Oxford Resource Partners' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Westmoreland Coal Co (WLB)
by: SA Transcripts

Oxford Resource Partners, LP (OXF) Q3 2013 Earnings Call November 5, 2013 10:00 AM ET

Executives

Karen Van Horn - Investor Relations Representative

Charles Ungurean - President, Chief Executive Officer and Director

Gregory Honish - Senior Vice President, Operations

Bradley Harris - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

David Feaster - Raymond James

Sam Dubinsky - Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the Oxford Resource Partners, LP Q3 2013 earnings conference call. My name is Alex and I will be your operator today. (Operator Instructions) And now, I'd like to hand the call over to Karen Van Horn, Investor Relations representative. Go ahead, please.

Karen Van Horn

Thanks, Alex. Good morning, and welcome everyone to our third quarter 2013 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I am Karen Van Horn, Investor Relations Representative with Oxford.

Participating on the call today are Oxford's President and Chief Executive Officer, Chuck Ungurean; Oxford's Senior Vice President of Operations, Greg Honish; and Oxford's Senior Vice President and Chief Financial Officer, Brad Harris.

Oxford released its 2013 third quarter results earlier this morning. On today's call, we will be discussing our operations and financial results. Following our prepared remarks, we will open the call up to questions.

Please be aware that some of our remarks may include statements that are not historical in nature and that may involve expectations, plans and objectives regarding future operations. These remarks are forward-looking statements and are subject to the cautionary language regarding forward-looking statements contained in our press release.

Additionally, we will be discussing adjusted EBITDA and adjusted net loss, which are non-GAAP financial measures. The definitions of adjusted EBITDA and adjusted net loss and reconciliations thereof to net loss, a comparable GAAP financial measure, are included in tables presented near the end of our press release. Our press release has been posted on our website, oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that, I would like to turn the call over to Chuck for some opening remarks. Chuck?

Charles Ungurean

Thanks, Karen, and thanks everyone for joining us today. As you saw on our press release this morning, we had a challenging third quarter. An overburden collapse trapped one of our two highwall miners, disrupting production for close to a month.

Fortunately, we were able to replace the lost equipment and resume production. However, the loss production and associated increase in our cost per ton as well as the planned lower sales volume from our Illinois Basin operations, negatively impacted our adjusted EBITDA for the quarter. Adjusted EBITDA was $11 million compared to $14.2 million in the third quarter of '12.

Conditions in our market remain challenging. Although, higher natural gas prices have started to drive some switching back to coal, there are some stockpile declines at the utilities. This has not yet translated into increased demand. Further, we continue to face an unfriendly regulatory environment; most importantly though, our customer relationships remain very strong.

Our projected sales volume is fully committed and priced for the balance of '13. For '14, we have 5 million tons of sales committed of which 3.3 million tons are priced. The other 1.7 million tons will be priced based on market indices. In spite of the challenging conditions in our region, we are optimistic that we will be able to further increase our sales commitments by years' end.

To show improvement in '14, we will need to see further declines in utility stockpiles and cooperation from the weather this winter. That being said, we believe we are well-positioned for when the market turns, we will at that time be able to increase production with little incremental CapEx investment.

Now, I will turn the call over to Greg to provide an update on our mining operations.

Gregory Honish

I'm going to report on safety and operations. Starting with safety. We completed the third quarter with the year-to-date MSHA reportable incident rate that was 16% better than the average for Appalachian basin surface mines and facilities. It is also worth noting that the few incidents we did have, did not result in significant lost work days. This is evidenced by our low severity rate, which was 65% better than the national average for surface coal mines. Oxford's commitment to running safe operations remains a constant in our business objectives.

Moving on to our operations. As Chuck discussed, third quarter production was 40,000 tons lower than expected. Essentially all of this shortfall resulted from the entrapment and associated recovery efforts on one of our two highwall miners. As our highwall mining personnel were diverted to recovery efforts, we still incurred the labor costs, but produced fewer tons. This negatively impacted our cost of coal sales for the quarter.

Fourth quarter highwall miner production is expected to be quite strong. We were able to quickly replace the trap highwall miner equipment and resume production. That along with the addition of a third highwall miner in late October should allow us to makeup most of the production loss from the third quarter during the fourth quarter.

