CONSOL Energy Inc. (NYSE:CEIX) Q3 2023 Earnings Call Transcript

CONSOL Energy Inc. (NYSE:CEIX) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good morning and welcome to CONSOL Energy’s Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead.

Nathan Tucker: Good morning, everyone and thank you for joining us. Welcome to consol energy’s third quarter 2023 earnings conference call. Any forward-looking statements or comments we make about future events are subject to risks, certain of which we have outlined in our press release and in our SEC filings and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our press release and furnished to the SEC on Form 8-K which is also posted on our website.

A coal miner emerging from a vast underground mining operation, his clothes blackened from the day’s work.

Additionally, we filed our quarterly report on Form 10-Q for the quarter ended September 30, 2023 with the SEC this morning. You can find additional information regarding the company on our website www.consolenergy.com, which also includes the supplemental slide deck that was posted this morning. On the call with me today are Jimmy Brock, our Chief Executive Officer; Mitesh Thakkar, our President and Chief Financial Officer; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our third quarter 2023 achievements and a detailed discussion of our operation. Mitesh will then provide an update on our marketing and financial progress, and our updated 2023 outlook. In his closing comments Jimmy will lay out our key priorities as we prepare to head into 2024.

There will be a Q&A session followed by our prepared remarks in which Bob will also participate. With that let me turn it over to Jimmy.

Jimmy Brock: Thank you, Nate. Good morning, everyone. I want to begin by acknowledging a major milestone that we reached during the third quarter. After retiring our Term Loan B in Q2 2023 we made a final discretionary payment of $24 million to fully retire our second lien notes during the third quarter. In doing so, we have officially retired all of the $800 million of debt that was raised in conjunction with financing our spinout transaction in late 2017. Through the first nine months of the year, we’ve generated $522 million of free cash flow which has already eclipsed full year 2022 total. With that free cash flow plus deploying some cash from our balance sheet we’ve returned significant value to our shareholders year-to-date through October.

We spent $292 million towards buying back shares of our common stock, $75 million toward dividends and $183 million toward debt repayments. From an operations and marketing standpoint we continued our pivot into the export market during the quarter and as such 71% of our total reoccurring revenues and other income has come from export sales year-to-date. As of early October, our CONSOL Marine Terminal has surpassed its previous annual throughput tonnage record of 14.3 million tons and is on pace for 19 million tons this year. Let’s now discuss our operational performance in more detail. On the safety front, our Bailey preparation plant Itmann Preparation Plant and CONSOL Marine Terminal each had zero employee recordable incidents during the third quarter of 2023.

Our coal operations finished the quarter with a total recordable incident rate, well below the national average for underground coal mines. Coal production at the Pennsylvania Mining Complex came in at 6.1 million tons in Q3 of ’23, an improvement compared to 5.3 million tons in Q3 of ’22. Additionally, we finished the third quarter of 2023 with 447,000 tons of inventory, simply due to the timing of export vessel shipments. On the cost front, our PAMC average cash cost of coal sold per ton for Q3 ’23 was $38.36 compared to $39.77 in Q3 of ’22. The improvement was mostly due to the fixed cost leverage that came from our fifth longwall, which was not operating in the prior year quarter. As we’ve said before, one of the major benefits of having the fifth wall is that it allows us to better smooth out weaker volume quarters due to planned shutdowns or multiple longwall looks.

For Q3 ’23, although expected, cash costs were higher than our annual public guidance range, as the third quarter is our seasonally weakest quarter because of our planned summer maintenance shutdown. We also had a planned longwall move in the quarter. However, for the full year, we still expect to be within our average cash cost of coal sold per ton guidance range. Moving on to Itmann. During the third quarter of 2023, the complex showed improved production performance, producing 91,000 tons compared to 70,000 tons in Q2 of ’23. All three of the super sections mined additional height for mains development, which requires cutting some rock. This caused our mining rates to slow during the quarter versus expectations, but this is necessary to support the long-term needs of the coal mine.

