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Good afternoon. My name is Nick, and I'll be your conference operator today. At this time, I would like to welcome everyone to Warrior Met Coal First Quarter 2021 Financial Results Call. [Operator Instructions] This call is being recorded and will be available for replay on the company's website.
Before we begin, I have been asked to note that this discussion today may contain forward-looking statements and actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press release and SEC filings.
I have also been asked to note that the company has posted reconciliations of non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the Investors section of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the Investors section of its website at www.warriormetcoal.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer; and Mr. Dale Boyles, Chief Financial Officer.
Mr. Scheller, you may begin your remarks. Please go ahead.
Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2021 results. After my remarks, Dale will review our results in additional detail and then you'll have the opportunity to ask questions.
During the first quarter, we saw COVID-19 and the Chinese ban on Australian coals have a continued impact on both pricing and demand across the met coal industry. We continue to take the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations to protect the health and safety of our employees while maintaining our operations. Despite these challenging headwinds, especially on met coal pricing, we were pleased to be free cash flow positive for the fourth consecutive quarter since the pandemic began. We remain focused on preserving cash and liquidity while managing the aspects of the business that we can control. Importantly, we achieved our second lowest quarterly cash cost per short ton since going public.
As the Chinese ban on Australian coals continued during the first quarter, we were able to monetize our higher-than-normal inventories on Chinese spot volumes, which partially offset some of the impact of the depressed pricing environment experienced in our natural markets. Strong market fundamentals persisted across all geographies during the first quarter, allowing our customers to benefit from record high steel prices and strong demand for their products. Global steel production remains on its recovery path to pre-pandemic levels. The World Steel Association has reported a 6% increase in global pig iron production for the first quarter, with China leading the charge with a year-over-year increase of 8%. Excluding China, the rest of the world grew at a more moderate pace of 2%.
Unfortunately, the met coal markets remained split in a 2-tier pricing system due to the ongoing Chinese ban of Australian coal imports. On one side, you have non-Australian premium hard coking coals imported into China benefiting from a stable and elevated CFR-based index price that was range bound between $214 and $223 per metric ton for most of the first quarter. On the other side, you have Australian-based premium coals that have been impacted by high volatility and low pricing. We saw the Australian index price climb from its low of $102 per metric ton at the start of the year and peak at a high of $161 per metric ton in late January. At this point, the price started its gradual decline, hitting its low of $110 per metric ton in late March.
The prolonged import ban by China has also created shifts in trade patterns as more Australian coals are making their way into Japan, South Korea, India and Vietnam and also in our natural markets of Europe and South America. As anticipated, Chinese buying interest was low during their New Year celebrations in February. However, it remained subdued for a longer period than expected following the holiday. However, an uptick in transactions and interest was observed prior to the end of the quarter and has remained active since. As we had expected, contracted sales into our natural markets were strong for the entire first quarter. Sales volume in the first quarter was 2 million short tons compared to 1.8 million short tons in the same quarter last year.
Our sales by geography for the first quarter were 30% into Europe, 14% into South America and 56% into Asia. Production volume in the first quarter of 2021 was 2.2 million short tons compared to a similar amount in the same quarter of last year. The mines ran well in the first quarter, and we built a little more inventory. As planned and previously communicated, inventories remained elevated at the end of the first quarter compared to pre-pandemic levels. Coal inventory levels increased 220,000 short tons to 1.2 million short tons at the end of the first quarter. The higher-than-normal inventory levels will allow us to continue to supply our valued customers during the rest of the year.
Our gross price realization for the first quarter of 2021 was 95% of the Platts premium low-vol FOB Australian index price and was higher than the 89% achieved in the prior year period. Our better gross price realization was primarily due to a higher percentage of our sales to Chinese customers at the CFR index price. Our spot sales volume in the first quarter was approximately 48% of total volumes compared to a normal expectation of approximately 20%.
The end of our first quarter also coincided with the expiration of our collective bargaining agreement with the United Mine Workers of America on April 1. While we continue to negotiate in good faith with the UMWA to reach a new contract, the UMWA has initiated a strike that continues today. Later in our prepared remarks, I'll provide more color on the business continuity plans we have in place to meet the needs of our valued customers.