Based on current market conditions, we are on track to idle production at our Illinois Basin operations by the end of the year. The remaining active equipment will be relocated to Northern App, further reducing our 2014 CapEx requirements. To that end, we relocated two haul trucks during the third quarter and are in the process of relocating two more.

And with that, I'll turn the call over to Brad. Brad?

Bradley Harris

Thanks, Greg. Good morning, everyone. Third quarter 2013 cash margin declined year-over-year to $6.40 from $8.19 per ton in the third quarter of 2012. Coal sales revenue increased by 2.6% to $50.74 per ton, but was offset by an increase in cash cost of coal sales of 7.6% to $44.34 per ton.

The cost per ton increase is attributable to lower production, as described by Chuck and Greg. We also anticipated lower production and sales due to the coal supply contract termination in earlier 2012, related to our Illinois Basis operations that we have previously discussed.

Total revenues were $87.6 million, including revenues of $84.7 million from our 1.7 million tons of coal sales. Comparatively, third quarter 2012 revenues totaled $97.2 million, including revenues of $95 million from our 1.9 million tons of coal sales. Adjusted EBITDA was $11 million for the quarter compared to $14.2 million in the prior year quarter.

Depreciation, depletion and amortization expense was $12 million for the third quarter compared to $13.1 million for the prior year period. Corporate SG&A for the third quarter decline to $3.1 million from $3.9 million in the prior year period due to a decrease in compensation and lower insurance and professional fees.

The $1.1 million gain on disposable asset reported during the third quarter relates to the net insurance proceeds associated with the highwall miner incident. Additionally, we incurred a $150,000 of restructuring charges in the third quarter related to relocating two haul trucks from our Illinois Basin to our Northern App operations.

Interest expense was higher for the third quarter, primarily due to higher interest rates and amortization of cost associated with our new credit facilities. And lastly, we recorded a non-cash gain of $2.7 million in the quarter related to the change in fair value of the warrants associated with our second lien credit facility.

CapEx totaled $12.6 million for the third quarter as compared to $15.2 million during the same period in 2012. Maintenance CapEx was down in part due to our use of the Illinois Basin equipment relocated to our Northern App operations.

As of September 30, 2013, we had $2.7 million of cash and $8.5 million in available borrowing capacity on our revolving line of credit. We continue to pursue the sale of a shovel, which is our one remaining piece of the Illinois Basin equipment to be sold.

And now, for our updated 2013 guidance. We expect to produce between 6.1 million and 6.3 million tons and we expect to sell between 6.6 million and 6.8 million tons. Our average selling price is expected to be between $50.75 and $51.25 per ton. And our average cost is expected to be between $43.75 and $44.25 per ton.

Fourth quarter cost are expected to be a bit higher on a per ton basis, given fewer operating days due to the holidays consistent with prior years. We have also reduced our adjusted EBITDA guidance to a range of $42 million to $45 million. And finally, we continue to anticipate capital expenditures to be between $22 million and $25 million net of reinvest in insurance proceeds.

With that, I'll open the call up to questions. Alex?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of David Feaster from Raymond James.

David Feaster - Raymond James

Could you give us some additional color on operational issue that you had in the quarter. It sound like most of it's been corrected, though the fourth quarter is not going to improve much for the reasons you just stated. Does this imply that 2014 should improve back towards the $43 a ton level for next year?

Gregory Honish

Let me see if I understand your question. Obviously, in the third quarter the big incident was with the highwall miner. And I guess I'd like to say right upfront that, none of our employees were injured in that incident. But if you're not familiar with how a highwall miner work, it essentially is a continuous mining machine that cuts a rectangular tunnel down, underneath the hill, and when it got back in a good ways, some of the strata above the tunnel came down in and wedged the miner, and we were not able to get it retrieved. So we lost the head to the miner.

That had a big impact on the third quarter. Obviously, you don't predict those kinds of things. It's not abnormal for highwall mining equipment, but we certainly don't anticipate that kind of a problem in upcoming quarters.

David Feaster - Raymond James

So like looking at it, if you're adding that 40,000 extra tons that you lost, it looks like costs would have been closer to the $43 per ton level. Do you think you can get back to that range for next year?

