Contura Energy, Inc. (NYSE:CTRA) Q1 2019 Earnings Conference Call May 15, 2019 10:00 AM ET
Alex Rotonen – Vice President-Investor Relations
Andy Eidson – Interim Co-Chief Executive Officer and Chief Financial Officer
Mark Manno – Interim Co-Chief Executive Officer, Chief Administrative & Legal Officer and Secretary
Kevin Stanley – Executive Vice President and Chief Commercial Officer
Conference Call Participants
Lucas Pipes – B. Riley FBR
Mark Levin – Seaport Global
Scott Schier – Clarksons
Good morning. My name is Denise, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Contura Energy First Quarter 2019 Earnings Conference 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. [Operator Instructions] Thank you.
Alex Rotonen, Vice President of Investor Relations, you may begin your conference.
Thanks, Denise, and good morning, everyone. Before we begin, let me remind you that during our prepared remarks and the Q&A period, our comments relating to expected business and financial performance contain forward-looking statements, and actual results may differ materially from those discussed.
For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company’s first quarter 2019 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures.
Participating on the call today are Contura’s interim co-Chief Executive Officers, Andy Eidson and Mark Manno. Also participating on the call are Kevin Stanley, our Chief Commercial Officer; and Scott Kreutzer, our Chief Operating Officer, which are here to answer any specific questions on Contura’s operational performance.
With that, I’ll turn the call over to Andy.
Thanks, Alex. Good morning, everyone. Thanks for calling and participating. We want to start by briefly highlighting a few of the top line metrics on our first quarter performance, and then we’ll outline the commitments we’ve obtained relating to the refinancing of our term loan. I’ll spend a little time talking about a new metallurgical project that we’ve got on the near-term horizon as well, and then we’ll cover some informational recent leadership changes at Contura, also talk about year-to-date safety environmental performance.
And as Alex mentioned, Kevin Stanley has some commentary to share from a market perspective, see what the dynamics are looking like. And then we’ll close up things with some color, some deeper color around first quarter results, our updated guidance. And then finally, we’ll walk through the details of our newly adopted capital return program.
So for – first for the financial highlights. The company generated $609 million in total revenues in the first quarter with net income from continuing operations of $8 million and EBITDA of $83 million. During the quarter, we shipped nearly 6 million tons of coal, an increase of more than 2 million tons over the same period last year. Met coal sales accounted for more than half of our total shipments in the first quarter and generated an average realization of nearly $129.
Now it’s worth noting that when we say metallurgical coal in that instance, that refers to all metallurgical coal sold, not just the CAPP - Met segment, as we do have some met coal that is sold and rolled up through the CAPP - Thermal segment, and also, as we’ve mentioned in the past, some met coal that comes out of Northern Appalachia.
On the refinancing front, we’ve obtained commitments for a new $555 million first-lien term loan facility to replace our current term loan B facility. The terms of this new facility grant has much greater flexibility to allocate capital while allowing for unlimited restricted payments while the company’s total leverage is 3x or less. The expected interest rate on this 5-year term facility is LIBOR plus 700 basis points for the first two years, LIBOR plus 800 thereafter with a floor of 2%.
I’m looking towards the future for just a moment, the company’s Board of Directors recently greenlighted a new metallurgical coal project in Logan County, West Virginia. We’re referring to it as the Lynn Branch Project and fully believe as a relatively small capital investment of approximately $25 million to $30 million will unlock the reserve consisting of over 25 million tons of high-quality, high-vol met coal and make some improvements to the Bandmill preparation plant to allow it to accommodate this coal.
The project is expected to produce approximately 250,000 to 500,000 incremental tons, and overall, 1 million to 1.2 million tons annually at its full estimated run rate with a cash cost per ton in the low $60 range.
So looking at this project, naturally, the incremental production here additional met will be a boost going forward, but the real value in this is the very low cash cost nature of this mine, and it will help bring down the overall cash cost profile of the entire met portfolio. We expect production to commence in the second quarter of 2020. And naturally, as we continue developing the project, we’ll keep you updated.
So I’ll now turn it over to Mark to cover some updates on recent leadership and Board activity.
