Warrior Met Coal, Inc. (HCC) Q4 2019 Earnings Call Transcript

Warrior Met Coal, Inc. (HCC 5.19%)
Q4 2019 Earnings Call
Feb 19, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal fourth-quarter and full-year 2019 financial results conference call. [Operator instructions] This call is being recorded and will be available for replay on the company's website.

Thank you. Before we begin, I've been asked to note that today's discussion 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 the 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.

Walt Scheller -- Chief Executive Officer

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our fourth-quarter and full-year 2019 results. After my remarks, Dale will review our results in additional detail and then you'll have the opportunity to ask questions. 2019 was another record-setting year for Warrior in operational performance.

Some of the highlights are as follows: Record annual sales volume of 8 million short tons; lowest quarterly cost and cash cost per ton in the last nine quarters; most annual cash cost per ton; best-ever annual production volume of 8.5 million short tons; record low safety invent rate while increasing production volume by 10% year over year. The Mine 7's production volume set in the best-ever record, breaking last year's previously achieved record. I'll provide more color on these record achievements in my commentary that follows. The company's fourth quarter played out as we expected and discussed on our third-quarter conference call, with the exception of higher inventories.

Though we achieved record sales and production levels for the full year of 2019, both sales and production volumes were lower in the fourth quarter compared to any other quarter during 2019. As we indicated previously, these lower volumes were impacted by soft market conditions, low pricing, more holidays during the quarter, additional days out of production to perform routine maintenance and the completion of one longwall move. While we elected to perform this additional routine maintenance and flex production volumes during these challenging market conditions, we were able to manage to control our cash cost of sales to less than $86 per short ton. The lowest quarterly amount in the last nine quarters.

The fourth quarter proved to be the most challenging quarter of 2019 for our markets. Bill producers continued to struggle with slim margins while constantly adjusting their production levels to match sales orders. As one would expect, these challenges extended to met coal pieces as well, to navigate through declining demand while also dealing with lower margins caused by a low pricing environment. All major indices for premium hard coking coals remain range bound at their lowest levels of the year, mainly due to stock soft steel demand, the uncertainty caused by the ongoing trade wars and the Chinese import restrictions on seaborne coals.

Despite a difficult fourth quarter, global pig iron production ended the year at 1.3 billion metric tons, equivalent to an increase of 2.3% compared to 2018. Our natural markets, Europe and South America, experienced year-over-year pig iron production declines of 4.2% and 8.7%, respectively. Warrior was not immune to these challenges as we saw some of our customer request adjustments to vessel shipments in order to minimize their on-site inventory levels. In addition, soft market opportunities were few and far between, and when available, we're normally met with a larger contingent of suppliers competing for these opportunities.

As a result of the difficult circumstances, a handful of U.S. met coal producers responded by shutting down or temporarily idling over 7 million metric tons of annualized production. Warrior was proud to have increased our year-over-year sales volumes in such an environment. Production's volume in the fourth quarter was 1.8 million short tons, compared to 1.9 million short tons produced in the same quarter of 2018, a decrease of 4%.

We successfully completed one longwall move in the fourth quarter, compared to one longwall move in the fourth quarter of 2018. I mentioned earlier the lower production volumes were driven primarily by our election to perform additional maintenance at the mines during the fourth quarter, as well as the softer market conditions that I described earlier. The company's strong performance in the fourth quarter propelled full-year production volume to a record high of 8.5 million short tons, which exceeded our guidance target. This record high represents over 700,000 more short tons in 2019 or a 10% increase over 2018.

The capital investment into the mine over the last three years has paid off nicely, and the operations ran extremely well with minimal disruptions during the year. Mine 7 reached a new milestone in its history with a record-high production of 6.2 million short tons in 2019, which was the best-ever year it had since it began production in 1970s. This record year was on top of last year's record-breaking year. Our operational success and record-high production volumes are a credit to the hard work and dedication of our employees, and I thank them for all they've been doing to help us perform as strongly as we did again in 2019.

Our goal for the sake of our people is that everyone who works at Warrior come to work every day and returns home every day without an accident or safety incident. I'm proud to announce that we set these record-high production volumes while also setting record low safety incident rate at the mines in 2019. Warrior safety rates have improved each year since 2016. We bid the company's safety incident rate is among the lowest in the U.S.

for underground mines and is 48% better than the U.S. industry rate. Our top priority remains working safely as that is the first and most important step to working efficiently and ultimately, achieving success in the marketplace. Sales volumes in the fourth quarter were 1.7 million short tons, compared to 2 million short tons in the same quarter 2018, a decrease of 16%.

