Material changes versus 2020
- Revenue rose about 35%, principally because the average net coal selling price increased by $67.31 per metric ton. Lower sales volume partially offset the price benefit.
- Coal sales volume declined by about 1.0 million metric tons and production fell about 2.0 million metric tons, primarily amid the UMWA strike.
- Net income improved from a loss to a profit, while operating income and operating margin also recovered substantially.
- Operating cash flow increased to $351.5 million. Cash capital spending and mine development totaled $71.4 million, and management reported free cash flow of $280.2 million.
- Cash increased by $183.9 million during the year. Financing cash use included redemption of the old notes, repayment of the remaining $40.0 million ABL draw, lease repayments and dividends.
Outlook, management commentary and risks
- Labor disruption: The UMWA contract expired April 1, 2021, and the strike remained ongoing at filing. Mine No. 4 was idled and Mine No. 7 operated at reduced levels. 2021 results included $33.9 million of idle-mine expenses and $21.4 million of strike-related business interruption expenses. Management continued negotiations and said operations could vary significantly quarter to quarter.
- 2022 production outlook: The filing gives differing figures and units in separate sections: 5.0–6.0 million metric tons without a new labor contract, and 5.5–6.5 million short tons; with a new contract, a ramp-up to approximately 7.0 million metric tons or 7.5 million short tons is described. Investors should verify the intended unit and reconcile the ranges. Management said a new contract could allow a ramp to the stated run rate within three to four months.
- Capital spending: 2022 capital spending was expected to be $95–$105 million, including $75–$80 million of sustaining spending and $20–$25 million of discretionary spending, primarily for 4 North portal construction.
- Blue Creek: Development was delayed and 2021 spending was minimal as the company prioritized liquidity amid pandemic uncertainty, the Australian coal trade disruption and labor negotiations. The project’s prior estimated development cost was $550–$650 million, with potential for inflation and labor shortages to increase costs. The filing describes expected capacity as 3.7 million metric tons per year in one section and 3.9 million in another; verify the current project estimate. Year-end reserves were 63.3 million metric tons, with 44.9 million metric tons of resources exclusive of reserves.
- Debt refinancing: In December 2021, Warrior issued $350 million of 7.875% senior secured notes due 2028 to redeem its 8.00% notes due 2024. The refinancing generated a $9.7 million early-extinguishment loss. The ABL facility was amended, extended to 2026 and changed from LIBOR-based pricing to SOFR-based pricing.
- Pricing, costs and concentration: Coal prices and demand depend on global steel production, supply, trade policy and competition. Five customers accounted for approximately 84.6% of revenue; Xcoal alone represented 51.0%. Inflation and supply-chain constraints were expected to weigh more heavily on 2022 costs, including steel, freight, labor and supplies.
- Other significant risks: The company is concentrated in Alabama and relies on a single rail carrier, with barge access as a partial alternative. Regulatory and permitting uncertainty, environmental and climate requirements, mine safety and operating hazards, reclamation costs, surety-bond availability, and potential increases in required black-lung collateral could affect operations, costs and liquidity. The DOL had requested $39.8 million of black-lung collateral, above the $17.0 million posted; the company appealed.
- Cash returns and taxes: The company paid its regular $0.05 quarterly dividend during 2021; the board declared $0.06 per share for March 2022. Repurchases remained suspended. Management expected no federal cash income taxes for six to eight years based on its forecasts and available tax attributes, but NOL utilization is subject to limitations and future taxable income.
Most important facts for investors to verify
- Whether the UMWA strike has ended, the status of contract negotiations, and the actual restart and production rates at Mine No. 4 and Mine No. 7.
- The correct units and assumptions for the conflicting 2022 volume outlook, and the current expected capacity of Blue Creek.
- Updated Blue Creek development schedule, total project cost, funding plan, permitting and reserve/resource assumptions.
- Customer exposure, especially Xcoal’s role and the effect of any change in Chinese demand or trade conditions.
- Actual 2022 cost inflation, capital spending, liquidity and debt-service requirements, including financing lease commitments.
- The outcome of the DOL collateral appeal, continued availability and cost of surety bonds, and the company’s ability to use its NOLs and sustain dividends.
The filing reports an unqualified audit opinion on the consolidated financial statements and an unqualified opinion that internal control over financial reporting was effective as of December 31, 2021. Ernst & Young identified asset retirement obligations as a critical audit matter because the estimates depend on significant judgments about reclamation scope, timing and cost.