Thanks, Andy. And thanks, everyone, for joining us this morning. While it’s been less than six weeks since our last call, much has transpired in that short period of time. First and foremost, our long-time CEO, Kevin Crutchfield, announced his resignation on April 22 in order to accept another leadership position outside the coal industry. Subsequently, Contura’s Board of Directors who were all reelected for respective one-year terms by the shareholders on May 1 appointed Andy and me as interim co-CEOs while the company conducts a search for a permanent CEO. Andy and I take this opportunity extremely seriously and feel fortunate to be supported by a deep bench of experienced, capable and unified leaders here at Contura.
Since the Board conducted search process that just recently commenced, we don’t have any material updates to share at this time, except to say that the Board has hired a seasoned search firm with a lot of experience in the sector, and we feel confident in its ability to find the right candidate to lead Contura well into the future. As we’ve discussed in this morning’s earnings release, the Board has also adopted what we believed to be a meaningful and sustainable capital return program to continue Contura’s focus on creating and returning value to our shareholders. Andy will discuss the details of the program in a bit.
As you have heard and you will continue to hear from us, safety is a core value at Contura, and our focus on safe operations is linked to how we manage our business. Year-to-date, the total reportable incident rate at our facility, at operations is trending better than national average with April being especially strong. The NFBL rate is also better than national average for the year-to-date period. And our violations per inspector day are tracking roughly at the national average. While we are proud of the continued strong safety performance of our men and women in the field, improvements can always be made, and our corporate safety personnel continued to conduct mine visits and training.
Shifting to environmental compliance; as part of our ongoing focus on responsible stewardship, we continue to work with community partners to fulfill and improve upon our reclamation obligation across our operational footprint. To better frame our commitment, I just want to share a few points regarding the company’s environmental focus. We’ve won eight national and state reclamation environmental awards since 2016. And at the same period, we planted approximately 2 million trees. We currently perform at a 99.9% compliance rate permitted discharges. And to ensure alignment between our corporate goals and employee behavior, we have an organization alignment environmental compliance metric that factors directly into the company’s annual bonus plans.
In summary, we are pleased with our safety environmental performance, but the work is obviously never done, and we remain committed to continuous improvement in all aspects of our business. Thanks again for participating on our call.
I’ll now turn it over to Kevin Stanley, our Chief Commercial Officer, who will give you a market overview.
Thanks, Mark. As is always been the case since the second half of 2016, market dynamics continue to be quite favorable for met coal, especially for the higher-grade products, with demand showing modest growth globally, while supply growth has been minimal. In addition, Australian met exports year-over-year through March are only up a meager 1.4%, while they continued to struggle with rail, port maintenance and labor issues, further limiting the seaborne supply.
U.S. met exports are also trailing last year’s pace with the East and Gulf Coast exports down 2.3% year-to-date through March. With the limited production growth we are seeing, however, especially in the U.S., where the met production growth has been virtually nonexistent over the past several quarters, the supply side continues to feel well balanced with limited new production expected to come online in the near-term.
With regard to global demand, Asia continues to serve as a market catalyst with strong crude steel production growth so far in 2019. Overall, Asian crude steel production has experienced year-to-date growth through March right at 7%. China, which accounts for approximately half of the world’s steel production, has been very strong this year, growing at 9.9% through March. Conversely, India has been essentially flat for the first three months of 2019, while Europe has been weak with year-to-date production declining by 2%. The South American region struggled with a 4.1% decline in crude steel production so far in 2019, while North America, driven by a strong U.S. production, has seen solid growth at 4%.
According to the World Steel Association, global steel demand in 2019 is anticipated to increase by 1.3% before slowing to 1% in 2020, primarily due to an expected flat slowdown in China. India, on the other hand, is forecast to be the primary driver in the near-term with an estimated steel demand growth at 7.1% and 7.2%, respectively, in 2019 and 2020. Europe, another one of our key markets, is estimated to experience accelerated albeit modest 1.2% growth in 2020.
So what does all this mean for Contura? As we mentioned on our April 3 call, the pricing environment for met coal has been very strong for quite some time. And with the supply-demand equation well balanced, we expect pricing to hold up quite nicely for the remainder of the year. In fact, the Aussie low-vol met futures are signaling a $196 price in December 2019, only a slight backwardation from the current plus $200 level. For reference, the Atlantic high-vol A is also maintaining a level north of $200. This should bode well for our export-proficient U.S. met suppliers for the remainder of 2019.
