Good afternoon. My name is Kaley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Medical Second Quarter 2021 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Number 1 on your telephone keypad. Call. 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 table of 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. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer and Mr. Dale Boyles, Chief Financial Officer.
Mr. Bell, you may begin.
Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our Q2 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 Q2, global steel production continued its recovery trajectory from the impact of the COVID-nineteen pandemic. And we were pleased to see strong market demand from customers around the world.
As met coal prices improved during the quarter, We were able to take advantage of the groundwork we previously established to increase sales and reduce inventories. As a result, We were able to capitalize on China's ban on Australian coal imports through higher sales to Chinese customers at higher prices compared to the Australian FOB prices. As a result of these pricing dynamics and our ability to successfully manage costs, working capital and CapEx spending, we were able to deliver another strong quarter of free cash flow and adjusted EBITDA. We continue to execute successfully on our business continuity plans in response to the UMWA strike, which began on April 1, allowing us to continue to meet the needs of our valued customers. While we continue to negotiate in good faith to reach a new contract, The UMWA unfortunately remains on strike.
Despite incurring incremental costs associated with the strike, We've been able to manage our working capital and spending to deliver strong results in this market. Fuel market fundamentals remained strong throughout the Q2 propelled by strong demand across the majority of sectors and tight supply across most regions. Even the impact of the microchip shortage on automobile production was barely noticeable on overall steel demand. The World Steel Association reported a 6.8% increase in global pig iron production for the 1st 6 months of the year, With China increasing its year over year production by 4%, excluding China, the rest of the world grew its pig iron production at an impressive rate of 13%. The strength observed in steel markets since the beginning of the year finally made its way into the met coal markets during the Q2.
Although we've been expecting some level of upward pricing correction to take place, we were nonetheless surprised by the magnitude and speed of the correction. During the Q2, the Australian FOB Indices experienced a gain of $82 per metric ton, rising from its low of $107 per metric ton on April 30 to its high of $194 per metric ton at the end of June. Likewise, the CFR China indices gained $93 per metric ton from its low of $2.16 per metric ton on April 1 to its highest $309 per metric ton at the end of June. The Chinese ban on Australian coals remains firmly in place with no signs of policy changes in the short term. The global seaborne met coal trade has adapted quickly to these conditions as illustrated by the change in trade flows.
China has increased its reliance on imports from North America, Russia and landboard imports from Mongolia. While Australian coal producers have increased their exports to India, Japan, Korea and Taiwan, more into our natural markets of Europe and South America. These conditions are expected to continue as long as the ban is in place. We've been successful in placing some of our premium coals into China during the Q2, while capturing 100% of the CFR China Index Price on the day of the sale. Sales volume in the second quarter was 1,800,000 short tons compared to 1,500,000 short tons in the same quarter last year.
Our sales by geography in the 2nd quarter were 31% into Europe, 6% into South America and 63% into Asia. The higher than normal sales to Asia was primarily driven by Chinese demand that we capitalized upon during the Q2. Production volume in the Q2 of 2021 was 1,200,000 short tons compared to 2,100,000 short tons in the same quarter of last year. The decrease is attributed to Mine 4 being idle and Mine 7 operating at lower rates due to the ongoing strike during the Q2. These results also include a 0 day longwall move during the Q2 at Mine 7, which was accomplished by having the extra set of longwall shields we purchased some time ago.
Our gross price realization for the Q2 2021 was 100% of the Platts premium low vol FOB Australian index price and was the same amount achieved in the prior year period. Our gross price realization was primarily due to a higher Call. Our spot sales volume in the 2nd quarter was approximately 34% of total volumes, Down from 48% in the Q1 and compares to a normal expectation of approximately 20%. I'll now ask Dale to address our Q2 results in greater detail.
Thanks, Walt. What a difference a year Last year's Q2 saw the peak stages of COVID-nineteen and its impact on the steel and met coal industries trickle down to our company, even as we continue to run both mines at near capacity. In contrast, This year, our 2nd quarter results were negatively impacted by the UMWA strike in which we idled Mine 4 and significantly reduced operations at Mine 7. As we executed our business continuity plans to meet our contractual commitments to our customers, we drew down our inventory levels to take advantage of strong market conditions to generate strong results of adjusted EBITDA and free cash flow. For the Q2 of 2021, the company recorded a net loss on a GAAP basis of approximately $5,000,000
for a loss
of $0.09 per diluted share compared to a net loss of $9,000,000 or $0.18 per diluted share in the same quarter last year. Non GAAP adjusted net income for the Q2 excluding the non recurring business interruption expenses, idle mine expenses and incremental stock compensation Adjusted EBITDA was $65,000,000 in the Q2 of 2021 as compared to $20,000,000 in the same quarter last year. The quarterly increase was primarily driven by a 24% increase in sales volume and a 14% increase in average net selling prices. Our adjusted EBITDA margin was 29% in the Q2 of 2021 compared to 12% in the same quarter last year. Total revenues were approximately 227 dollars in the Q2 of 2021 compared to $164,000,000 in the same quarter last year.