Furthermore, although all three continuous minor super sections are installed underground, we are currently operating two of the three as two super sections, as we continue to deal with a challenging labor market in the region. Once we have completed our mains development, we will operate the three super sections and targeted blocks of our coal reserves. This is expected to lead to more efficient mining heights and improve production rates and cost. Finally, in the third quarter, the complex sold 123,000 tons of Itmann and third-party coal. And year-to-date, the complex has sold 357,000 tons of admin and third-party coal in aggregate. Moving to the CONSOL Marine Terminal. We achieved a throughput volume of 4.3 million tons shipped during Q3 ’23 compared to 2.7 million tons in the prior year quarter.

The CONSOL Marine Terminal continues to prove its worth in executing our longer-term strategy of moving more PAMC tons into growing export markets. Terminal revenues for the quarter came in at $22.7 million and CMT operating cash costs were $7.5 million. Accordingly, CMT adjusted EBITDA finished at $14.9 million compared to $8.3 million in the prior year period. With that, let me turn the call over to Mitesh to provide the marketing and financial updates.

Mitesh Thakkar: Thank you, Jimmy, and good morning everyone. Let me start with an update on the marketing front and our contracting progress. During the third quarter, we continued to take advantage of our high-quality product and sold 60% of our total volumes into the export markets where the demand for our coal remains strong in the industrial and crossover metallurgical markets. On the industrial side, while the Indian cement market is by far our largest, we continue to explore new markets for our product. We are pleased to report that during the quarter, a cargo of our PAMC coal was delivered into a country in South Asia, which was the first time for this country in the history of the PAMC. A deal for a second cargo into the same country has already been signed with an expected delivery schedule for the fourth quarter.

Traditionally this country imports Mitsui coals from Indonesia, Russia and Mozambique but it is interested in further testing the high heat content of our PAMC product. Furthermore, on the crossover metallurgical front, we shipped approximately 630,000 tons during 3Q 2023, which similar to the second quarter is one of the highest quarterly levels we have achieved in recent years. With the commissioning of our fifth longwall at the Enlow Fork mine, which has lower sulfur content, we are seeing increased demand for our product. Much like the industrial market, we are focused on penetrating new crossover metallurgical customers and geographies as well. We are pleased to report that during the third quarter, we sold our first direct cargo into Indonesia to a co-producer and are currently in negotiations for 2024 sales.

We are seeing significant demand growth for our crossover product in Southeast Asia specifically Indonesia where coke-making capacity is expected to double by 2025. This again highlights the desirability of our high-quality product on the global stage where it can be used in many different applications. Indonesia, which is the world’s largest exporter of coal still has certain applications that require high quality imported coals, which are in short supply globally. Coal demand in the domestic power generation market was predictively underwhelming in the third quarter as coal stockpiles remained elevated in certain areas following a weak second quarter. However, domestic power generation overall was strong during the summer of 2023. We expect that the continued increase in LNG export demand and reduced rig comps will support improved natural gas price futures, which is evident in the current forward curve.

This will in turn support increased coal demand and coal prices. During 3Q 2023, we sold 6.1 million tons of PAMC coal at an average realized coal revenue per ton sold of $70.34 compared to 5.3 million tons at $72.83 in the year ago period. As Jimmy alluded to, we finished the third quarter with elevated inventory levels compared to what is typical for us. We ended 3Q 2023 with 447,000 tons in inventory due to the timing of export vessel loadings, which essentially reduced our sales tonnage for the third quarter. However, given that this was only timing in nature this should be a tailwind to our fourth quarter sales. Additionally during the third quarter, we negotiated partial buyouts of some contracted volumes in exchange for certain fees paid to us, which contributed $16.4 million to miscellaneous income.

Had our customers not bought out these partial volumes, we would have recognized $2.67 higher coal revenue per ton during the quarter and would have surpassed the average realized coal revenue per ton sold from the prior year quarter. For the third consecutive quarter and the third time in our history, sales into the export industrial market outpaced sales into the domestic power generation market. Overall, sales into the export market on a year-to-date basis, accounted for 71% of our total recurring revenues and other income. Conversely, domestic power generation has accounted for less than 25%. Since our last earnings call, our sales team increased our forward sold position at the Pennsylvania [Ph] mining complex by 5.4 million tons for delivery through 2025.