I'll now ask Dale to address our first quarter results in greater detail.
Thanks, Walt. For the first quarter of 2021, the company recorded a net loss on a GAAP basis of approximately $21 million or a loss of $0.42 per diluted share compared to net income of $22 million or $0.42 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the first quarter, excluding the noncash charge for a tax valuation allowance, was $0.08 per diluted share compared to $0.39 per diluted share in the same quarter of 2020.
Adjusted EBITDA was $47 million in the first quarter of 2021 as compared to $62 million in the same quarter last year. The quarterly decrease was primarily driven by a 13% decrease in average net selling prices, partially offset by higher sales volume. Our adjusted EBITDA margin was 22% in the first quarter of 2021 compared to 27% in the same quarter last year.
Total revenues were approximately $214 million in the first quarter of 2021 compared to $227 million in the same quarter last year. This decrease was primarily due to the 13% decrease in average net selling prices, partially offset by an 8% increase in sales volume in a weak price environment, as Walt noted earlier.
The Platts premium low-vol FOB Australian index price averaged $28 per metric ton lower or down 18% in the first quarter of 2021 compared to the same quarter last year. The index price averaged $127 per metric ton for the quarter. Demurrage and other charges reduced our gross price realization to an average net selling price of $106 per short ton in the first quarter of 2021 compared to $122 per short ton in the same quarter last year.
Cost of sales was $154 million or 75% of mining revenues in the first quarter compared to $152 million or 68% of mining revenues in the same quarter of 2020. The slight increase in total dollars was primarily due to higher sales volume, offset by lower variable cost and a focus on controlling cost. Cash cost of sales per short ton FOB port was approximately $79 in the first quarter compared to $83 in the same period of 2020. This $79 per short ton was our second lowest quarterly amount in the last 4 years.
Cash costs on price-sensitive costs, such as wages, transportation and royalties that vary with met coal pricing, were lower in the first quarter, along with a focus on cost control. SG&A expenses were about $8 million or 3.6% of total revenues in the first quarter of 2021 and were 10% lower than the same quarter last year, primarily due to lower professional fees and employee-related expenses.
Depreciation and depletion expenses for the first quarter of 2021 were $33 million compared to $29 million in last year's quarter. The increase quarter-over-quarter was primarily due to a higher amount of assets placed in service and higher spending levels. Net interest expense was about $9 million in the first quarter and included interest on our outstanding debt plus amortization of our debt issuance costs associated with our credit facilities, partially offset by interest income. This was approximately $1 million higher compared to the same period last year, primarily due to incremental borrowings on our ABL facility and lower returns on cash balances.
We recorded an income tax expense of $24 million during the first quarter of 2021 compared to an expense of $3 million in the same quarter last year. The first quarter's tax expense included a noncash charge recognized upon the establishment of a valuation allowance against our state deferred income tax assets. This result was due to a change in Alabama state tax law in February that became effective as of the beginning of the year. In essence, our export sales are no longer subject to Alabama state income taxes, and therefore, the value of our state net operating losses have been written down.
Turning to cash flow. During the first quarter of 2021, we generated $23 million in positive free cash flow, which resulted from cash flows provided by operating activities of $45 million, less cash used for capital expenditures and mine development cost of $22 million. Free cash flow in the first quarter of 2021 was positively impacted by a small decrease in net working capital. The decrease in net working capital was primarily due to higher collections of accounts receivable, lower prepaid expenses and other receivables, offset partially by an increase in inventory this quarter. Operating cash flows were higher in the first quarter of 2021 compared to the same quarter last year, primarily due to higher sales volumes on lower cost.
Cash used in investing activities for capital expenditures and mine development costs were $22 million during the first quarter of 2021 compared to $26 million in the same quarter last year. We continue to rationalize spending during these unprecedented times. The company spent $13 million or 58% less on CapEx in the first quarter of 2021 compared to the same period last year, which was largely offset by higher spending on mine development costs. Cash flows used by financing activities were $13 million in the first quarter of 2021 and consisted primarily of payments for capital leases of $8 million and the payment of the quarterly dividend of $3 million.
