Warrior Met Coal Announces Fourth Quarter and Full Year 2018 Results

 

 

February 22, 2019 - Warrior Met Coal, Inc. (NYSE: HCC) (“Warrior” or the “Company”) has announced results for the fourth quarter and full year ended December 31, 2018. Warrior is the leading dedicated U.S. based producer and exporter of high quality metallurgical (“met”) coal for the global steel industry.

Warrior reported fourth quarter 2018 net income of $374.2 million, or $7.11 per diluted share, compared to net income of $97.2 million, or $1.83 per diluted share, in the fourth quarter of 2017. Excluding the noncash income tax benefit recognized upon the release of the valuation allowance on deferred tax assets associated with Warrior’s net operating losses (“NOLs”) and a noncash adjustment to the Company’s asset retirement obligations due to a change in reclamation estimates, adjusted net income per share for the fourth quarter of 2018 was $2.38 per diluted share compared to $1.83 per diluted share in the fourth quarter of 2017. The Company reported Adjusted EBITDA of $161.6 million in the fourth quarter of 2018, compared to Adjusted EBITDA of $86.3 million in the fourth quarter of 2017.

The market for high quality premium met coal continued to be strong in the fourth quarter, reflecting robust economic growth and global steel production. “With strong customer demand and our ability to take advantage of a favorable pricing environment, we are pleased to report record high sales and production volumes for 2018, leading to record high financial performance,” commented Walt Scheller, CEO of Warrior. “We exceeded our guidance targets for this year and our unique business model provides a critical competitive advantage that gives us a confident outlook for 2019. Moreover, as a result of our record performance, we were able to invest capital of over $100 million in 2018 to further strengthen our company while also returning significant capital to stockholders through cash dividends and stock repurchases.”

Warrior reported full year 2018 net income of $696.8 million and adjusted net income of $459.0 million or net income of $13.17 per diluted share and adjusted net income of $8.67 per diluted share, compared to net income of $455.0 million and adjusted net income of $467.9 million, or net income of $8.62 per diluted share and adjusted net income of $8.86 per diluted share, in 2017. The Company reported Adjusted EBITDA of $601.0 million for the full year of 2018 compared to $517.7 million in 2017.

Warrior continues to advance its Blue Creek growth project and evaluate various development options to enhance project economics and reduce execution risk. Warrior believes that Blue Creek represents one of the few remaining untapped reserves of premium High Vol A metallurgical coal in the United States and that it has the potential to provide Warrior with meaningful growth. “With strong and consistent performances from Mine No. 7 and Mine No. 4, we are evaluating development alternatives for Blue Creek as we consider the next phase of growth for Warrior. We believe that Blue Creek represents a world-class asset that produces a complementary premium met coal product that has the potential to generate significant free cash flow through-the-cycle,” said Mr. Scheller. “We are excited by the promising results from our early work and believe Blue Creek has the potential to deliver significant value to our shareholders.”

Operating Results

The Company produced 1.9 million short tons of met coal in the fourth quarter of 2018, 20% more than the amount produced in the fourth quarter of 2017. For the full year of 2018, the Company produced 7.7 million short tons, a record year, which exceeded its guidance and expectations as the Company ramped up its operations and maximized efficiencies at the mines. Sales volume in the fourth quarter of 2018 was 2.0 million short tons, 45% more than the same quarter last year, reflecting the strength of both continued production and demand from customers. Sales volume for the full year 2018 reached a record high for the Company of 7.6 million short tons and was 17% higher than 2017.

Additional Financial Results

Total revenues were $360.4 million for the fourth quarter of 2018, including $349.9 million in mining revenues, which consisted of met coal sales of 2.0 million short tons at an average net selling price of $177.50 per short ton, net of demurrage and other charges. Total revenues for 2018 were $1.4 billion, 18% higher than in 2017, due to a record sales volume of 7.6 million short tons that was 17% higher than 2017. Warrior capitalized on the rising pricing environment in the quarter by selling its met coal at 93% of the quarterly Australian premium low-volatility (“LV”) hard coking coal (“HCC”) index average price (the “Australian LV Index”).