Finally, I’ll add a bit more color on a couple of important markets for us, specifically South America and Europe. The South American market, as we said previously, experienced aggressive pricing competition in the first quarter. And unfortunately, we continue to see very aggressive market behavior in that region. It is our belief that European buyers are largely contracted for the near-term, limiting spot opportunities in that market and forcing traders to become more aggressive in certain geographic areas, mainly South America, as they are trying to move their long positions off the books.
Despite these challenges, we feel very good about our position in the Met segment, where 61% of our expected tonnages committed and priced with another 17% committed but unpriced, together landing at the midpoint of our 2019 guidance.
In summary, met markets are exhibiting strong fundamentals, and we expect that they will continue to do so with both the supply and demand side behaving quite well. With the exception of Turkey, where tariffs continue to negatively impact market opportunities, the end markets have performed well for us.
And with that, I’ll turn the call back over to Andy.
Thanks, Kevin. I want to spend some time now going through the first quarter results and hit our guidance update, and then we’ll get into the capital return program referenced earlier. Simply stated, first quarter results were below our expectations. As we’ve previously mentioned, lower-than-anticipated met coal sales volume units and also resultantly some high operational costs across the CAPP region on both Met and Thermal.
As we stated earlier, adjusted EBITDA was $83 million in the quarter compared with $99 million in the prior year first quarter. And that decrease is mainly driven by lower CAPP realizations at $124 a ton compared to a very strong $141 per ton first quarter of 2018. As you recall, pricing in that quarter was a bit up and down but growing into the beginning of the year, it was about $20 a ton above where we were for Q1 of 2019. In addition, our CAPP - Met costs were approximately $93 a ton, up from just over $80 a ton in the year-ago period.
So really digging into the meat of what happened during the quarter. There are three primary issues I want to talk about and make sure we explain. Beginning with CAPP - Met costs; first off, those costs were up, primarily due to some production issues at the Marfork complex. There were smaller issues at other places, but Marfork was really the main driver. That had an EBITDA impact of approximately $15 million. We’ll get into some of the details on that in just a moment.
Secondly, our met volumes were approximately 400,000 tons below our expectations. We did have slightly higher seasonality expectation for the quarter. But as Kevin mentioned, the pricing behaviors that we ran into when we just elected not to compete with those behaviors in areas such as South America, and then also, as we’ve mentioned on the last earnings call, the challenge of overcoming higher tariffs in Turkey, and so that resulted in an additional impact of about $13 million.
Finally, Central App was – the costs there were also pretty high. That was predominantly caused by Slabcamp, one of our mines at the mammoth complex. It has some infrastructure challenges. That contributed another $13 million to our EBITDA shortfall. So those three items, again, which we’ll get into more detail in just a moment, those, combined with kind of where we ended up from an EBITDA perspective, that gets you to what we can – would be considered more of a normalized EBITDA of approximately $125 million. So that’s really a bridge driven by three items.
More detail on the CAPP - Met situation. Several factors going on, but the primary driver was just geology and Marfork. We had mines in areas that basically were producing lower-than-anticipated clean tons per foot and some challenging cutting conditions. During the quarter, as these issues became more apparent to us, we started to address them by slightly tweaking the mine plans and relocating mine sections to pursue higher utilized areas. We think this is the appropriate approach, and we do believe that it will be effective. We expect to see improved performance going forward.
Another factor impacting CAPP - Met costs was a noncash coal inventory fair value adjustment related to the allocation of the Alpha purchase price, and this is an issue that we also discussed for the year-end earnings call, because it did impact year-end costs as well. This is related to inventory on Alpha’s books at the time of the merger. That inventory, just by purchase price accounting requirements, was mark to market. And so as that inventory flows through the P&L, it comes with a full market cost rather than a production cost. So that did contribute about $2 a ton of additional cost during the quarter.
And also, due to the production issues at Marfork, that required us to acquire more purchased coal than had been planned. We needed to fill orders at the similar quality, so that further impacted our cost performance by approximately $2 a ton.
And you’ve seen in our guidance update we will hit in just a moment, we do expect some continued cost pressure from the Marfork issue in particular. But the plans have been implemented to get us back to original guidance cost levels by year-end. So this is a temporary issue, and we are working through it, and we’re confident that it will be remediated by year-end.