Most of these tons were sold into the export market, where we continue to increase our sold position. As such, we have 21.5 million tons contracted for 2024 and 10.8 million tons contracted for 2025 at attractive prices. We are currently ahead of the schedule for 2024 and 2025 compared to where we typically expect to be at this point. As we speak, we are in talks with multiple strategic partners for future contracted volumes. Now let me provide an update on our balance sheet management progress, before discussing our financial results. First, during 3Q 2023, we generated $120 million of free cash flow and reduced our unrestricted cash and cash equivalents and short-term investments by $42 million in aggregate. Approximately, 19% of which was deployed towards reducing our gross debt and 85% was deployed towards share buybacks within the quarter.

As Jimmy mentioned, we fully retire our second lien notes during the quarter and have now achieved our target gross debt level of approximately $200 million. Second, when factoring in our unrestricted cash and short-term investments, we remain in a net cash position. And as of September 30, we had net cash of $50 million. Third, we finished the quarter with a strong liquidity position of $465 million. Now let me recap our financial results. This morning we reported a strong third quarter 2023 financial performance, especially when you consider that the third quarter is historically our weakest quarter. We finished 3Q 2023, with net income of $101 million or $3.11 per diluted share. Additionally, we finished the quarter with adjusted EBITDA of $186 million and generated $120 million of free cash flow.

On a year-to-date basis, we have generated net income of $499 million adjusted EBITDA of $808 million, and free cash flow of $522 million all of which are records for our company. Now, let me provide a quick update on our outlook for 2023. On the guidance, front for the Pennsylvania mining complex, we are simply tightening our sales volume range from 25 million to 27 million tons to an updated range of 25.5 million to 26.5 million tons. The midpoint of the range remains intact. We are also reiterating our average cash cost of coal sold per ton guidance range of $34 to $36 per ton, as we expect a strong fourth quarter performance to close out the year. Additionally, due to our success in optimizing our sales portfolio so far this year, and the continued strength in API2 forward prices offsetting weak domestic demand trends and partial contract buyouts, we are reiterating our full year expected average, realized core revenue per ton sold of $76 to $80 per ton For our Itmann mine, we are adjusting our 2023 production guidance range down to 300,000 to 400,000 tons from the previous range of 400,000 to 500,000 tons, due to the extended mains development time line and persistent staffing challenges.

Lastly, on the capital expenditures front for 2023, we are lowering our guidance range to $160 million to $175 million from the previous range of $160 million to $185 million as supply chain bottlenecks persist for certain pieces of equipment causing extended lead times and delayed deliveries. With that let me turn it back to Jimmy.

Jimmy Brock: Thank you, Mitesh. Let me now provide an update on our shareholder return program. We deployed approximately 77% of the free cash flow generated during the third quarter toward repurchasing shares of our outstanding common stock. In total, through October, we deployed $93 million of our Q3 2023 free cash flow toward, repurchasing nearly 1 million shares of CEIX stock at a weighted average price of approximately $95 per share. This brings our year-to-date share repurchases as of the end of October to 4.1 million shares or nearly 12% of our public float as of year-end 2022. As we close out 2023, we have a few key areas of focus to set us up for success in 2024. First, we are excited by our contracting progress to date specifically our success beyond 2024.

We continue to build new long-term relationships particularly in the export industrial and crossover met markets and our contracting progress allows us to be patient and more opportunistic moving forward. Second, we are committed to ramping up the Itmann mine to full run rate production by the end of the year to ensure we hit the ground running in 2024. Our focus is on bringing consistency to the operation and eliminating some of the staffing challenges we faced throughout the year. This will be crucial in achieving a consistent production profile at the mine and bringing further revenue diversification to CONSOL Energy. We remain very excited about the potential of this complex and the revenue diversification that our Itmann low-vol product will bring.

To-date, we have seen strong interest for our Itmann product in domestic and export markets. Achieving consistent operating results is the key area of focus so we can get to the business of cultivating these potential new markets and relationships. Third, we remain focused on returning value to our shareholders through our rigorous capital allocation framework. We’ve always prioritized the highest rate of return in the most advantageous use of our capital and we will evaluate our capital deployment decisions regularly. We continue to believe that share buybacks remain the most attractive and accretive form of shareholder returns and as such we intend to continue that strategy. In aggregate, we are pleased with our execution in 2023 to this point and our ability to optimize our sales book throughout the year.