Cost of sales for the fourth quarter of 2018 were $180.2 million, or 51.5% of mining revenues, and included mining costs, transportation and royalty costs compared to $136.7 million, or 60% of mining revenues in the same period of 2017. Cash cost of sales (free-on-board port) per short ton decreased to $92.64 in the fourth quarter 2018 from $100.97 in the fourth quarter of 2017, primarily due to higher sales volumes, lower spending and offset slightly by higher transportation costs, which is price sensitive to met coal pricing. For the full year 2018, cost of sales was $716.6 million compared to $592.5 million in 2017 and cash cost of sales (free-on-board) per short ton was $93.76 compared to $90.58 in 2017, primarily as a result of higher spending associated with the increased sales and production volume.

Selling, general and administrative expenses for the fourth quarter of 2018 were $7.6 million, or 2.1% of total revenues, and were $36.6 million for the full year. Depreciation and depletion costs for the fourth quarter of 2018 were $25.5 million, or 7.1% of total revenues, and were $97.2 million for all of 2018. Warrior incurred interest expense, net of $8.8 million during the fourth quarter of 2018 and $37.3 million for the full year.

Income tax benefit was $225.8 million in the fourth quarter of 2018, primarily reflecting the release of the valuation allowance on deferred tax assets associated with the Company’s NOLs. The release of the valuation allowance was reflective of the Company’s earnings trends and projected future taxable income.

Cash Flow and Liquidity

The Company continued to generate strong cash flows from operating activities in the fourth quarter of 2018 of $130.8 million compared to $91.4 million in the fourth quarter of 2017, a 43% increase. Full year 2018 cash flows from operating activities were $559.4 million, compared to $434.5 million for the full year 2017, a 29% increase. Net working capital, excluding cash, for the fourth quarter of 2018 increased by $38.9 million from the third quarter of 2018 and increased $10.7 million for the full year 2018 compared to 2017. The increase in net working capital, in 2018 was primarily attributable to an increase in trade accounts receivable due to higher sales volumes combined with an increase in income tax receivable offset by an increase in accounts payable and accrued expenses due to increased production and sales volume. The Company continued to make significant investments in its business during 2018, with total capital expenditures for the fourth quarter of 2018 of $25.6 million and $101.6 million for the full year of 2018.

Free cash flow was $105.2 million in the fourth quarter of 2018, which was $43.7 million, or 71% higher than in the prior year period. Free cash flow for the full year 2018 was $457.8 million, which was $115.9 million, or 24% higher than 2017. Free cash flow conversion increased 10% in 2018 to 76%. Cash flows used in financing activities for the fourth quarter were $27.0 million primarily due to the Company’s stock repurchases, described below. The Company returned $400.0 million of capital to shareholders in 2018 in the form of dividends and stock repurchases, as reflected in cash flows used in financing activities.

The Company’s available liquidity as of December 31, 2018 was $326.0 million, consisting of cash and cash equivalents of $205.6 million combined with $120.4 million available under its recently-amended Asset-Based Revolving Credit Agreement.

Capital Allocation

The Company repurchased 1.1 million shares, totaling approximately $25.9 million, of Warrior’s common stock in the fourth quarter of 2018. For the full year 2018, the Company repurchased 1.6 million shares, or 3% of outstanding shares, totaling approximately $38.0 million, under the Company’s Stock Repurchase Program which authorized the Company to repurchase up to an aggregate of $40.0 million of the Company’s outstanding common stock.

During 2018, Warrior returned $400 million of capital to stockholders and has returned $1.2 billion since its IPO. Warrior remains committed to returning cash to stockholders through dividends and stock repurchases.

Regular Quarterly Dividend

On February 19, 2019, the board of directors of the Company (the “Board”) declared a regular quarterly cash dividend of $0.05 per share, totaling approximately $2.6 million, which will be paid on March 11, 2019, to stockholders of record as of the close of business on March 4, 2019.

