Rhino Resource Partners' (RNO) CEO Christopher Walton on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Rhino Resource (RNO)

Start Time: 10:00

End Time: 10:24

Rhino Resource Partners LP (NYSE:RNO)

Q2 2014 Earnings Conference Call

July 31, 2014, 10:00 AM ET

Executives

David G. Zatezalo - Chairman

Christopher I. Walton - President and CEO

Richard A. Boone - SVP and CFO

Scott Morris - VP of IR

Analysts

James Rollyson - Raymond James & Associates, Inc.

Paul Forward - Stifel, Nicolaus & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2014 Rhino Resource Partners Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Scott Morris, Vice President of Investor Relations. Please go ahead.

Scott Morris

Thank you, Kim, and good morning, everyone. The earnings release was issued before the market opened this morning and is posted at the Partnership's website at www.rhinolp.com. We also have a presentation posted on our website that provides information on our operations and results for the quarter.

Participating in the call today are Chris Walton, Rhino's President and Chief Executive Officer; Rick Boone, Senior Vice President and Chief Financial Officer; and David Zatezalo, Rhino's Chairman, who will be available during the question-and-answer session. Before I turn the call over to Chris, I want to make a few general reminders.

Our call today may contain certain forward-looking statements that are subject to a variety of risks, uncertainties and assumptions, which are described more fully from time to time in the Partnership's filings with the SEC. We refer you to these sources for additional information.

Forward-looking statements are based on management's current expectations and assumptions, and actual outcomes and results may differ materially due to various factors. Rhino expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in its views or expectations or otherwise.

A replay of this call will be available, and instructions for accessing the replay are included in today's earnings release. The webcast of today's call will also be archived on our website for one year.

With that, I'll turn the call over to our President and CEO, Chris Walton. Chris?

Christopher I. Walton

Thanks, Scott. I'd like to thank those of you who are participating in Rhino Resource Partners second quarter 2014 earnings call. During the quarter, we experienced the same problems that have been affecting nearly all coal companies. Market conditions which appear promising at the beginning of the quarter have weakened with the cool summer weather and lower natural gas prices.

At Hopedale, costs were significantly higher than anticipated as we advance through thin coal while developing the 7-seam reserve. We are encouraged that in the past four weeks, we have mined more coal from the 7-seam than the total that was mined in six months since starting the project. This gives us confidence that the cost will improve going forward.

Hopedale was also negatively impacted by poor rail service likely due in part to the exceptional level of oil and gas activity in the Utica. We continue discussions with two rail companies [serving] (ph) the Hopedale facility to work on improving service in the second half of 2014. In addition to the higher cost at Hopedale, we experienced one-time charges during the quarter totaling approximately 1.6 million, which included expenses due to a large number of unanticipated claims under our employee healthcare plan and the cost to settle a potential legal claim.

We are pleased that the new Pennyrile mine has gone into production as expected and shipments began in early July. The initial shipments are part of the base 800,000 ton per year contract and we have begun test shipments with additional customers that we expect will result in more long-term sales. Pennyrile gives us additional diversification and we expect it to be a significant source of stable cash flow as it ramps up to its full potential run rate of 2 million tons per year.

Market conditions in Central App have remained challenging due to the weak met prices and the retracement of prices in the steam market. Mine 28 was temporarily idled at the end of May due to a fire in the CSX rail tunnel that shut off rail service. Although rail service has been restored, we have not yet reopened the mine while we work down the high stockpiles.

Since completing the sale of our Utica oil and gas interests, we have kept debt levels low with approximately 30 million drawn along the bank line at the end of the quarter. We currently have no planned growth capital expenditures, and the spending to develop Pennyrile is essentially complete. There are several distressed assets offered in the market, and our low debt level gives us the flexibility to evaluate these and other opportunities. We anticipate cash flow to grow at Pennyrile, and expect costs to improve at Hopedale and Castle Valley. We continue to evaluate the overall structure of the organization as we look to reduce costs wherever possible.