This increase was primarily due to the 24% increase in sales volume and the 14% increase in average net selling prices. The Platts premium low vol FOB Australian index price averaged $19 per metric ton higher or up 16% in the Q2 of 2021 compared to the same quarter last year. The index price averaged $137 per metric ton for the quarter On the back of a 37% increase in the month of June alone, the Merge and other charges Reduced our gross price realization to an average net selling price of $123 per short ton in the Q2 of 2021, compared to $108 per short ton in the same quarter last year. Cash cost of sales was $152,000,000 or 68% of mining revenues in the 2nd quarter compared to $130,000,000 or 82% of mining revenues in the same quarter of 2020. The increase in total dollars was primarily due to a $31,000,000 impact of higher sales volume, partially offset by $9,000,000 of lower variable cost and a concerted effort to keep our costs low and in line with lower production.
Cash cost of sales per short ton FOB port was approximately $83 in the 2nd quarter compared to $88 in the same period of 2020. Cash costs on price sensitive costs such as wages, transportation and royalties that bear with met coal pricing were lower in the 2nd quarter combined with a focus on cost control. Depreciation and depletion expenses for the Q2 of 2021 were $40,000,000 compared to $22,000,000 in last year's quarter. The increase quarter over quarter was primarily due to 24% higher sales volume as these expenses are first capitalized into inventory and then release when the tons are sold. In addition, this quarter included approximately $5,000,000 of mine for depreciation that would have normally been capitalized into inventory with production.
However, it was directly expensed due to the idling of Mine 4. SG and A expenses were about $11,000,000 or 5% of total revenues in the Q2 of 2020 And we're higher than the same quarter last year, primarily due to higher non cash stock compensation expense, Which included an incremental $4,000,000 associated with the accelerated vesting of awards to certain individuals that reach retirement eligibility. During the Q2, we incurred incremental non recurring business interruption expenses of $7,000,000 directly related to the ongoing UMWA strike. These non recurring expenses were primarily for incremental safety and security, Legal and Labor Negotiations and Other Expenses. As a result of the ongoing UMWA strike that began on April 1, We idled Mine 4 in the 2nd quarter.
We incurred $11,000,000 of expenses associated with the idling of Mine 4 and reduced operations at Mine 7. These expenses were primarily fixed cost in nature for electricity, insurance, maintenance, labor and taxes. Net interest expense was about $8,000,000 in the 2nd 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. We recorded an income tax benefit of $7,000,000 during the Q2 of 2021 compared to a benefit of $4,000,000 The year to date tax expense include a non cash charge of $25,000,000 recognized On the establishment of a valuation allowance against our state deferred income tax assets.
This result was due to a change in Alabama state tax law in February that became effective as of the beginning of the year. In essence, Our export sales are no longer subject to Alabama state income taxes and therefore the value of our state net operating losses have been written down. Turning to cash flow. During the Q2 of 2021, we generated $53,000,000 of free cash flow, which resulted from cash flows provided by operating activities of $69,000,000 less cash used for capital expenditures and mine development cost of $15,000,000 Free cash flow in the Q2 of 2021 was positively impacted by a $32,000,000 decrease The decrease in net working capital was primarily due to a decrease in coal inventory due to higher sales volume and lower production. Our collections of accounts receivable partially offset the decrease in accounts payable and accrued expenses from lower production volumes in the Q2.
Cash used in investing activities for capital expenditures and mine development costs for $15,000,000 during the Q2 of 2021 compared to $31,000,000 in the same quarter last year. We continue to rationalize spending during these unprecedented times. However, we do expect to spend more dollars in the second half of twenty twenty one to keep the mines well capitalized. Cash flows used by financing activities were $9,000,000 in the Q2 of 2021 And consisted primarily of payments for capital leases of $6,000,000 and the payment of the quarterly dividend of $3,000,000 Our total available liquidity at the end of the second quarter was $288,000,000 consisting of cash and cash equivalents of $267,000,000 $21,000,000 available under our ABL facility. This is net of borrowings of $40,000,000 and outstanding letters of credit of approximately $9,000,000 Balance sheet has a leverage ratio of 1.3 times adjusted EBITDA and notably, we have no near term debt maturities.