On the CAPP - Thermal cost side production, as we mentioned, at Mammoth Slabcamp was negatively impacted by some infrastructure issues. Basically, the mine was running at half the productive capacity during the majority of the first quarter. That cost impact was a little over $8 per ton during the quarter, just related to that particular Slabcamp mine. This issue is now resolved. The mine resumed full production in mid-April, so no continued impact from that. Also, elevating costs in the CAPP - Thermal segment was, similar to CAPP - Met, was a fair value adjustment, and that added about $3.5 a ton to the CAPP - Thermal cost structure.
And just a note on that particular issue, there was about $1 million of inventory fair value adjustment impact in the CAPP - Met inventory at the end of March, so it should have only a minimal impact in the second quarter. CAPP - Thermal inventory adjustment was fully depleted at the end of Q1, so it should have no additional impact going forward.
So clearly, we had several issues that negatively impacted our costs this quarter. But appropriate time and resources were quickly distributed to those locations in the quarters to address the issues, and we believe they’ve been adequately addressed and we think we’re back on track. Obviously, cost performance wasn’t up to par, but be assured, as it has been and will continue to be a significant area of focus for the management team in this and in future quarters.
So despite our challenges in the CAPP - Met segment, it still generated more than $91 million of EBITDA during the quarter. Hitting our other two segments, we’ve not spoken much about, the other Met-related segment, the Trading and Logistics, or T&L, business generated approximately $10 million of EBITDA, while our thermal operations, both CAPP - Thermal and Met, were essentially breakeven. I would note that [indiscernible] mine actually had a very good quarter from a cost perspective. It did have a longwall move. We do – we will continue for the next couple of years to have two longwall moves a year, but we had one in March. We’ll have another one in the third quarter. So inclusive of the longwall move, the costs were right around expectation, and the mine was very productive during the quarter. So it did very well.
Moving to liquidity. At the end of the quarter, the company had approximately $182 million in unrestricted cash as well as $298 million in restricted cash, including deposits and long-term investments, for a total of $400 million – $480 million in total cash. Our total liquidity, which is inclusive of unrestricted cash and availability under our ABL, was $378 million at quarter-end.
Looking at cash flows during the quarter. Cash provided by operations was about $15 million in the quarter. Working capital was the main use of cash, about $56 million in total with roughly half split between accounts receivable and inventory. And naturally, the inventory increase was driven by the lower sales numbers. A lot of production was going on to the balance sheet, and the AR naturally shifts the function of timing of receipts. So both of these are expected to reverse back into cash as the year moves along and as we make up the sales that were not realized in Q1. We also made a quarterly debt amortization of around $7 million, and we repurchased just over $4 million of common shares. Those were related to share settlements on equity [indiscernible]
So based on the results, particularly from a cost perspective, we are making some changes to our 2019 guidance. We’re still comfortable with our shipment arrangements across the board. We still expect between 12.2 million and 12.8 million tons on the CAPP - Met segment, 1 million to 1.5 million tons of T&L met coal, 4.6 million to 5.2 million tons of CAPP - Thermal and 6.8 million to 7.2 million tons in the NAPP segment. From a committed sales position, we’re looking at 61% of CAPP - Met as being committed at an average price of $125.68. We are fully committed at the midpoint of our productive guidance range for NAPP, an average price of just over $43. And then we do still have some open ton in CAPP - Thermal, about 90% committed, priced at a little over $55 per ton.
We’re maintaining our NAPP operating costs at $34 to $37 a ton, but we are increasing CAPP - Met cost of sales from a range of $79 to $83 up to a range of $83 to $87. Given the production challenge at the Marfork complex, and as we mentioned, the time required to remediate the issues and also the continued use of some purchased coal to bridge the gap on coal needed for blending and meeting sales orders, we believe that being conservative with our guidance is prudent at this time. So mathematically, that just makes sense. And again, the expectation is that we start gravitating back toward original guidance production cost ranges by year-end.
In the same approach, we’re increasing our CAPP - Thermal guidance to be in the range of $52 to $57. Mammoth Slabcamp, as I mentioned earlier, is the main contributor to the higher cost there. And again, this is just reflective of the first quarter being where it was and the rest of the year effectively returning to original guidance levels. So it’s just running through the math there.