Hopedale is sold out this year and about 75% in 2015. We expect Castle Valley to soon be fully committed through the end of 2015. We’re currently doing test burns which we expect will lead to additional sales at Pennyrile. Pennyrile could be expanded to a two section mine in mid-2015. In Central Appalachia, we have remained focused on safe operations while keeping costs as low as possible with reduced levels of production and sales. We have not yet seen encouraging signs in either the met or Central App steam markets.

At Rhino Eastern, we have fully transitioned to the Eagle 3 mine as we have completed mining the Eagle 1 reserve. The results at Rhino Eastern have been below our expectations and we instituted a number of management changes at this operation. In addition, we encountered adverse mining conditions at Rhino Eastern in the quarter, which included a roof fall, the result is in 10 days of lost production. With the management changes we have made at Rhino Eastern, we expect cost to improve.

Overall, we believe many of the operational issues and one-time events that affected us in the quarter are largely behind us and we look forward to improving the results in the second half of the year.

With that, I’ll now turn the call over to our CFO and Executive Vice President, Rick Boone who will review the financials. Rick?

Richard A. Boone

Thanks, Chris. Good morning, everyone. I want to thank you for joining in the call today. With the $179 million received from the sale of our Utica assets in the first quarter, we continue to maintain a relatively low debt level and we finished the second quarter with about 30 million drawn under our bank line. At June 30, 2014, Rhino had total availability of 147.1 million which includes cash of 0.6 million and available credit under our facility of 146.5 million.

Looking at our results of operations. Total revenue for the quarter was 55.9 million and coal revenues totaled 46.9 million. Both were down from Q2 2013 and down sequentially from Q1 2014. Other revenues for the quarter were slightly higher at 9 million compared to 8.7 million in 2013.

In the second quarter, Rhino incurred a net loss of 6.9 million and adjusted EBITDA for the quarter of 3 million. Both of which were impacted by the operational issues and other one-time items that Chris discussed earlier.

Coal revenues per ton decreased quarter-over-quarter and year-over-year due to the lower price of metallurgical and thermal coal at our Central App operations as well as a higher mix of lower price tons from our Western and Northern App operation.

This negative price impacts were partially offset by favorable pricing in our Northern App and Rhino Western operations. On a per ton basis, coal revenues in the second quarter of '14 were $59.17 compared to $62.47 per ton in the same period of 2013, a decrease of $3.30 per ton.

Cost of operations per ton was $58.69 in the second quarter of 2014 compared to $56.44 in the second quarter of 2013. The increase in cost of operations per ton was primarily due to the increased costs as Chris mentioned earlier.

Rhino had actual maintenance capital expenditures of approximately 3.6 million for the quarter, all expansion and capital expenditures were approximately 60.4 million which consisted primarily of the final development phase of Pennyrile which was substantially complete as of the end of the quarter.

With that, I would like to turn the call back over to Chris for his closing remarks.

Christopher I. Walton

Thank you, Rick. To summarize, we are ramping up Pennyrile, which will provide us with increasing cash flow. We believe the development issues at Hopedale are largely behind us. We have taken steps to get Rhino Eastern back on the right track and we have a strong balance sheet with ample liquidity that provides us financial flexibility to operate our business during the period of depressed prices. On behalf of the Board and the employees of Rhino Resource Partners, I thank you for your participation today.

Operator, please open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jim Rollyson from Raymond James. Please proceed.

James Rollyson - Raymond James & Associates, Inc.

Good morning, guys.

Christopher I. Walton

Good morning, Jim.

Richard A. Boone

Good morning, Jim.

James Rollyson - Raymond James & Associates, Inc.

Chris, let's start with Hopedale. You mentioned you've – on the 7-seam you've had more production or in the last four weeks, I guess the month of July than you had the last couple of quarters, relative to the kind of 250,000 to 260,000 ton run rate you've been running in the last two quarters with what you see in the seam right now, where do you think that production bounces back up to? Are we back up in the like 315,000 ton range like you had in the second quarter of last year or is it higher, lower, just maybe a little thought there so we can model that through and see what the impact looks like on cost and margins?

Christopher I. Walton

I’d say it would be more in the range of 250,000 to 275,000. We’re in the same and it’s pretty much fully developed but we’re taking off right now normal money cycles and we will make sure we do that safely.