Our balance sheet remains strong with a leverage ratio of 2.4x adjusted EBITDA. We believe our liquidity is adequate to navigate these uncertain times. Our strong balance sheet with no near-term debt maturities, combined with a low and variable cost structure, has allowed us to continue paying our quarterly dividend during the pandemic. Our total available liquidity at the end of the first quarter was $272 million, consisting of cash and cash equivalents of $222 million and $50 million available under our ABL facility, which is net of borrowings of $40 million and outstanding letters of credit of approximately $9 million.
Now turning to our outlook. Due to the ongoing uncertainty related to our negotiations with the union, the COVID-19 pandemic, the Chinese ban on Australian coal and other potentially disruptive factors, we will not be providing full year 2021 guidance at this time. We expect to return to providing guidance once there is further clarity on these issues. We continue to appropriately adjust our operational needs, including managing our expenses, capital expenditures, working capital, liquidity and cash flows. We have delayed the development of the Blue Creek project, and our stock repurchase program also remains temporarily suspended.
I'll now turn it back to Walt for his final comments.
Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments. We still do not have a clear view of when the trade of seaborne met coals will return to normal and efficient market conditions, although we continue to believe that a partial or full easing of the Chinese ban on Australian coal is most likely to happen at some point in time. We expect current pricing bifurcation in the markets to remain in place as long as the ban remains in place. We would expect the difference between the Australian FOB and the China CFR indices to narrow once the ban is lifted, returning to normal levels.
However, the correction may take some time as there are plenty of floating vessels with Australian coals off the coast of China as well as large volumes of coals in the ports that have been offloaded but have not cleared customs. We believe that demand for our coals will remain strong for the next few quarters as indicated by our customers' buying patterns. Also, we believe that our markets remain vulnerable to COVID-19-related demand disruptions, mostly in Asia, Europe and South America. We'll remain focused on serving our customers through the duration of our ongoing labor negotiations, while taking advantage of spot volumes when possible.
As I mentioned earlier, our contract with the UMWA expired on April 1, and the UMWA has initiated a strike that continues today. We believe that we are well positioned to fill our customer volume commitments for 2021 of approximately 4.9 million to 5.5 million short tons through a combination of existing coal inventory of 1.2 million short tons and expected production during the rest of the year. For now, we have idled mine 4. We expect production to continue at mine 7, although at lower-than-usual rates. While we have business continuity plans in place, the strike may still cause disruption to production and shipment activities and the plans may vary significantly from quarter-to-quarter in 2021. Finally, as we navigate through these headwinds, we will continue to execute our business continuity plans to meet our customer demands.
With that, we'd like to open the call for questions. Operator?
[Operator Instructions] Your first question comes from the line of David Gagliano, BMO.
I just wanted to ask a little bit about the current strike situation and the commentary regarding volumes. I guess it's the obvious question, right? So we had 2.1 million tons, I think, of sales in the first quarter. The commentary around 4.9 million to 5.5 million, is that essentially -- if the strike is -- remains in place for the remainder of the year and how should we model quarterly sort of degradation in production? I'm assuming that the front end of that is going to be higher than the full year average. If there's a way you can give us some color on how we should be thinking about sales volumes each quarter as the strike persists.
Well, the -- giving a quarter-by-quarter breakdown is really pretty tough, Dave. This is Walt. And the reason for that is due to the fact that we just don't know what disruptions will be caused throughout the period of the strike. The way we've kind of walked through this in the 4.9 million to 5.5 million is, in the first quarter, we actually had about 1.9 million in sales. So that will leave us with 3 million to 3.6 million to hit. We have 1.2 million in inventory. If you take that down to the level where we say we like to be, which is around 400,000 tons, that brings us down to needing to produce 2.2 million to 2.8 million for the remainder of the year, which brings us down to, call it, 750,000 a quarter to 930,000 a quarter.
And we think that we'll be able to achieve that with the operating plans we have. We have enough lead time on our continuous miner units at mine 7 for us to be able to do that. So that's about as much guidance as I feel comfortable giving you because I just don't know exactly how things will play out quarter-to-quarter.