We believe our liquidity position and strong balance sheet combined with a low and variable cost structure has enabled us to weather this period of uncertainty and gives us the flexibility to continue to manage through a continued uncertain landscape. Now turning to our outlook. Due to the ongoing uncertainty related to our negotiations with the union, the COVID-nineteen pandemic, the Chinese ban on Australian coal and other potentially disruptive factors, we will not be providing full year 2021 guidance at this time. We expect to return to providing guidance once there is further clarity on these issues. 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. I'll now turn it back to Walt for his final comments.
Thanks, Dale. Before we move on to Q and A, I'd like to make some final comments. As we look forward, we expect the favorable market conditions to continue throughout the Q3, as indicated by our contract and spot customers. We recognize the uncertainty created by the Chinese government's mandate to limit 2021 steel production to 2020 levels and we'll continue to monitor the situation closely. At the same time, we are also balancing our contractual obligations to our long term customers with the transitory opportunities created by the changes in the seaborne met coal trade flows.
We understand that many of you have questions about the status of the UMWA negotiations, estimates of potential outcomes and possible timelines. Unfortunately, we cannot speculate at call. Let me just say that we value and appreciate the hard work of our hourly employees. Our priorities have always been keeping people employed with long lasting careers and ensuring the company remains financially stable in a particularly volatile coal market. While we are disappointed that the union continues with the strike, we continue to negotiate in good faith to reach a resolution.
Finally, as we navigate through these headwinds, we will continue to execute our business continuity plans to meet our contractual customer commitments. In closing, we believe we are well positioned to fulfill our customer volume commitments for 2021 of approximately 4.9 to 5,500,000 short tons through a combination of existing coal inventory and expected production during the rest of the year. Those numbers assume that Mine 4 continues to be idle and that production continues at Mine 7, although at lower than usual rates. While we have business continuity plans in place, the strike may still cause disruption to production and shipment activities, and the plans may vary significantly from quarter to quarter for the remainder of 2021. With that, we'd like to open the call for questions.
Operator?
Call. Your first question comes from David Gagliano with BMO Capital Markets. Please go ahead.
Hi. Thanks for taking my questions. I just have a couple of quick ones. First of all, can you just give us the number of Direct tons that were sold into China in the second quarter and what was the netback price of those tons? And On a related note, can you just give us a sense as to what, if any, the expected sales are for the Q3 On 2 parts, direct into China and then overall, given the uncertainty around the duration of the strike and inventories down to 500,000 tons, to get a better sense of your expectations for the next couple of quarters for sales lines.
Thanks, David. This is Dale. For the Q2, it was about 600,000 short tons sold into China. So as we drew down our inventories more to that normal level, not sure how much We will be selling into China the rest of this year. It's going to depend on production.
But if we get some opportunities, as you can see, we still We have about 1,100,000 to 1,700,000 tons in customer commitments for the rest of the year. So To the extent we get the opportunity, we'll try to capitalize on it as best we can. But at this point, it's kind of difficult to forecast that.
Okay. So just a quick follow-up. So 600,000 tons and I guess you can probably back into it, but what was I actually Call. What was the average price of the tons that were sold directly into China on a netback basis?
Well, we typically capitalized on the CFR price Call. So we're not going to get into the details of what the netback was on those particular transactions, but It did help us achieve 100% of the benchmark that really kind of drove up the realization gross profit I'm sorry, the gross price realization Call for the quarter.
Okay. And then just real quick, you mentioned $1,100,000 to $1,200,000 left to sell Call. Under customer commitments, is that effectively what we should be assuming for second half sales volumes overall?
Well, that's our minimums. To the extent we produce more during the second half each quarter, That would help us rate any positive upside from there.
Call. Okay. I'll turn it over to someone else. Thanks.
Your next question comes from Nathan Martin with Benchmark Co. Please go ahead.
Hey, good afternoon, guys. Congrats on the quarter and thanks for taking my questions. First off, maybe just To follow on with Dave's comments, I think maybe your sales number in the quarter caught some people by surprise. And obviously, it looks like you've already sold Nearly 3,500,000 tons here in the first half, but you're sticking with your plan to fulfill commitments of 4.9 to 5.5. It sounds like maybe, Dale, your point was got 1.1 to 1.7 left as far as customer commitments are concerned for the year.
That's the minimum. There could be some upside. I mean, are we thinking about that correctly? And maybe just looking at production, you guys did 1,200,000 tons Production of Mine 7 in the second quarter. Do you think that's repeatable in 3Q or even 4Q if the strike continues?