James Rollyson - Raymond James & Associates, Inc.

Any thought on what the impact will be on cost just quarter-over-quarter, just give us a magnitude?

Christopher I. Walton

I believe that they’re going to be much lower.

James Rollyson - Raymond James & Associates, Inc.

Okay. Pennyrile, you mentioned – congrats on getting that started up. Maybe a little color on what the market outlook is right now or what the environment's like out there as far as putting additional tons on contract just given the – did the cool summer kind of messed up the timing of that or you still have interested customers on contracting more tons?

Christopher I. Walton

No, we have a lot of interest in test burns right now. We feel those will go well and we’re looking forward to contracting more forward.

James Rollyson - Raymond James & Associates, Inc.

Any sense on when you might ramp up towards your 2 million ton a year type of capacity?

Christopher I. Walton

We think by mid next year at least. It will depend on how soon some of our test burns are done and what utilities, what kind of decisions they make.

James Rollyson - Raymond James & Associates, Inc.

Okay. And then last one from me, just if we think about what's going on with Rhino Eastern, you guys mentioned the Eagle #3 being a lot lower cost but obviously at this moment your total Rhino Eastern costs are pretty high. It sounds like you're making changes to try and fix that. Any sense on when you might see that improve on the cost side, because clearly cost were up significantly quarter-over-quarter. I mean, do we get back down toward that a little over $100 type cost over the next couple of quarters or what's your prognosis there?

Christopher I. Walton

We expect it to improve this quarter and continued improvement after that. I mean there’s only so low we can go, but the next couple of quarters should be a big turnaround.

James Rollyson - Raymond James & Associates, Inc.

Okay. Thanks, guys.

Richard A. Boone

Thank you, Jim.

Operator

(Operator Instructions). Your next question comes from the line of Paul Forward from Stifel. Please proceed.

Paul Forward - Stifel, Nicolaus & Company, Inc.

Thanks. Good morning, Chris and Rick.

Christopher I. Walton

Good morning, Paul.

Richard A. Boone

Good morning.

Paul Forward - Stifel, Nicolaus & Company, Inc.

You'd mentioned some that – you've got certainly some borrowing capacity and that there a lot of distressed assets available on the market. Just wanted to ask you how active are you in evaluating these properties and can you anticipate that? Is there going to be the potential for a big enough acquisition, a significant enough acquisition to allow a strategic shift for the company or you think it more picking up assets here and there, bolt-on, where you see value?

David G. Zatezalo

Paul, this is Dave Zatezalo. I’ll take the question. We are actively engaged in a couple of reviews right now. We think that both of these opportunities may be doable. I won’t divulge much about them other than to say would greatly add to our breadths of exposure and our stability that would both be for us sizable assets and sizable acquisitions that would provide and generate continued distributable cash flows. We are fairly active in it right now. We’ve reviewed a lot but we’re actually interested today primarily into different ones. So, I’m not sure I can say much else about them.

Paul Forward - Stifel, Nicolaus & Company, Inc.

Okay. Thanks, Dave. And just a follow up on that. When you look at your 2015, the forward sales that you've got, I mean the one that stands out, again is Central App where there's really just not a whole lot of sales that you've got in hand for 2015 and I don't think it would be a stretch to say that now the volume outlook in '15 is probably going to be weaker compared to '14 or there's certainly that risk. How important is it going to be as you evaluate M&A opportunities to replace the kind of missing volumes, missing revenues out of Central Appalachia?