We are also very excited about our demonstrated ability to generate the majority of our revenue from the growing seaborne coal markets and our ability to grow our market share over time as the demand for our product expands. This is made possible through the high-quality characteristics of our coal, our first quartile cost structure, and our significant logistics advantage through our dual rail service and ownership of our CONSOL Marine Terminal. For these reasons and many others we remain even more excited about the future. Looking back on the success we’ve achieved in our roughly six-year history, we’ve returned well north of $1 billion to our shareholders through share repurchases, dividends and substantial debt pay down. We’ve proven we are no longer a domestic power generation driven company and that the tail of demand for our high-quality assets is much longer via niche and growing export markets.

Finally, let me wrap-up by once again acknowledging our hard working employees across the organization. Through their efforts and dedication, we’ve achieved tremendous success to-date. Our balance sheet is strong. We’re at a target gross debt level. We’re in a net cash position. Our liabilities have been declining. We are returning capital to our shareholders. And we continue to expand our sales reach and open up new markets for our coal. I remain proud of this team. And I thank all of our team members for their commitment to our core values. With that, I will hand the call back over to Nate.

Nathan Tucker: Thanks Jimmy. We will now move to the Q&A session of our call. At this time, I’d like to ask our operator, to please provide the instructions to our callers.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes: Thank you very much, Operator. Good morning everyone.

Bob Braithwaite: Good morning, Lucas. A – Jimmy Brock Good morning, Lucas.

Lucas Pipes: Good to see you maintained the full year outlook this morning. And I wanted to touch on first, pricing for 2024 and 2025. You gave us the volumes in the release. And I’m sorry if I missed it in the prepared remarks, but could you maybe share the pricing as well? What would be the kind of average locked price? And I understand there are sensitivities to power and API2. But as of today, what would the average price be? And if you could maybe then also give a breakdown of what amount is fixed domestic? What is power linked? What is locked fixed price in the export market? What is floating collar in the export market would really appreciate additional details on the commercial book. Thank you so much.

Bob Braithwaite: Sure. Lucas, this is Bob. I’ll take that. This morning we did announce that we had new sales of 5.4 million tons through 2025. I think very importantly, there yes most was in the export market. But we did in particular, concluded a two-year deal with a domestic utility in the third quarter and just say that pricing had a six handle on it. And then, furthermore, this morning, we received confirmation for additional domestic business through 2027, that’d be 1.6 million tons. And the average pricing on those new tons is north of $60. So when you look at 2024 in particular we announced this morning 21.5 million tons which is about a 3.9 million ton improvement quarter-over-quarter. When you look at the breakdown about three million is linked to power.

We have about 9.5 million slated for the export market of which 6.5 million do have, indices linked to them all have ceilings and floors and then the balance or about $9 million is domestic and fixed price. When you look at where we modeled the API2 price for 2024, it was $120. And then we also modeled in power at the floor. I will also tell you that based on where the futures are today, we certainly could see some upside to power, should they remain at those levels. But the pricing we’re seeing today on that 21.5 is upper 60s to close to $70. And then for 2025, 10.8 million tonnes, we announced this morning, the breakdown there is 2.5 to power, 3.7 is domestic and fixed and the 4.6 is export, 100% of the 4.6 is linked indices, all have ceilings and floors.

And again based on $120 API2 price for 2025, we’re looking at pricing in the upper 60s there as well.

Lucas Pipes: Bob, you’re saying it like you’ve committed this to heart. Thank you very much for all the color there. Very, very helpful. To follow-up on the pricing side more for 2023. I’d love to understand the delta from Q3 to Q2, a little better, right? Q2 I think the average realized price was $81.27, Q3, $70.34. I’m backing into $75 to $76, again in Q4. Can you provide a little bit of color, what caused that variance in Q3? And why do you think it’s going to kind of snap back up here in the fourth quarter of this year? Thank you.