S&P Upgrade

On January 23, 2019, the Company announced that Standard & Poor’s (“S&P”) had affirmed the Company’s corporate credit rating of “B+”, raised the issue level rating on the Company’s Senior Secured Notes due 2024 (the “Notes”) from “BB-” to “BB” and raised the recovery rating to 1 from 2. According to S&P, the upgrade reflects the Company’s strong financial performance, strong credit metrics and a stable outlook. The upgrade further reflects S&P’s view about the Company’s ability to maintain strong EBITDA margins, low debt leverage and strong free cash flow in 2019.

Restricted Payment Offer and Concurrent Tender Offer

On February 21, 2019, the Company announced in a separate press release the commencement of an offer to repurchase (the “Restricted Payment Offer”) up to $150.0 million aggregate principal amount of its 8.00% Senior Secured Notes due 2024 (the “Notes”) at a repurchase price of 103% of the principal amount plus accrued and unpaid interest to the repurchase date. The Restricted Payment Offer is being made in accordance with the indenture governing the Notes to provide the Company with the ability in the future to declare special dividends and/or repurchase shares of common stock of an estimated $150 million. The Company concurrently announced the launch of a tender offer (the “Tender Offer”) to repurchase up to $150 million aggregate principal amount of its Notes at a repurchase price of 104.25% of the principal amount plus accrued and unpaid interest to the repurchase date. This press release is not an offer to purchase or a solicitation of an offer to sell the Notes in the Restricted Payment Offer or the Tender Offer.

Blue Creek Update

Warrior continues to evaluate a number of development alternatives for Blue Creek. The Company is currently studying the feasibility of a single longwall operation that could produce up to 3.0 million short tons annually. While Warrior continues to optimize project parameters, preliminary engineering studies have estimated that initial capital expenditures of approximately $550 million to $600 million would be required to be spent over five years in order to develop this project. 

 

Warrior controls approximately 114 million short tons of reserves at Blue Creek and has the ability to acquire adjacent reserves that would increase total reserves to over 170 million short tons at Blue Creek. Based on our preliminary engineering studies indicating up to 3.0 million short tons of annual production from a single longwall operation, Blue Creek is expected to have a mine life in excess of 40 years. Also based on our preliminary engineering studies, we believe that the geology and reserve base of Blue Creek could support a second longwall that would be expected to increase annual production up to 6.0 million short tons, which would provide Warrior with future growth opportunities at Blue Creek.

Our third party reserve report indicates that Blue Creek would produce a premium High Vol A metallurgical coal that is characterized by low-sulfur and high coke strength after reaction (“CSR”). High Vol A has traditionally priced at a slight discount to the Australian Premium Low Vol and the U.S. Low Vol coals; however, recently has been priced at or slightly above these coals. Warrior expects High Vol A coals will continue to become increasingly scarce as a result of Central Appalachian producers mining thinner and deeper reserves, which is expected to continue to support prices. Warrior believes this creates an opportunity for Blue Creek to take advantage of favorable pricing dynamics driven by the declining supply of premium High Vol A coals.

Given the positive results of the work completed to date, Warrior plans to pursue a number of activities in 2019 to maintain project momentum and optimize Blue Creek’s project parameters. These activities are expected to include additional core drilling, finalizing the rail loop design, and permitting the slurry storage and coarse refuse areas. Additionally, Warrior plans to continue to explore potential off-take arrangements as well as project financing alternatives. The Company expects Blue Creek will be fully permitted and ‘shovel ready’ by early 2020 at which point Warrior would be in a position to make a decision on development. “We are extremely excited by the potential we see at Blue Creek and believe the project could become the cornerstone of our future portfolio. We look forward to providing updates to our shareholders on our progress and key milestones over the next twelve months,” said Mr. Scheller.

Company Outlook

The Company’s outlook for 2019 is subject to many risks that may impact performance, such as market conditions in the steel and met coal industries and overall global economic and competitive conditions, all as more fully described under Forward-Looking Statements. As a result of strong production in 2018, the Company expects to complete a total of five longwall moves in 2019, as compared to three longwall moves in 2018. Despite additional longwall moves, the Company is increasing the upper end of its guidance range for coal production and coal sales for 2019 compared to guidance provided for 2018.