Bradley Harris

I think the $43 mentioned, your number is probably a little bit low. We're certainly seeing some creep that that's in there, but I would agree that we should be able to perform better on a cost basis than we did this quarter.

David Feaster - Raymond James

More broadly, you've got about 75% of your production or so locked up for 2014 by my math. Given the better fundamentals in this region relative to the others it's nice to actually have some open coal in here versus others. Could you talk a little bit more broadly about what you're seeing in the region? And how contracting for next year is going and kind of where prices are shaking out?

Charles Ungurean

Well, you're correct, currently the Northern App, I do believe it's a little better. We are seeing some more of that piece coming out now, which we are certainly going to bid on. We have been able to put some additional coal to bed. We do believe that our unpriced tons will price higher, given where the indices are now. We're probably a little better than 75% committed. I think you probably were looking at the Illinois Basin, we've stated we're going to idle. So we're better than 75% committed right now.

David feaster - Raymond James

For the tons you've contracted and priced already for next year, could you give us kind of some color on where you're looking, like what kind of price range?

Charles Ungurean

I think it's going to be similar to where we've been this year, quite frankly a big increase or a big decrease.

David Feaster - Raymond James

On the redeployment of the Illinois Basin equipment, is there any operational benefit with this or is it purely just CapEx savings?

Gregory Honish

Both, the CapEx is probably about $1.3 million that we should be able to see a reduction in CapEx for 2014. And some of this equipment we bought up here was bigger, more efficient equipment than the equipment that were replaced in Northern App. So we'll see a benefit on both fronts.

David feaster - Raymond James

SG&A has much improved this quarter. Is this a better run rate that we could assume going forward?

Bradley Harris

I think we're looking at this quarter closer to a normal run rate. We did have the change between myself and my predecessors that was in the third quarter last year, and so we saw a little bit a higher cost in that quarter. But yes, I think this run rate is more, let's say, appropriate or predictable.

David Feaster - Raymond James

Last question for me. The interest expense, could you give us some guidance on your expectations, because it sounds like it was artificially higher this quarter, should comeback down a little bit, where do you think it should shakeout?

Bradley Harris

Actually the interest expense this quarter is probably a pretty good indicator of what to expect going forward. Our new credit facilities, where we talked about in length in the past call, higher interest rates, from a cash perspective, we have deferred cost associated with getting the deal done. And there is also a PIK interest that's involved in there. So the bottomline is this should be more indicative of what you expect going forward.

Operator

Our next question comes from the line of Sam Dubinsky from Wells Fargo.

Sam Dubinsky - Wells Fargo

Just a couple of quick housekeeping question. So how does spot pricing compared to contract pricing for 2014? And how should we assume the unpriced tons will then should be priced, are they just sold at spot?

Charles Ungurean

Yes, spot pricing is lower than current contract pricing. And any new business that we do would more unlikely be on the spot basis.

Sam Dubinsky - Wells Fargo

And what magnitude is it below contract pricing? Couple of bucks or how should we think about that?

Charles Ungurean

It's in the $2 range.

Sam Dubinsky - Wells Fargo

And do you think current liquidity is adequate enough to last through 2014? And how much cash do you expect to raise from the remaining equipment sale?

Gregory Honish

As far as liquidity standpoint, yes. This liquidity is following the way it modeled, what we had expected and we are comfortable operating at this level. So, yes, I think it will fine through '14. We do have one remaining piece of equipment that's there. But I'm going to, if you will, tell to stay away from that, and that we are hoping to negotiate a price related to that. So I prefer not to throw that out.

Sam Dubinsky - Well Fargo

And then I'm not sure if you mentioned this already, but what do you think CapEx will pen out for '14?

Bradley Harris

We have not disclosed that number yet.

Sam Dubinsky - Wells Fargo

What type of CapEx, do you have any idea if you can just give us some ranges, if it would be above or below today's levels?

Charles Ungurean

I think it would be fair to say given our current expectations that we have now CapEx for 2014 would be less than they are for 2013.

Operator

We have no further questions in the queue at this time. I would now like to hand the call over to Chuck for closing remarks.

Charles Ungurean

Thanks again, everyone, for your ongoing support of Oxford. We look forward to sharing our progress with you on our next earnings call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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