Bob Braithwaite: Sure. So Lucas, we did anticipate a lower sales price in Q3. If you look at our original guidance of $78 midpoint, we’re certainly on pace to hit that. A couple of things in Q3 that drove the lower pricing or I should say several things. One, API2 prices were down quarter-on-quarter. So I think API2 prices were down $7, $8, $9 from Q2. Second was just the mix of sales. We actually exported more volume in Q3 than we anticipated. We had some higher priced domestic contracts that did not load in Q3. However, those will be loaded in Q4. We’re starting to see a pickup in domestic demand in October and we expect that to continue through the balance of the fourth quarter. A lot of that’s due to the increase in natural gas prices.

We’re starting to see gas, well north of $3 in the futures are there as well. So we expect additional coal burn from our domestic customers. If we don’t get those tons moved in Q4, we’ll certainly continue to get the value of those into next year. And then third, I think it’s just we had lower volumes and that was anticipated but when you have lower volumes you just have less ability to optimize the portfolio. So in Q4, we’re expecting to end the year strong. We had 400,000 tons of inventory carry into Q4. I can tell you pretty much all that has been loaded out of the terminal. So we’re anticipating a 6.8 to 6.9, call it type of level to get to the midpoint in total sales. So that gives us a better opportunity to optimize. So again, optimization, higher-priced domestic business.

And right now API2 prices are certainly looking to be stronger in Q4 than in Q3.

Mitesh Thakkar: But Lucas in summary, I think the neighborhood that you talked about for Q4 is reasonable, given what our guidance is and the fact that we have three quarters behind us.

Bob Braithwaite: Yes that’s fair.

Lucas Pipes: Thank you so much. I want to end with a higher level question. You mentioned your – you sold coal into South Asian country for the first time. And — can you provide some color as to what allows you to compete that far away from home. Indonesia is on the doorstep, Australia with high BTU coal is on the doorstep. How do you get into that market competitively? Thank you very much for your details.

Jimmy Brock: Yes. That’s a good question, Lucas. I think, it’s more tied to our relationships that we’re trying to build long term. It takes a lot of travel and Bobby and Mitesh have certainly been doing that. They just visited Indonesia and our high-quality coal allows us to get in those markets, particularly with the BTU basis and our ability to ship out of the Baltimore terminal.

Mitesh Thakkar: And the other thing I would mention too Lucas is like, we have been shipping coal in South Asia. India is the greatest example, right? Like India is a country in South Asia, where we have been doing business for a very long time. I think, there are smaller markets around that area that can use and benefit from some of the hard calorific value coal such as ours. They are a little bit more tolerant on some of the other things such as sulfur and those. So it helps us. I think, if you look at one of the traditional suppliers and I touched upon briefly, they used mid-CV coal in the past from Indonesia, Russia and all these places I think. So, we had an opportunity to replace some of that here with everything that we are seeing geopolitically.

And I think this is one of those things that once you develop these markets, I think tend to become a more regular supplier which is what we ended up happening in India. So if you look at the playbook that we had in India, we’re going by a similar playbook here. It’s smaller markets though, it’s not as big as India.

Lucas Pipes: Great. Very helpful. I really appreciate all the color this morning and continue best of luck. Thank you.

Operator: The next question comes from Nathan Martin with the Benchmark Company. Please go ahead.

Nathan Martin: Thanks, operator. Good morning guys. Appreciate you taking the questions. I also just wanted to round out the question on full year ’23. Like sales guidance in particular I think Lucas just mentioned, the implication is 6.8 million tons at the midpoint in the fourth quarter. But can you kind of talk about what gets you to the high or low end of that guidance range? It sounds like those inventory shipments have mostly moved, but that would just be great to have a little more color there. Thanks.

Jimmy Brock: I think the inventory that we had been shipped is certainly going to help those numbers. And we’re — as long as we have the planned longwall move, we have one of those in Q4 here. But thus far, things are going well for us. We do have that fifth wall. And as long as we can continue to ship that out, we’re seeing some increased customer demand here domestically that Bobby talked about that will help. And I think, we certainly have — we do have the holidays that we have and we have that last week of shutdown, but we feel pretty good where we are from a production standpoint and to have the opportunity to run even higher to those numbers, we would have to run some of those holidays or just have the operations running really well and a quicker longwall move than we have planned. But all of those are opportunities that are in front of us.

