Thank you for standing by, and welcome to the Hallador second quarter 2022 earnings call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question at this time, please press star one on your telephone keypad. I'd now like to hand the call over to Rebecca Palumbo, Investor Relations. Rebecca?
Thank you, Sam, and thank you everybody for taking the time to join us on today's call. Yesterday afternoon, we released our second quarter 2022 financials and operating results on Form 10-Q. That is now posted on our website. With me today on this call is Brent Bilsland, our President and CEO, and Larry Martin, our CFO. After our prepared remarks, our team will be available to answer your questions. Before we begin, please note that the discussion today may contain forward-looking statements that are statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we've projected or expected.
For example, our estimates of mining costs, future sales, legislation, and regulations. In providing these remarks, we have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise may be required by law. For a discussion of some of those risks and uncertainties that may affect our future results, you should see the risk factors described from time to time in the reports we file with the SEC. As a reminder, this conference call is being recorded. In addition, a live and archived webcast of this earnings call is also available on Hallador's website. We encourage you to ask questions during our Q&A. If you are on the webcast and would like to ask a question, you will need to dial into the conference.
The toll-free number is 844-200-6205, access code 393229. Now, with that, I'll turn the call over to Larry.
Thank you, Becky, and good afternoon, everyone. Today, we're reporting our second quarter operating results. Before I get started, I wanna define Adjusted EBITDA as operating cash flows plus current income tax expense, less effects of certain subsidiaries and equity method investments, plus bank interest, less the effects of working capital period changes, plus cash paid on asset retirement obligations, reclamation, plus other amortization. We had a net loss for the quarter of $3.4 million or $0.11 a share. Our year-to-date loss was $3.5 million or $0.44 a share. Our Adjusted EBITDA was $11.5 million for the quarter, $14.1 million for the year, and we increased our debt by $10.7 million for the quarter and $19 million for the year. Our bank debt at June 30th was $130.7 million.
Our net debt was $121.9 million, and our leverage ratio, which is debt to Adjusted EBITDA, was 3.27 x. I will now turn the call over to our CEO, Brent Bilsland.
Thank you, Larry. In the second quarter, our accomplishments exceeded our expectations. We were successful in returning our operating cost structure to historical levels. We contracted for 2.2 million tons of forward sales at over $125 per ton, dramatically increasing our future sales prices. We were successful in raising a total of $29 million over the second and third quarter to add to our liquidity. All three of these events, lowering our cost structure, increasing our sales prices, and adding to our liquidity, greatly improved our current and future financial position. Also, during the quarter, we made significant progress towards closing the acquisition of the Merom power plant, within the next few months, pending governmental and financial approvals.
As we look to operating results, 1.6 million tons were shipped during the quarter at an average sales price of $40.23. This was $1.17 per ton lower than Q1 and is expected to be our lowest sales price quarter for the next several years, as we will experience roughly an $8 per ton increase in the third and fourth quarter, and significantly more than that next year. Q2 production costs were $31.83. This represents a $7.71 per ton decrease over Q1. Productivity at the mine improved dramatically, accounting for the majority of the cost improvement.
During the second quarter, our operating cash flow was - $2.7 million due to increases in accounts receivable, inventory, parts and supplies, and cash spent on ARO reclamation. Our bank debt increased by $10.7 million, which as of June 30th, stood at $130.7 million. Liquidity was $9 million, and our leverage ratio came in at 3.27 x. To put ourselves in better financial footing and to increase liquidity, we issued $10 million of convertible notes during the second quarter, followed by an additional $19 million of convertible notes in the third quarter, equaling a total of $29 million. $10 million of the convertible notes were converted to equity during the second quarter. The company was successful in executing an amendment with our banks modifying our debt to EBITDA covenant and our debt service covenant for Q3.
We project being fully in compliant with all future covenants. During the second and third quarter, we are successful in executing forward contracts, sales for coal averaging prices in excess of $125 a ton for the 2022, 2023, 2024, and 2025 time frame. These new contracts will dramatically improve our average sales prices. If you look at the first half of this year, we have averaged $40.77 per ton. In the last half of this year, we expect to average $49 per ton. I expect that price increase to be a little bit more heavily weighted towards the fourth quarter than the third. When we look at 2023, we expect our average sales price to be at $58 per ton. This in effect will more than triple our margins going forward.