Yes. Understood. That makes sense in terms of the unknowns here. So -- but just to clarify, so is it reasonable at this point to effectively just kind of spread it evenly over the remainder of the year and use that 4.9 million to 5.5 million range, again, if the strike were to continue for the year?
Yes, that's reasonable.
Okay. Okay. And then just one other quick question. The cash costs were, obviously, at least in my view, exceptionally good in the quarter. Was there anything extraordinary that suggests that we shouldn't assume a similar level of cash costs going forward? Obviously, the volumes are going to be lower, so we have to adjust for that. But if we just sort of gross that number up and then adjust for the lower volumes, is that still a reasonable kind of way to approach it?
David, it's Dale. Yes, I mean, we're really focused on keeping our costs low, and we obviously got a little more volume in the quarter. So there was nothing other than that significant. Look, for the rest of the year, we do expect our cash cost to be a little bit lower, but then again, we're going to incur some cost with the idle in the mine 4 and some other costs associated with the strike, negotiation fees around -- legal fees and stuff like that. So we're going to have some other higher costs. So while the cost per ton may be down, you may have some other cost that offset that. So we don't see any significant change because of those offsetting issues.
Okay. Sorry, so just to clarify, on a cash cost per ton basis even with the lower volumes, you think your cash cost per ton have kind of offsetting issues that will result in cash cost per ton being similar in the near quarters?
Well, if we sell what we have in inventory, right, which was produced at prior levels, right, prior levels of people working and everything. So those cash costs won't turn until after you bleed off all that inventory. Then after that, you would start to see the lower cash cost, right, on lower volumes. But again, like I say, in total, you'll some offsetting incremental costs associated with the strike that we wouldn't normally have.
[Operator Instructions] Next question comes from Lucas Pipes of B. Riley Securities.
My first question is on the sales commitments for 2021, the 4.9 million to 5.5 million tons. And I wondered if it's possible to give us a little bit more of a flavor for what the geographic mix is of those commitments. And would those be sold at the equivalent of the Australian benchmark, which obviously is still languishing due to the ban? Or would those also be commitments into the higher-priced Chinese market, for example? Or just off of higher U.S. East Coast index pricing? Would really appreciate your thoughts and comments on that.
The commitments are to our primary customers in Europe, South America and a few others into Asia, and those are based on the Australian low-vol price. But there are also opportunities and swapping opportunities and things that allow us to also participate, much as we did in the first quarter, in the Chinese market's CFR prices. And what we've seen is there's been kind of enough of that to offset some of the lower pricing and bring us back to kind of a normalized level. And I think that's what we'll see throughout the year is I expect it to get closer to traditional targets, which were [ 55 ] into Europe, [ 30 ] or so into South America and [ 15 ] or so into Asia. I expect this to move in that direction, but I don't expect us to be the whole way back into those numbers.
That's helpful. So for now, kind of modeling pricing near the benchmark, would that be -- very simplistically be the right way to think about it and with that Australian benchmark?
Yes.
And then I want to return to Dave's question on the cost side. So if we kind of think about, I think, 700,000 to 930,000 tons per quarter, that means your inventory -- like in the second quarter, you'd be essentially selling all out of inventory. So that would still be at, Dale, the lower kind of current costs, similar to Q1. Then should we be thinking about a step-up in costs in the -- back on a per ton basis kind of as you exhaust the inventory and, again, assuming the strike continues, of course? So kind of Q3 then, should that be a step-up on a cost per ton basis or not?
I think what -- hopefully, I'll be clear. But yes, in Q2, you would see a similar cost, if not just a little bit slightly higher. But after that, after you sell off the inventory, then what we're producing now would clearly be at a little bit lower cost per ton. But in your P&L, we will have some additional cost other than cost of sales, and that will be such as mine 4 idling cost and other costs, as I said, related to the strikes, such as legal fees around the negotiations and some other expenses that we incur there. So when -- I'm talking about total dollars. So while your cost per ton may be a little bit lower on just a pure cash cost of sales, we're going to have some other costs kind of offsetting that.