Mitesh Thakkar: And just to add to it, the inventory situation that we talked about, it’s not about inventory lying on the ground not sold. It’s already sold coal that just because of the timing of the vessels and shipments just moved from third quarter to the fourth quarter, that inventory has gone as we speak here today.

Nathan Martin: Perfect. And then just maybe on the logistics side, how are things cooperating from a rail and port and maybe even thinking about labor as well from those standpoints.

Jimmy Brock : Yes. I think we’re dual served by both rails. And I think they’re performing okay, we haven’t had any real issues out of them. We always expect some shipments to move around a little bit. But the railcars have been pretty good for us thus far.

Bob Braithwaite : Yes. I mean think about it, Nate, I mean look at the shift, right? I mean, we’re talking about moving potentially 19 million tons through our terminal, which about 16 million of that will be from PAMC just this year.

Nathan Martin : Got it. And then maybe just a higher-level longer-term question. It would be great to get your thoughts guys around CONSOL’s ability to kind of maintain that 26 million-ton plus or minus shipment run rate over the next several years.

Jimmy Brock : We used 26 million tons Nate our base. And as you well know, we’ve run as high as 27.4 [ph] we run to the market. So if the market is there we certainly have the ability to run that. We don’t have anything that’s in the near term certainly for the next several years, we will use that 26 as a base, and we certainly have the opportunity to flex that up or down depending upon the market.

Mitesh Thakkar : And if you think about the cadence like, historically, we are not this heavily contracted. So we have more contracted for 2024 than we typically are. So that tells you that we have enough sales already booked and with the development of some of the newer markets and RFPs that Bobby and his team is working on in the domestic market as well we feel very confident about getting around that base and continue to optimize that.

Nathan Martin: Very helpful guys. And then maybe shifting to the export business. First maybe what the netbacks look like today kind of both based on API2 and Techco prices? And then Secondly congrats on entering some of those new markets. You guys just talked about both on the industrial and it sounds like crossover met side as well. And I know — in the past you’ve been successful tying some of that long-term business the API2 prices the floors and ceilings, but how should we think about some of this newer business? Is that still the way you’re looking at pricing that? Or could there be some other mechanisms you’d entertain or working on to possibly better capture the value of your product?

Bob Braithwaite : Yes. So in the quarter two of the deals under the 5.4 million tons that we did were significant export deals for 2024. When I say significant, there’s a significant amount of tons. And one we did at a fixed price and I can tell you that net to back over $70 to the mine. That is likely going to Europe. We looked at where API2 prices for the time we did that deal. And then the other deal we did was linked to both pet coke and API2 prices and had a fixed price component. So we continue to look at ways that we can price our product that makes sense into these markets, especially into the India market. And then the later deal I just mentioned it also had floor and ceilings tied to it, where the floor is going to provide us a minimum $20-plus cash margin and then we have some significant upside.

We’re also working on some additional term export deals and not only for thermal but also the crossover product. And as you know the crossover product typically gets linked to high-vol B prices, or in some cases if it’s going into Asia we’ll look at we’ll look at taking a discount off of TSI prices. So we’re looking at each individual opportunity based on where the ultimate destination is and the ultimate use of the coal, but we like fixed price deals better, but we certainly are looking at API2 and pet coke link deals as well. The market has been very volatile. I think the last I saw CFR India pet coke prices are in $125, $130 range. The PAMC equivalents about mid-60s back to the mine at that type of level. And then API2 prices are very volatile as well.

They were higher than $130 recently down in, call it the 120s today. And as I mentioned, we were able to get pricing netting over $70 during a time when API2 was in the upper $120s to $130 today you’re probably looking at somewhere again in the mid-60s based on $120, $125 API2 price.

Nathan Martin: Great. Appreciate all that, Bob. I’ll leave it there. Thank you guys for the time, and best of luck in the fourth quarter.

Bob Braithwaite: Thanks, Nathan.

Operator: [Operator Instructions] The next question comes from Michael Dudas with Vertical Research Partners. Please go ahead.

Michael Dudas: Good morning, gentlemen.

Jimmy Brock: Good morning.

Bob Braithwaite: Good morning.

Michael Dudas: Bob, how are your customers in Europe, maybe — just maybe generally how they’re looking at their inventory levels and their early indications on demand and usage going into 2024 given global economic activities on one hand but still some shock from what’s happened with the gas over the past couple of years.