Well, the Lynn Branch Project, as mentioned earlier, that CapEx is expected to be approximately $10 million in 2019. We’re still comfortable with our CapEx range of $170 million to $190 million, so we’re not changing CapEx.
So I’ll finish my remarks on anonymous received, obviously, a lot of time and attention from management and the Board, our capital return program. Based on commitments to refinance announced earlier today, we were able to simplify and expand the capital return program compared to what we described on our last earnings call. Naturally, that program was more tied to our term loan B and the restriction held therein. Now we have more freedom, and therefore, the restrictions no longer apply. We have a lot more freedom and flexibility.
Our Board has now adopted a capital return program to which the company plans to return up to $250 million of capital to shareholders. We believe this program provides both ongoing value to shareholders and the right amount of flexibility and discretion for the company. The returns will take place in the form of share repurchases or dividends or a combination thereof, and that will be naturally determined when appropriate by the Board. Decisions to return the capital will continue to be a discretion of the Board and naturally subject to applicable law and other factors.
On an investor outreach front, we will be participating at the Deutsche Bank Global Industrials and Materials Summit in Chicago in early June. I’m sure we’ll run into some of you there. And really, in closing, despite a quarter that was below our expectations, market conditions continue to be positive. Cost challenges are being and have been addressed, and appropriate actions have been taken to vastly improve our ability to return capital to shareholders.
In total, we remain very confident in Contura’s future performance and really a lot of faith in the management team currently in place during this time of leadership transition, and we’re excited about our prospects for the rest of the year.
So again, thanks, everyone, for being on the call today. So operator, we’re ready to open the line for questions.
[Operator Instructions] Your first question comes from Lucas Pipes with B. Riley FBR. Your line is open.
Hey, Good morning everyone. So I’d like to go through here. I’ll try to, first, focus a little bit on Q1. I think you broke down kind of the discrete items into Marfork, $15 million; and kind of lower sales, so 400,000 tons, $13 million; then also Mammoth of $13 million. Maybe to stroke the back on this 400,000 tons of lower sales, were those produced and not sold? Or was this kind of across the portfolio, just not kind of what – the performance lacked behind your expectations in terms of production.
Yes. It’s a little bit of both, Lucas. We did produce some inventory that wasn’t able to be placed because of the sales shortfall, and that was the impact to the cash flow statement. We did book that in the working capital. But the production issues at Marfork did put us behind the curve because, naturally, we – the way we blend coal, we need access to all quality. And so the – we were producing coal. Some of the coal that we were producing wasn’t able – we weren’t able to put in on orders that will be appropriate because we just didn’t have access to the coal we needed out of Marfork to blend it. So it was kind of a multiple – a two-pronged issue.
Okay. So and then when I look at kind of tons, I think in results of operations in the attachment to your press release this morning, it shows – it breaks down kind of met coal tons sold and also what was included I assume on the purchase tons. But can you tell us kind of what your company-produced tons were during Q1? I didn’t see it on there.
Yes. I don’t have that number in front of me, Lucas, because that purchased coal actually – without the coal raw, and it blends in with our coal as it goes through the prep plant, so it basically – the only part about it that isn’t truly produces is not coming from our – it’s not coming from our captive reserves. And so it rolls into our productive number. And I’m afraid, I don’t have that breakout in front of me at the moment. I do think…
I believe it’s about 250,000 tons, in that neighborhood.
So about 250,000 tons were purchased?
And then what is the amount of inventory that you built during the quarter?
In tons, yes.
I think we’ll have to get back to you on that, Lucas. We don’t have it handy.
Yes, just the dollars, don’t have the tons in front of us.
Yes. And then – no problem on that. Whenever you can get back, that would be great. And then on – just to kind of go into the full year guidance on the tons for Central App on the met coal side, that 12.2 million to 12.8 million. Do you have a sense for how much purchased ton would be included in that figure?
Overall, I think that our internal estimates probably had us running about 150,000 tons per quarter, so somewhere in the 500,000-ton to 600,000-ton zip code. And so you can see when we bring in 100,000 tons more than what was budgeted, it does create some cost pressure because you’re paying more for the coal than it would cost to produce it from our own captive mines.