Thanks.
This is Walt. First on the production, we didn't mine 1,200,000 tons out of Mine 7 in the Q2. Actually, both mines before the strike began, we had 1 full week of production out of both mines. So it's really not a complete quarter of just strike related production volumes. So I think just taking that and assuming that's the correct number Call.
And Q3 and Q4 is probably a little aggressive. On our sales, I think we're just We're looking at where our inventory levels are, what we think are reasonably placed production expectations and we feel confident that we can hit make our customer commitments and hopefully have a little extra coal to sell Some other opportunities.
Yes, I apologize, Walt. That is fair in the production. Forgot you did have about 150,000 tons for Mine 4 as well before that got idle. So I guess maybe just Shifting over to the cost side, obviously, you guys sold a decent chunk of inventory this quarter. And as you mentioned before, I guess the cost Would have been based on full year workforce numbers for those tons.
Assuming again the strike continues, how do we think about what costs could look like going forward Based on Mine 7 operating at reduced levels, have you seen any impact from inflation at this point as some of your peers have started to point out?
We haven't seen a great deal of impact from inflation yet. I think in terms of our costs, I think once you balance everything in the additional costs of Some of the strike issues and the fact that prices have gone up Call. Quarter to quarter, we're going to see a little higher transportation costs. We're going to see a little higher royalty costs. But all in all, I think we'll still end up in the same Place we've been quarter after quarter and be pretty manageable around that level.
Okay. Thanks for that color, Walt. And then just maybe one final bigger picture question for me. Just thinking about looking ahead to 2022, Call. Let's just assume the strike has ended, full workforce is back.
How might we think about production? You guys mentioned before that you had enough lead time with the continuous miners there at Mine 7, which should be set for production this year and fulfilling your commitments. But now that you've been working with a slightly reduced team there at Mine 7, how do we think about next year and possible changes, if anything has to be based
My expectation would be that we would enter next year with If the strike ended and we were back at full production, my expectation, we would get back to normal full production volumes that we've achieved over the last few years.
So somewhere maybe in that 7, 7.5 kind of range. Is that fair?
Yes.
Okay, perfect. Great. Dale, I appreciate your thoughts. And thanks for the time. Best of luck in the second half.
Thank you.
Your next question comes from Matt Barlow with Roth Capital.
Call. If you could just Give me an understanding of productive capacity of mine number 7. I know that we've talked about Cove. You know, some ideas, some you give us some idea of what productive capacity is, but Is it 800,000? Is it 900,000?
And is that all continuously mined Tons, or is the longwall running? I just wanted to get some further clarification on that question.
Both long walls are currently operating. Several of the Centimeters units are currently operating. Productive capacity is Variable based on how many folks we actually have. But right now, as I said, if you look at Q2 And back out that 1st week, we would have probably been in the, I don't know what, 950,000 or That's something like that would have been about the number, something like that. It might be off by 50,000.
Great. Thanks. That's all I have for now. Thank you very much.
Thank you.
Your next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.
Thanks very much and good afternoon everybody. I have a follow-up question to Matt's question just there. In terms of the Centimeters units, Are they able to keep pace at my number 7 with the longwall that the development panels are Getting cut or would you say that kind of longwall is catching up to the Centimeters units? Thank you very much.
We don't have any concern with where our Centimeters units are in relation to our long walls at this point. We're pretty confident about where we are from a lead time standpoint.
Got it. Very helpful. And bigger picture question. In terms of current market conditions, obviously, you noted I mean, your prepared remarks, pretty impressive turnaround. I'm sure this factors in the negotiations, but is there a price where you'd say like, look, let's get people back to work?
Call. I'm sure you can't answer it directly, but any thoughts you could share as to how this market environment Call. Lucas,
when I look at the market over the last 10 years, It's so volatile. And we've seen prices down in the 80s. We've seen prices at 300. And when we look at the market, We can't just focus on the current quarter or what we see things happening in the next quarter. We have to look at for a 5 year contract, Call.
We have to look at what our costs would be throughout the duration at various market points. And that's Where we are very focused is making sure we had, call it, 1,000 hourly employees and 400 or so salaried employees and we're trying to make sure that we have the ability to keep every one of those people working The entire 5 years as we did in this last contract. And that's our goal is to take care of these folks and make sure they have Fair compensation and that we're also protecting the company at the same time.
I appreciate that. Thank you and best of luck.
Thank you. Thanks, Lucas.
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. We appreciate your interest in Warrior Met Coal.
Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.