Bob Braithwaite: Yes. I mean as I just mentioned to Nate, one of the deals we did last quarter was into Europe that had a seven handle on it. And I’m actually heading over to Europe here next week to meet with several of our customers at their request, which certainly is positive news. And I do think that many are concerned about actual needs and if supply will be there even assuming a normal winter. I did read this morning to that ARA prices or — I’m sorry ARA inventory levels are continuing to drop. A lot of that has to do with the Rhine River situation now getting back to normal. So, I am quite bullish in Europe and when it comes to their thermal coal needs in 2024, and I think you’ll continue to see some strength in the API2 prices as well.

Michael Dudas: How about your Indian customers?

Bob Braithwaite: Yes. I mean, India, we’re getting constant demand for our product over there. I mean the retail market seems to be pretty strong so far this year and then there continues to be growth in cement capacity as we move forward as well. So, we are passing on some opportunities today to move some coal into India for the balance of this year as the crossover market continues to be the best market for us to sell our product. And based on where our current sold position is, we’re taking advantage of the best market to ensure that we have the highest realizations.

Michael Dudas: And yes, speaking on the crossover, certainly there’s been upside volatility in the global coking coal markets. How do you see it in positioning not only some of the crossover opportunities and I’m assuming there’s some marginal benefit to that maybe in the first half of next year placing some of that coal. And then with Itmann, give a sense of where you are on customer interest and for where your capacity is going to get to at the end of this year beginning and next? And how comfortable you feel you can ramp up not only on the production side to place those tons into the market at reasonable pricing.

Bob Braithwaite: Yes. So on the sales side talking about our PAMC product and the crossover, if you think about where we’re at so far year-to-date, I mean we’re on pace to do over 2.5 million tons into the crossover market this year, which I wouldn’t say is a record for us but it’s certainly much higher than what it traditionally has been. Brazil is our core market. But as Mitesh mentioned, we’re in Indonesia now. We’re also selling a lot of coal into China now as well. So, we feel as though — and that’s the reason why we brought back that fifth longwall in particular at Enlow Fork, because of the quality of that longwall and that’s certainly benefiting us in that crossover market. So again, we feel very confident in our ability to continue to expand that crossover market for our PAMC coal.

Moving on to Itmann, certainly a lot of interest there. We did participate in a lot of the domestic RFPs for 2024 we were successful in concluding close to 300,000 tons under those RFPs. I will tell you we certainly could have secured more volume, but we elected to not do so for desire to diversify. And then we also felt as though prices were likely going to be higher on the export side. We’ve certainly seen a nice jump in TSI prices. We saw a nice jump in US East Coast low-vol prices although it’s come off a bit. But again, there’s certainly a lot of interest there. As soon as we get the mine fully up to full run rate, we feel that we’ll be able to participate in additional markets there as well.

Michael Dudas: Excellent. Thanks for your thoughts, Bob. Gentlemen, good luck.

Jimmy Brock: Thanks, Mike.

Mitesh Thakkar: Thanks, Mike.

Operator: The next question is a follow-up from Lucas Pipes with B. Riley. Please go ahead.

Lucas Pipes: Thank you very much, and thank you for taking my follow-up question. It’s Itmann related. Approximately what is the utilization rate today? Should we think of like two out of the three super sections are running so it’s kind of close to call it 70% or so? Or would you describe it differently? And what do you think will take on the labor front to get that third super section fully mobilized? And then on the domestic contracting you just mentioned you participated with I think you said 300,000 tons, what — could you share the pricing that’s associated with that tonnage? Thank you very much.

Jimmy Brock: Well, on the production rate, I would say utilization, we are somewhere around that 70% number. We have two of the three super sections running now. However, we’re still in managed development, which is requiring us to cut a little bit of height, which slows our mining progress down to allow for equipment and things to get into mind for the long term. I think here before the year-end we will have one of those super sections into a panel development, which will increase production and lower our costs, as well as our yield. So I think, we’ll get more tons there. I’m pretty excited about where Itmann is right now. On the labor side of it, we’re still having some challenges down there of getting fully staffed. We have some turnover, we’re working on all those things.