Got it. So if I were to model, let’s say, a 10% to 15% margin on the purchased tons, would that be in the right zip code?
That’s probably fair. I mean, it will depend on the quality. Sometimes, you’re buying the coal for more about our quality sweeteners. Sometimes, you’re buying the coal more for the bulk, and we’ve got the sweeteners. So your margin is going to vary, but that’s probably not a bad guess just across the board.
Got it, got it. Okay. That’s helpful. And then maybe a final question on Marfork, obviously a big impact to the quarter. Could you kind of share with us a little bit more color as to when those issues started to show up? And then you’ve mentioned you started to revise the mine plan. When did that work commence? Would just appreciate a little bit more color given the importance Marfork seems to have on the met coal segment.
Yes. I think we noticed probably mid-quarter that costs were trending higher. We had – obviously, we keep basically daily watch on production numbers coming out of the mines. Production was streaming lower. When you’re in the room [indiscernible] mine, you’re going to run into temporary issues and your clean tons per foot will vacillate. But once we saw a trend of consistently low clean tons per foot, it was probably pretty close to the end of the quarter where it became more of a – this isn’t a temporary geologic issue. This is an issue where we’re mining into more consistently low clean tons per-foot areas. And at that point in time, it became apparent that we needed to revisit the mine plans, look at the mine mapping and determine where deposit has thicker coal, so we could react on it and reorient the mines to get to those areas faster.
So it’s one of those issues where you know you’ve got a cost problem, but you don’t really have enough information until you’ve been in that issue for a while to know that it’s not a temporary geologic issue. It’s more of a – just a coal thinness issue. So yes, we spent a better part of the quarter digging through that. And – but now the mine plants have been adjusted, and it will take a little bit of time as we reorient the mines. We will have to redeploy some equipment underground to get where we need to be. But we’re very confident by fourth quarter, we’re back in the cost structure that we planned and we’re back in the thickness of coal that we need to be in.
Got it. Okay. So I appreciate all the color. I will turn over for now. Thank you very much.
Thank you, Lucas.
Your next question comes from Mark Levin with Seaport Global. Your line is open.
Hey, Andy, how are you?
Hey, Mark, how are you doing?
Doing well, thank you. Doing well. Okay. So just a few questions. Look, I said on a number of the issues in Q1, I wanted to focus more looking forward. So we’re halfway through Q2. And if I understand it, there’ll be no longwall moves in Q2. You won’t have the Mammoth issue in Q2, but it sounds like you’re going to have a little bit of Marfork to deal with in Q2. So from that perspective, as you sit here kind of in the middle of the second quarter, I would assume it’s reasonable to assume EBITDA in Q2 would be meaningfully above Q1 levels or is that too much of a leap at this point?
I mean, we don’t want to guide too deeply into the quarter, but I think sales have been more of on-budget trend. So that issue is more less of an issue this quarter, really not an issue this quarter thus far. From a cost perspective, Marfork will, as you mentioned, it will bear additional cost over the next couple of quarters likely. Slabcamp was remediated in mid-April, so there’s a little bit of costs coming into it. But by and large, it’s in good shape. And [indiscernible] the longwall move, so it’s going to be in the zip code of where it needs to be. So a lot of this is being taken care of during the second quarter. I don’t want to guide you too much, but the quarter should look pretty different relative to first quarter.
Okay. Great. And then just in terms of the tons that – the tons that have not been priced yet on the Met side, maybe what the quality of those tons look like?
I think it’s still a pretty similar blend to what we’ve processed far. I mean, typically, the vast majority of our initially guided commitments were domestic tons. And those – they do tend to be a little bit more on the higher-quality spectrum. But it’s not enough to materially make a difference between it and the mix left for international. It’s not like we’re pushing all of the high-vol A into domestic, and international is all high-vol B. It’s a pretty consistent split. So I think you’ll see product mix remaining pretty consistent throughout the year.
Okay. Got it. And then the metric – coming back to costs for a second. I know I’m skipping all over the place here. But met coal cash cost, again, you guys gave full year guidance. Is it reasonable to assume that Q1 was the high watermark for met coal cash cost and that we will maybe get a little bit better in Q2, and then the more meaningful improvement is in the back half of the year, just based on what you – based on your preliminary comments? Just trying to get an idea of cadence so that quarterly expectations at least are reasonable.