In our prior earnings call, we had discussed our plan of taking up to 25% of our 2023 Oaktown production to the Merom power plant as we felt that was the most valuable use of those tons at that time. However, soon after disclosing those plans, market conditions changed significantly, and we felt it was better use to sell the majority of those tons to third party customers. I think this is a prime example of the optionality the Merom plant will afford us once we close on the transaction. You know, if Merom is the best use of tons, which I think the majority of the time it will be, that's where we'll take them.
Like we just showed, you know, if third party customers are willing to pay more than we feel they're worth at the plant, we're willing to execute on that plan as well. These contracts allow Hallador to generate $160 million of Adjusted EBITDA in 2023. We expect very little profit from Merom in 2022 and in 2023 as the plant is fuel limited. However, the cash flow will be so great that we project that we'll be net debt free before the end of next year. We're very excited about that. If we're able to alleviate Merom's fuel limitations, there's further upside to Hallador's 2023 Adjusted EBITDA.
Looking at the closing of the acquisition, we feel we've made great progress towards closing the Merom acquisition on both the regulatory and the financial front. We anticipate closing will occur in the next couple of months, subject to attaining our final government and financial approvals. Our team, our operating partner in KAM, our energy partner in ACES, have all worked very hard to ensure a successful transition and for Merom to perform as it should on day one. We've never been more excited about the future of Hallador. We're thrilled with our new sales contracts. We feel comfortable that we are on solid ground financially, and we look forward to the promising opportunity the Merom power plant brings Hallador and its shareholders. With that, I'll open up the line for questions and comments.
Thank you. We will now begin the Q&A session. If you'd like to ask a question, please press star one on your telephone keypad. If for any reason you'd like to remove that question, please press star two. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here for just a moment to compile the Q&A roster. Our first question comes from the line of Lucas Pipes with B. Riley Securities. Lucas, your line is now open.
Yeah. Hi, this is Nick Giles asking a question on behalf of Lucas. What does the $160 million of EBITDA assume for volume and cost, respectively?
I'm sorry, I didn't catch your name.
Hi. Yeah, this is Nick Giles asking a question on behalf of Lucas. How's it going?
All right. Hi, Nick. Larry, our cost. Yeah, Larry, I don't wanna misspeak on the cost. I know that we're bringing on some additional production next year out of a surface pit that is a little higher cost. We've reported that number going forward as. Larry, I'll let you fill that in.
$34-$35 in the fourth quarter and, well, $36 for next year.
Got it. Okay, that's helpful. To follow up there, does the $160 million require the transaction to close at Merom, or is it independent of the power plant acquisition?
That's independent. As we've said, we expect very little profit out of the plant unless we are able to secure additional tons for the plant, which we are working on. If we are successful in securing additional tons for the 2023 year, then there's upside to the profit potential beyond just the $160 million.
Great. Okay, that's clear. Thanks for that color. I think last one from me. Do you need to, you know, make any investments in mine infrastructure, equipment, hiring any labor to get to that $160 million target?
Well, we've made great progress on the hiring front. That's an area that we've struggled since, you know, I think our initial plan started in September of 2021, that we had a goal of hiring an additional 200+ employees. I think we've now last count, we've added about 190 of those. We're almost to our target number that we wanna be at. As far as on the equipment front, no, we have the equipment. We have, you know... Oh, I take that back. We have added some CapEx to reopen a surface pit in Freelandville, Indiana.
We've added a little bit of surface equipment to that to the company to bring roughly 600,000 tons out of that pit you know, basically fourth quarter of this year and the balance of next year. You know, coal prices we're seeing at levels that are just, quite frankly, unheard of. We're seeing, you know, a little bit of turn to that as well. You know, it justified bringing on a little bit of higher cost production, which is why we're showing, you know, our costs jumping up into the $36 range because it is expensive surface mining coal.
When you can sell, you know, as we've said, over 2 million tons north of $125 a ton, those margins work. Gas prices have stayed strong. European prices have stayed strong. I think, you know, I saw a price for power in Europe next August of $600 a MWh . I mean, as long as that keeps happening, you're gonna see US coal flow to Europe, and that's gonna keep our market pretty tight. We're seeing, you know, an extension of, you know, a lot of coal-fired power plants that had announced to retire.
I can name three kind of in our backyard that have all now extended saying, all right, we're gonna put a couple more years on these plants just because capacity is really hard to find, which is why capacity prices went from almost nothing to legal limit in this past auction. We still see more, you know, power plant retirements announced, which is gonna keep capacity prices tight, and elevated. We still see disruption in Europe, which is, you know, also keeping prices elevated, and we're still seeing, you know, really for the next three years, pretty high natural gas prices. You know, all of those things are good for Hallador's business.