Got it. That's helpful. I appreciate that. May circle back with that later. But I want to ask one final question. Just your variable cost structure has been a true differentiator, and I would say really positioned you well during the pretty volatile met coal market over the past 5 years. Can you -- I know this is difficult, but -- given you're negotiating, but how important is that going forward to have a variable cost structure, including on the labor side? Thank you for any thoughts you can share.
Well, I think a huge part of that variability was around the rail contract and the variability for the royalty rates. In actuality, when we look at the labor variability, it has had, I would say, a very small impact over the last 5 years, primarily with things just like bonuses based on the benchmark pricing. So I think for the past 5 years, the -- that variability has had very little impact.
Yes. The bigger amount of cost are the transportation royalties. And as we've said in the past, that's about 1/3 of the total cash cost. So of that $79, 1/3 of that is just pure variability. And then the other piece of that is the mining cost, whatever it takes to get it out of the mine. And while there's some variability to that, it's a smaller piece of the total.
That's helpful. And in an environment like Q1, like we just had, on a kind of dollar per ton basis, what would be the labor variability tailwinds on the cost side for you guys, roughly?
The variability in the future quarters?
No, no. So when I look at -- Q1 was a terrific cost number that you just reported, so very, very good job there. And what I'm trying to get at is, in a quarter like Q1, where pricing is very low, and obviously, your costs were fantastic, how much of the lower cost was due to the variable cost structure on the labor side that had been part of the prior or current labor agreement?
Again, it's a small percentage of the total cost.
So even in an environment like we just had, it would still be a small percentage?
Right. Right.
[Operator Instructions] Our next question is from David Gagliano, a follow-up question, from BMO.
I just have a couple of quick ones. I was wondering if you could talk a little bit more about the demurrage charges in the first quarter and what those were related to and how they may transpire in the coming quarters. And then the second question, just regarding the strike. If you can just possibly give us a little color on what are the key issues here and are there negotiations still happening and kind of the status of the talks between the 2 sides at this point.
All right. David, this is Dale. I'll take the first one on demurrage. Demurrage was just a little bit higher in the first quarter. A couple of things. One, higher moisture content than normal because of the weather-related heavy rains in Alabama over the past few months in the normal rainy season here. And then with a higher proportion of sales going into China, there were some ash penalties because they have a very low ash requirement. So the penalties in demurrage were related to those primary 2 factors.
And on the contract negotiations, we are currently negotiating on a weekly basis with the UMWA. We had reached a tentative agreement with the international and it was voted down by the locals about a month ago. The issues are just about what's always the typical issues in a labor contract, it's days off, it's pay, it's benefits, just all the normal things.
Okay. Is there -- are there any sort of next steps that we should -- your votes or anything coming up that we should be thinking about?
No, nothing scheduled at this point.
The next question comes from Matt Farwell, ROTH Capital.
Just wondering if you could provide an estimate for what the idling costs for mine 4 might be, just so we can understand what the cash flow impacts are in 2021.
Yes. For mine 4, those are going to vary. Obviously, we've got some of your fixed costs like electricity, your property taxes, but we do have a very small crew that has to continue to [ fireballs the ] mine and those kind of things. So we're in the range of $2 million to $3 million a month to maintain the idling.
Okay. So it seems like the liquidity is well sufficient to handle the strike at least in the next 12 months. Is that a fair statement?
Yes, I think so. I think we've developed our continuity plans for the rest of this year with our customers. And those have several different alternatives as we go forward, and we'll adjust those as we go as we need to. But we do feel like our liquidity is sufficient, $272 million, $220 million of that is cash. And we don't have any near-term commitments for our debt maturities. We don't have any significant funding of pension liabilities or anything like that. So it's really just your normal expenses in the business. So given what we've outlined here with our commitments and how we're planning to meet those commitments, we feel very good that our liquidity is adequate to navigate through these times right now.
At this time, we have no further questions. Now I'd like to turn the call back over to Mr. Scheller for closing remarks.
That concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest in Warrior Met Coal.
Thank you. And that concludes today's presentation. You may now disconnect. Thank you for participating.