We’ve made some changes there in the last couple of weeks that we feel like it’s going to help. And then on the equipment side of it, we still get delays. I mean, we have some new equipment coming, but we’re not going to receive that this year like we had hoped to receive in the fourth quarter. So I think when I look at Itmann, where it is today, we have lots of room to improve there, particularly on the production side. As soon as we get the third super section up and running get one of these three super sections in the panels, I think you’ll see our productivity come up, and I’ll be excited to see what type of cost we can actually run at Itmann.

Lucas Pipes: Thank you. And helpful — that’s helpful. On the pricing side, anything you can share?

Bob Braithwaite: Yeah. I mean, obviously, I think it’s known that the pricing has been down year-on-year on the domestic contracting front. But right now, if you look at where US East Coast low-vol prices are we typically net back about 70% of that index. So if you look at the index right around 260 figure FOB mine netbacks are in the 180 to 185 range.

Lucas Pipes: And would that be for the tons you would sell into the export market? Or would that be the price where you could contract it domestically?

Bob Braithwaite: Domestically would be a little bit lower than that. But again based on where — if US East Coast oil prices hover around that 260 range it kind of gives you a sense of where the balance of the volume we would sell at into the export market. But again we’ll provide full guidance in January or February when we announce our next earnings.

Lucas Pipes: Very helpful. Thank you. And — just one more follow-up on the labor front. How do you go about recruitment? Do you mostly recruit in state? Or do you go out of state? Curious how you kind of what the strategy is to get the people in there. I know it’s an industry-wide problem which is why I want to dig a little deeper to understand how you might have come in.

Jimmy Brock: We relied pretty heavily on our job fairs that we have and we try to get those somewhat locally close to where the mine is because I mean you have to have employees that’s not going to travel too far to work or you just can’t keep them. They’ll go someplace else. But one of the things that we’ve done pretty successful is use some of our managers that we have there that knows a lot of these employees. We try to use the internal mechanisms that we have as well as the job fairs and continue to pay very attractive wages, very attractive benefits. And one of the things that we have seen some success in lately is the job fairs that we’ve had done. And I think as things tighten up a little bit here we’ll see the labor market open up a little more than it has been in the past.

Lucas Pipes: Okay. Thank you, Jimmy. Last question for me I promise. You’ve always been very discipline when it comes to ranking your capital allocation priorities. You scrapped the dividend because you saw more bang for the buck on the buyback. You obviously were very diligent on paying down debt when you saw the best risk-adjusted returns there. And so I wondered if you could kind of provide an update today on how you prioritize what’s the best bang for the buck and then maybe if you could go down the list would really appreciate that hierarchy? Thank you.

Jimmy Brock: Yes, and thanks for the question. That is something that we are very diligent on. We have normal capital allocation reviews on where we are. We always try to return every dollar of capital to the highest rate of return. And it was critically important for us. It was always a priority to pay that debt down. And we had that targeted growth $200 million of gross debt. We achieved that kept increasing our capital allocation for share buybacks. And as I said in the prepared remarks when I look at it today the highest rate of return continues to be buying back shares. So I don’t think we’ll change our strategy on that. In fact as we’ve paid down our debt and got to these levels we committed to 75% of our free cash flow going towards share repurchases.

However, we may have opportunities to take that number up. It just depends on where we are at the quarter when we have those capital reviews. For an example, we paid the $24 million down on our second lien note it would have created an opportunity maybe for us to buy back shares. So we certainly, would take a look at that as we generate free cash flow on what we do with it.

Mitesh Thakkar: And Lucas, having the contracted base that we have gives us a unique benefit, that it gives us a lot of revenue visibility. And essentially, when you’re buying back your stock you’re buying an asset and you know what the cash flows look like, based on your contracted position. So I think, on a risk-adjusted basis, it makes a lot of sense for us compared to other opportunities, which might have inherent risks in them.

Lucas Pipes: That’s good to hear. Really appreciate all the color and detail, again best of luck.

Jimmy Brock: Thanks, Lucas. Sounds good. [ph]

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Nathan Tucker, for any closing remarks.

Nathan Tucker: Thank you, everyone for your time today, and we look forward to speaking with you on our next earnings call.

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