You know, we're just tremendously excited about the future of being able to profit both as our coal company and with the addition of the Merom power plant, which we're feeling, you know, good about that transaction getting closed here shortly.
Got it. That's very helpful. Really appreciate all the detail there. I guess just one last one would be, can you put some numbers around the incremental CapEx that you mentioned?
Yeah. I'll defer to Larry here so I don't misquote the number.
Yeah. The incremental CapEx for the surface mine is about $6.5 million.
Got it. Well, really appreciate all the color and congrats on the progress so far and continued best of luck.
All right. Thank you, Nick.
Thank you, Nick. The next question comes from the line of John Moran with Robotti & Company. John, your line is open.
Hi, Brent. Thank you. Hey, I had a que-
Hi, John.
On the 2.2 million tons that you sold during the quarter, you have a disclosure on these forward sales in all of your 10-Qs that references a customer's options or ability to reduced tonnage or increased tonnage. How much of that would come into play on the new tons that you sold? For example, if the coal price collapses next year, can these customers walk away from portions of that of those contracted tons?
The 2.2 million tons I referenced, those are fixed tons. There's no plus/minus on the volumes.
That's just, that's a fixed price and no ability to get out of that?
Correct.
What about on the 2024 - 2027 volumes? How much of those that were in place prior to this, these new contracts would be subject to increasing volumes at, you know, I guess, what I call stale pricing, if any?
We disclosed, what? 7 million tons of sales, I think, in the 2024 through 2027. We were successful in selling some of those 2.2 million ton. Like I said, it was in that 2022, 2023, 2024 and 2025 timeframe. Anything beyond that was legacy. We do have. Hang on here. Let me look something up. The legacy out in that 2026, 2027 timeframe is unpriced. We have volume commitments, but not pricing commitment. You would see the pricing come up.
Okay.
Maybe $200,000-$300,000 of that $7 million is. You can go up or down by $200,000 or $300,000.
The rest of it's either unpriced or fixed?
Correct.
Correct.
Okay, great. Hey, then just a question about Merom. So assuming that closes as you expect, what will that look like next year? You said you're fuel limited. Can you say? I assume some of that information's public. I don't know where to find it, but so they must have contracts with third party producers. So I guess there is no coal available for next year. So can you say-
No, I think there's been. Yeah, there is some fuel purchased for that plant. Though that fuel will be dedicated to generating Hoosier electrons. And we've set a price with them on that. But we expect, again, that plant to run at low capacity factors. It will run. It will make a small profit. But it, you know. This, Hell, John, you were the guy on the last call who said, if you can sell coal versus take it to the plant at these higher prices, why wouldn't you do that? I think it was, you know, a couple nights later, we saw an offer to us at pricing that was, you know, above our expectations.
We made the decision to do just that. Instead of taking 2 million tons to the plant, we took it to the market. Like I said, it's not that there's no fuel for the plant, it's just fuel limited. It's not gonna run a lot of hours. We do see some opportunities to acquire additional tons to bring to the plant, but those deals are not finalized and you know. We'll assume they're not gonna happen until they do. All we want is-
Yeah. I mean, yeah, that decision seems like it made.
All we wanted to really point out was traditionally we've been about $50 million of EBITDA. We are now fully contracted for 2023. At the prices we're talking about and the production cost numbers that we're expecting, we think that will generate $160 million of adjusted EBITDA. We basically have tripled our business. That will generate enough cash flow to pay off all of our debt, almost here in the next, let's just call it 13 months.
Yeah, I think the decision seemed like it make a lot of sense. I was just trying to figure out, you know, for example, if the plant will be running at 25% capacity and then you make a little bit of money or break even. I just don't know what the Merom economics look like from that standpoint, is all. Or can you say-
Yeah, we haven't released any of the economics on the Merom plant, and we will not do that before closing. All I'll tell you is it's correct, it's gonna run at a very low capacity factor. There's parts of the years that'll run more than others, so it gets a little confusing as to, you know, why did it run harder in the first quarter than it ran in the third quarter. At the end of the day, if we are successful in finding more fuel for the plant, there's upside to our projections, right? Power prices are still pretty healthy. Capacity prices are extremely healthy. For all those reasons, we're excited about, you know, the potential of this company.