Yes. That’s absolutely correct. And again, if you just look at the math of it, starting off Q1 with $92, $93 cost, and now the midpoint of our guidance is $85. Obviously, that – you can kind of make some assumptions if we expect to be closer to original guidance by year-end. You can kind of see the trajectory we’re expecting on costs over the next few quarters.
Got it. Okay. And then with regard to the capital return program. I know on the – I believe it was the last call Kevin had mentioned that the Board was contemplating a strategy whereby 50% of the excess free cash would be returned, either through dividends, buybacks or debt repurchases. So I guess this morning, you guys come out with a $200 million – you now – you have the refinancing, and you now have $250 million. Is there a – is there, from what you can tell, a leaning either toward buybacks or dividends, special or otherwise at this point in terms of the way the Board would approach the $250 million?
Yes. I mean, naturally, we don’t want to problem the Board’s decision. They’ll have to evaluate as situation dictates whenever – after we get the facility closed and we’re ready to start make some movements. But I mean – when we look to smart guys like yourself and Lucas who report on us as being undervalued compared to our peers, we think that is accurate. And so in instances like that, it’s really hard to argue there’s anything more accretive than repurchasing shares at these levels. Again, not saying that that’s where the Board’s going to end up. But I think, logically, people can kind of see – you can do the math and figure out where this probably should head. Naturally, if things change between now and when we get the deal closed, then we would have to – the Board will reevaluate and look at it on a different perspective. But based on current numbers, I think that’s probably what will make the most sense.
Got it, got it, got it. Then my last question is related to Lynn Branch and any – I think you mentioned, obviously, there’s no change to CapEx in 2019. But as you – and I realize we’re sitting here in May. But would there be any incremental CapEx associated with this project in 2020? Meaning, when you’re trying to think about modeling the out-years from a capital perspective, does it have any impact on that? And maybe preliminarily, this modeling kind of flattish CapEx or – in 2020 seem reasonable to you?
Well, so keep in mind, guidance for 2019 included $60 million of additional growth capital, both for [indiscernible] development and some new…
That’s right, that’s right. Yes. That’s right.
Coming up the Alpha mine, so we’re already at a pretty inflated capital number. We certainly would expect that number to come down next year, even includes the remaining capital to be spent on Lynn Branch.
Got it. Okay. Great. Appreciate the time this morning.
Thank you, Mark.
[Operator Instructions]. Your next question comes from Scott Schier with Clarksons. Your line is open.
Good morning everyone.
If I can stay on Lynn Branch, can you talk a little bit about how we should think about the ramp-up here? I know you mentioned first production in I think the second quarter of 2020. Can you give any color on how many tons we’re going to expect in 2020 and then going into 2021?
Yes. I mean, as with most continuously monitored sections – continuously monitored mines, we’ll start – we’ll do development, and we’ll be adding sections as the mine gets developed out. I think probably for next year, we’re looking at somewhere around 400,000 tons, 500,000 tons coming out of that mine, and then we’ll be a full run rate in 2021. So we’ll be at the 1.1-ish zip code. So we’ll get basically a half-year production next year, a little under half year.
Okay. Great. That’s very helpful. And then will that be domestic or expert focused, do you think?
This is a kind of quality coal, it can actually go on either. It’s kind of a, call it, hybrid High Vol A/B. It’s – from a vol perspective, it’s probably closer to a B+, but it’s very low sulfur, low ash. It’s an excellent quality coal, so it gives us a lot of flexibility.
Okay. That’s very helpful. And then one last one. Are you thinking that, that will be a new product for you guys? Or will that kind of integrate with some of the other products that you have?
I think we’ll probably continue to do what we do best, which is blend. Again, we don’t like necessarily marketing a particular product. We like finding what the customer wants, and we’ll blend to hit their specs specifically rather than making them just take what we produce. So this – again, this gives us a lot of flexibility to hit multiple requirements from the customers.
Okay, great. That’s very helpful. Thank you for taking my questions.
You’re very welcome, Scott.
There are no further questions. And so at this time, I turn the call back over to Mark Manno, co-CEO, for closing.
Again, thank you, everyone, for your interest in Contura and your time this morning on the call. Have a great rest of your day. Thank you.
This concludes today’s conference call. You may now disconnect.