David G. Zatezalo

Well, I think it’s very important to us which is why we’re fairly well actively engaged in it. No particular secret that Central App the prices are at such a level that you react to the (indiscernible) when you’re buying or even bother to run it or not. Generally, we won’t both running it if we don’t think we can do okay on it. I think any acquisitions we look at would be out of that particular area because of various factors, coal seam thicknesses, railroad captivity, those issues tend to make that coal less competitive in the market. So we would be looking at places that add to our portfolio and not in a way of just reserves that would not bring anything to the table. The ramp up to Pennyrile next year gives us a good volume increase and it gives us a good volume increase for the rest of this year. Chris didn’t say it but I’m pleased to say that they actually shipped a little over their target in July and we’re actively filling test burns now as we speak, which we believe will lead to future business. So between the ramp up of Pennyrile potential for other acquisitions, we look for that to more than make up for what we think is going to be a fairly common market in 2015 in Central App, because I’d like to say that our metallurgical position will lead to a lot of value in '15 but I’m not sure I really believe that but I’m not you would either. So, we have good assets there. We have good reserves there, but the current pricing environment is not such that unless something changes, we’re obviously not going to emphasize just to practice mining coal. I don’t know if that answers your question.

Paul Forward - Stifel, Nicolaus & Company, Inc.

Sure. That answers it.

David G. Zatezalo

All right.

Paul Forward - Stifel, Nicolaus & Company, Inc.

I wanted to follow up on Jim's question on Rhino Eastern. I mean definitely a tough quarter there and MSHA was fairly – got some pretty strong comments on their assessment of the mine. I just want to ask about just what kind of operational changes have you made. And I think, Chris, you talked about improvements already there. But where do you think Rhino Eastern can go and can you get the volumes up to the point that the unit cost come down that this is as you look at the next few quarters, a positive cash generator?

Christopher I. Walton

We made management changes in the Rhino Eastern company and also in the mine itself. We’ve done a lot of additional training there with the operators and all the employees, so that anything that wasn’t been done properly there is absolutely no excuse now that it isn’t. We don’t condone our rules of health and safety at all or regulations not being adhered to or the federal or the state. I mean that’s all part of mining coal. As far as the improvements, I think we’re seeing improvement already in our daily production and we’ll continue to see that. But our main focus right now is safety and doing everything safe and it will continue to be that way. I can’t really give you a timeframe. I think it’s going to steadily improve if that answers anything.

Paul Forward - Stifel, Nicolaus & Company, Inc.

Sure. I think that's all I've got. Thanks a lot.

Christopher I. Walton

Okay.

Richard A. Boone

Thank you.

Operator

Your next question comes from the line of [William Devin from Moors & Cabot]. Please proceed.

Unidentified Analyst

Hi. I had some questions. Could you talk a little more about the opportunities with the Green River? You talked about access to a large customer base and export markets. Can you talk a little to that?

David G. Zatezalo

We can. I mean we started shipping coal during the month of July. We are slightly ahead of our shipment schedule. The production is slightly ahead of where we expect it to be in our inaugural month. Everything at this point seems to be working very properly. We had a couple of pre-plan startup problems, which are not unusual for this kind of situation. Everything seems to be working properly. As far as markets, we are out with two different test burns right now one of which is being loaded at present. We do have a solid base contract there. We believe these test burns are going to lead to additional business and we’ve regarded that we are cost advantaged by being directly on the river. I mean the coal there is directly to the river. It’s not truck or belted in between. So we feel we’re in a good position. That market seems to be healthier than other markets and we certainly get lower cost BTUs to customers from that location. So with the advantage of water transportation, with the advantage of a little greater seam height than what we’ve had in the past in Central App, I wish that we had frankly brought Pennyrile on line a year earlier, but we weren’t able to do that so we’ve got it on as fast as we could. I mean it’s actually a fairly reasonable sales situation from that basin especially as compared to something (indiscernible). So I can’t disclose anything about customers or test burns or potential contracts at this point but we’re very encouraged by what we see so far.

Unidentified Analyst

That sounds great. And the export markets, is that more of like an insurance policy for you guys?

David G. Zatezalo

We are currently not active in the export market with that coal and frankly would probably not be until 2016 or so. We prefer to stay indigenous to the U.S. where we can but we certainly wouldn’t turn our nose at the export market either.

Unidentified Analyst

Okay. Thanks a lot.

David G. Zatezalo

Thank you.

Operator

Ladies and gentlemen, that concludes our question-and-answer session. I will now turn the call back to Scott for closing remarks.

Scott Morris

Thank you, Kim. Again, we would like to thank everyone for participating in today’s call and we will speak with you again next quarter. Thank you.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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