I mean, you're talking about a company that has a market cap of, you know, a little over $200 million, and it's gonna do $160 million of EBITDA. It's gonna pay off $131 million of bank debt in that time frame. I think that's punching above our weight.
All right. Thanks a lot. I also want to just compliment the company and the directors on the capital raise. I don't think anybody likes dilution, but it seems like it's a little over 10% at a decent price and reasonable terms. Anyway, for what it's worth. Thank you.
Well, I appreciate that. Thank you, John.
Thank you, John. Again, to ask a question, it is star one on your telephone keypad. Okay. We have a question from Robert Baker, Private Investor. Robert.
Yeah. Hi. Thank you for taking my questions. Well, my first one, I was curious about the 2.2 million tons priced at $125 a ton. Just, you know, any context you can give around that as far as, is that kind of more where the overall market is currently pricing at? Was it a customer who was extremely short just trying to lock in tons? Or anything you can provide on that would be appreciated.
Well, we actually transacted with five separate customers. You know, the market is backward dated, meaning that, you know, coal in 2022 is more valuable than 2023, and coal in 2023 is more valuable than 2024. What we're seeing generally is, I think utilities are pausing from buying a little bit. They're gonna get into the RFP, you know, go out for RFP here in September, October, and see where market prices are. I think they're trying to get a handle on what railroad and transportation performance is gonna be like in the third and fourth quarter. I mean, it's one thing to buy tons, it's another thing to actually get them shipped. CSX has done a reasonably decent job with us thus far. I would say about 85% of everything that we have scheduled has been shipped.
Our moves are typically a little simpler than some of the other people out there trying to go to export. You know, as gas, we basically keep seeing gas pricing. You know, high price gas keeps extending out further and further, and as that happens, we think that adjusts power prices up further and further. It'll push higher pricing out the curve, is what we think will happen. You know, and again, as long as there is disruption in the market, meaning we had a tight market and then Russia's and Ukraine's, you know, altercation, whatever you wanna call it, you know, that has created enormous disruption to the market.
Again, Russia is the third largest coal exporter in the world, and now you've got Europe basically saying, "We won't take those BTUs." The largest natural gas exporter in the world, Europe saying, "We won't take those BTUs." What Europe's saying or Russia's saying, I don't know. But those BTUs aren't flowing, and so Europe is getting those from the United States. We've seen several contracts for LNG to leave the United States and go to Europe and other countries. There's been just an enormous amount of activity of new contracts being signed. These are 20-year term contracts. So that removes a lot of gas from the United States, which then you know kind of. You know, gas is a competitor to coal.
We've gone through this period which is where our legacy contracts came from, of five years, six years, seven years of really cheap gas. Now we've kind of entered into this environment where you know, the price of gas has doubled or tripled, depending on what timeframe you're looking at. Because of that, you know, the market then looks to get more of its electrons from coal. You know, there really hasn't been a dramatic supply response from coal production due to, you know, nobody's putting in new mines. It's been hard to hire people. It's been hard to get capital. All those reasons has kind of kept a lid on, you know. We've seen some supply response, but it hasn't been dramatic. You know, you're not gonna see the U.S. coal production double. It just isn't gonna happen.
From that perspective, you know, we're excited about the future. We're seeing pricing that we've, quite frankly, never have seen before. You know, selling coal versus in the mid-30s versus selling coal, you know, in the 130s, it's a magical experience. You don't have to sell very much of it. You know, there's all sorts of pricing charts out there to show where it's all trading at. Transportation is hard, but it is moving. You know, we think as long as gas and as long as there's disruption in the market, we're gonna see pricing, you know, continue to push out the curve. Now, will it stay above $125 a ton? You know, your guess is as good as mine.
You know, high prices tend to cure high prices. We don't see. You know, we don't think it's going back to 30s anytime soon. For that matter, we think that, you know, we're seeing average prices now up around $50 to, you know, our average price moves to $58 next year. We make great margins with that. We produce a hell of a lot of cash flow with that. You know, we just see a lot of opportunity, particularly with the addition of the plant. That's a very beneficial thing to our company, and we're looking forward to getting that transaction behind us.
Great. Thanks. My next question, I kind of already started to answer when you mentioned CSX doing about 85%. There was in the Q3 2022 activity, you know, it did mention the delivery of all the tons could be delayed by transport logistics. I was wondering if you could elaborate on that a little bit where yeah, if it's one rail line in particular or kind of all of them or yeah, just any more detail or elaboration on that.
