Warrior Met Coal, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. The company mines and exports metallurgical coal for steel production, operating two underground mines in Alabama.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $180.1 million | $287.5 million | $570.5 million | $1,063.4 million |
| Operating income (loss) | $(14.5) million | $54.6 million | $10.6 million | $359.3 million |
| Net income (loss) | $(14.4) million | $45.0 million | $(2.1) million | $280.9 million |
| Operating margin | (8.1)% | 19.0% | 1.9% | 33.8% |
| Adjusted EBITDA | $16.1 million | $82.7 million | $97.3 million | $439.6 million |
| Segment Adjusted EBITDA | $23.9 million | $90.6 million | $121.9 million | $459.9 million |
| Operating cash flow | Not separately presented | Not separately presented | $82.2 million | $508.3 million |
| Capital expenditures | Not separately presented | Not separately presented | $72.1 million | $78.4 million |
Q3 coal sales were $175.2 million, down $105.6 million year over year. Average selling price fell to $99.96 per metric ton from $155.59; sales volume was 1.753 million metric tons versus 1.805 million. Nine-month average selling price was $117.37 per metric ton versus $180.89, while volume sold declined to 4.734 million metric tons from 5.738 million. Cash cost of sales per metric ton decreased to $85.92 in Q3 and $91.09 for the nine months, from $104.97 and $100.37, respectively.
The company recorded income tax benefits of $8.2 million for Q3 and $9.3 million year to date. The year-to-date benefit included a $24.3 million cash refund of alternative minimum tax credits received in Q3; the refund affected cash and tax receivables.
Financial position and liquidity
- At September 30, 2020, cash and cash equivalents were $216.4 million, compared with $193.4 million at December 31, 2019; short-term investments were $8.5 million.
- Total liquidity was $280.4 million: $216.4 million cash plus $64.0 million available under the ABL facility. The company had $40.0 million drawn on the facility and $9.4 million of outstanding letters of credit.
- Total debt was $379.7 million, including $343.4 million of 8% senior secured notes due 2024 and $40.0 million of ABL borrowings. The ABL facility matures in 2023. Finance lease liabilities totaled $36.4 million.
- For the first nine months, investing cash outflow was $79.1 million and financing cash inflow was $20.0 million. The financing inflow reflected the ABL draw, partly offset by its repayment, dividends and lease principal payments.
- The company reported compliance with applicable ABL covenants and said it expected cash flows, cash on hand and ABL availability to fund debt service and planned operating and capital needs for at least the next 12 months.
Material changes and management commentary
- Revenue and profitability declined sharply year over year, primarily due to lower met coal prices and lower sales volumes. Q3 gross price realization was 90% of the Platts index, compared with 102% a year earlier; nine-month realization was 92% versus 99%.
- Cash provided by operations fell to $82.2 million for the first nine months from $508.3 million. The filing attributes the period’s working-capital changes partly to increased inventory and lower sales volumes, while the 2019 comparison included substantially higher earnings and working-capital benefits.
- The company withdrew its full-year 2020 guidance because of uncertainty related to COVID-19. It said it was managing expenses, working capital, capital spending, liquidity and cash flows conservatively.
- Operations continued without a mine shutdown as of filing, but COVID-19 could affect employees, customers, suppliers, transport and port access, demand, prices, collections and capital-project timing.
- Development of the Blue Creek project was delayed; most of its budgeted $25 million first-year development spending was deferred until at least early 2021. Management described the project as a potential long-term growth opportunity, subject to financing, market and execution risks.
- The company temporarily suspended its share repurchase program to preserve liquidity. It continued its $0.05-per-share quarterly dividend and declared another $0.05 dividend in October, payable in November; management cautioned the policy could be suspended if necessary.
- Unusual items included $1.8 million of settlement proceeds recognized as other income in March 2020 from Walter Canada claims. The comparable 2019 period included $22.8 million of such proceeds year to date and a $9.8 million loss on early debt extinguishment.
Risks, contingencies and other items
- Results remain exposed to global steel and met coal demand, market pricing, COVID-19 developments, operating and geological risks, transportation availability, customer credit and access to liquidity and capital.
- Coal sales commitments are generally indexed and typically not long-term, leaving the company exposed to market price fluctuations. The ABL borrowings carry variable interest; a 100-basis-point rate change would alter annual interest expense by approximately $0.4 million at the reported balance.
- Reclamation obligations included $55.6 million of asset retirement obligations. The company also reported $40.8 million of reclamation surety bonds and $19.2 million of letters of credit for miscellaneous purposes.
- The filing reported no environmental accruals other than asset retirement obligations and no accruals for miscellaneous litigation or minimum-throughput obligations. It said ordinary-course litigation was not expected to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether met coal prices, realization and sales volumes recover, and how changes affect unit costs and margins.
- Whether the company maintains liquidity and covenant compliance if operating cash generation weakens or customer and transport disruptions intensify.
- Timing, funding and expected economics of the delayed Blue Creek development.
- Whether quarterly dividends can be sustained and when, if ever, share repurchases resume.
- Potential effects of COVID-19 on mine operations, customers, supply chains, shipping, collections and capital projects.