I think that all forms of transportation are struggling, whether that's CSX, NS or trucking. Everybody's running at their maximum. You know, we sell the coal, we produce the coal, but it's our customer's responsibility to deliver the freight to us. Once we load the transportation they provide, that's when title transfers and that's when we effectively have made a sale. One of the things we have to be diligent on is to make sure that we're working with our partners, the CSX primarily and trucking companies, to make sure that our product is flowing to the customers. What I'm saying is there's been a lot of press out there of a poor railroad performance.
I've usually found that the railroads take a little time to get wound up, but once they get going, they perform pretty well. They've struggled with COVID, they've struggled with hiring people just as we have. We have seen on our front, it's gotten a little easier to hire people here, I would say in the last two months. You know, is that a regional success that we're experienced and others aren't? I don't really know. From our standpoint, you know, we've made gains there. Anyhow, we feel good about transportation at this point. It is something we're keeping an eye on.
Okay. Thanks.
Just to be clear, when we said all of our tons, we didn't mean every single ton could get delayed. We meant all of our contracts to all of our customers could have some delays. We didn't mean 100% delays.
No. Okay. Yeah, I wasn't interpreting it as 100%. It just said yes, you know, delivery of all. Well, yeah, I guess I wasn't sure if it was just referring to the 2.2 million tons or potentially all tons could have. Yeah, I wasn't quite sure if it was specific to the 2.2 million.
Yeah. There is a percentage of any ton we deliver that could be delayed. I mean, it's not, you know. It's just every customer, as Brent said, all transportation is having price issues now. Any customer we have could have some carry over or delays this year.
Right. Okay.
They are picking it up and doing a lot better, so.
Okay. All right. That's good. Now, another question regarding labor needs. I think it was. I forget. I hope I have the name right. Nick asked about it. You'd mentioned that, Brent, that you'd had been able to hire 190 out of 200 employees. I just wanted to clarify, was that 190 of 200 that you needed to hire for Oaktown and separate from the hiring you have to do for Prosperity and Freelandville?
That's correct. I think we wanted to add 210 at Oaktown. We've done about 190, 185 of that, something like that.
Okay.
Give you scale of, you know, we're not quite where we need to be at Oaktown, but we're getting much more comfortable on the hiring front. Now, you know, we've had much higher turnover with new hires than we have with historical employees. I think we are starting to see some experienced people come back. People that have left to try a steel company or try to work at a car manufacturer or something like that, we're starting to see those, you know, some of those people have found that, you know, the grass isn't greener on the other side of the fence, so they've come back, which is great. Those are people that, you know the drill and are very efficient when they show up. Correct.
We will be hiring some people associated with the surface mines, both at Prosperity and at. You got to think about it this way. I mean, we're winding down Ace as it mines out, and we're winding up Prosperity and Freelandville. Some of those people will be moved from Ace, and some of those people will be new hires. We found it's much easier to hire surface miners than undergrounders. We haven't really experienced, you know, any trouble with that. Where we've struggled over the last year has been, you know, to hire undergrounders and keep them.
Oh, okay. Interesting. All right. Last question. I was wondering, you know, with you mentioned the possibility of being net debt-free at some point in 2023, you know, as that progresses throughout the year, what thoughts, if any, you know, the board has in regarding what to do with cash flow as leverage comes down? I mean, in terms of either dividends or buybacks or so forth or, you know.
Yeah, I think at this juncture, you know, we've been raising money to make sure that we have enough liquidity to get to our high price contracts. We wanna get the Merom plant closure behind us, make sure there's no surprises there, and we'll see where the opportunities bring next year as far as, you know, is there room for additional investment at the plant or, you know, are there other plants that can be acquired, or does it make sense to buy in stock? Those are all things that, you know, we'll lay out what the opportunities are next year and address those with our board at this time. But to date, we're not in the mode of buying in stock.
Okay. All right. Great. Yeah, thanks for answering my questions. Appreciate it.
Thank you.
Thank you, Mr. Baker. Again, to ask a question, it is star one on your cell phone keypad. As a final reminder, it is star one to ask a question. Okay. That concludes our Q&A session for today. I'll hand the call back to Brent for any concluding or additional remarks.
Well, thank you, everybody, for their time, and we look forward to executing on all the things we've laid out today. Thanks again, and we'll talk to you next quarter.
That concludes the Hallador second quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.