Demand from our customers continued to be weak during the fourth quarter, especially in South America. The sales by geography in the quarter were 53% into Europe, 19% in the South America and 28% into Asia. The mix shift from South America and Asia was primarily driven by more spot market opportunities in Asia and less demand from South America largely due to extended maintenance at customers, as well as softer market conditions. Sales volumes for the full year of 2019 reached a record high of 8 million short tons, which exceeded our guidance targets and compared to 7.6 million short tons in 2018, an increase of over 300,000 short tons of 4%.

Our sales by geography for the year was 56% in the Europe, 22% in the South America, and 22% in the Asia. We expect that Warrior will continue to increase its exposure to select Asian steel markets with producers to value our premium coals. In the fourth quarter, coal inventories increased 148,000 short tons to 749,000 short tons at the end of the year, primarily due to soft market conditions and production volumes exceeding sales volumes during the fourth quarter. We believe the company is well-positioned heading into 2020 to capture better market pricing than we saw in the fourth quarter of 2019.

Our gross price realization for the fourth quarter was 97% of the Platts Premium Low Vol FOB Australian Index price. Index prices remained flat during the quarter and averaged $140 per metric ton, while reaching a three-year low in November of $132 per metric ton. The company spent $34 million on capital expenditures and mine development costs during the fourth quarter this year, compared to $26 million last year. For the full-year 2019, capital spending was $107 million, compared to $102 million for the previous year.

Of the $107 million, we spent $89 million on sustaining capital and another $18 million on discretionary capital, primarily on the 4 North shaft construction. In addition, we spent $23 million on 4 North mine development in 2019, compared to $9 million in 2018. These development costs are related to a continuous monitor unit and support costs that were incurred to develop longwall panels at 4 North. We expect to be longwall mining in the 4 North area in approximately four to five years.

Over the last three years, we've demonstrated a commitment to reinvesting significant amounts of capital into the business. More specifically, we've spent over $300 million to strengthen our operational platform by driving production efficiencies and higher equipment utilization. In addition, these higher than normal sustained capital investments during high price environments provide the company with better flexibility to reduce our capital spending and lower price environments. As I will discuss later, we expect to continue that investment approach again in 2020, subject to favorable market conditions.

Warrior's record performance continues to demonstrate the unique value of our highly focused business strategy as a premium pure-play met coal producer. Our goal is to operate profitably and maximize cash-flow generation in any pricing environment, not just in the favorable conditions we've experienced over the past few years. We've invested in the business where appropriate to support this strategy we've also continued to reward our stockholders as conditions warrant. We performed mostly as expected in the fourth quarter, which led to a regular in production and sales volumes for 2019.

These operational records also drove strong financial performance. We're proud to announce that for the full-year 2019, we achieved $1.3 billion in revenues, $479 million of adjusted EBITDA, and free cash flow of $402 million. In addition, we continued our commitment of returning capital to stockholders, which totaled $253 million of cash dividends and stock repurchases over the course of 2019. A strong fourth-quarter and full-year 2019 results continue to demonstrate the key strengths of our business model: one, focus on the highest quality met coal products sold into the seaborne market to some of the largest global steel producers; two, realizing industry-leading price realizations for our high quality products; three, a low and variable cost structure that generates some of the highest operating margins and free cash flow in the industry; and four, a highly talented workforce through our safety, sales, production volume and efficiencies in the business.

I'm pleased to note that Warrior continues to maintain a strong sustainability record and is committed to further improvement. Earlier this month, the company released its inaugural corporate environmental, social and governance sustainability report that can be found on our website. The report was prepared in accordance with the global reporting initiative standards and highlights the company's strong environmental record. We're committed to supply in the global steel industry as a responsible corporate system, focusing not just on what we do but how we do it.

That means collectively lowering energy use, reducing greenhouse gas emissions, ensuring land reclamation and maintaining a leading safety record. Lastly, before I hand things over to Dale, as previously stated on our earnings calls, the company spent a significant amount of time in 2019 completing its work on the Blue Creek project feasibility study. The additional core drilling permits for floor restorage and other key project analysis to be in a position to make a go/no-go decision regarding the development of the Blue Creek mine in the first-quarter 2020. We're extremely pleased to announce today that the company's board of directors has approved the company's development of the transformational Blue Creek growth project beginning in 2020.

I'll go in greater detail in a few moments. I'll now ask Dale to address our fourth-quarter and full-year results in greater detail.

Dale Boyles -- Chief Financial Officer

Thanks, Walt. As Walt commented on earlier, the company's fourth quarter played out mostly as expected and discussed on our third-quarter conference call. Both sales and production volumes are lower in the fourth quarter compared to any other quarter in 2019. Another key theme in the fourth quarter, with the soft market conditions, which led to low market pricing and significantly impacted our quarterly results, especially compared to the fourth quarter of 2018 when market pricing was very strong.

2019 was a record year in operational performance that generate strong financial results for the company. The company met or exceeded most of its guidance targets. However, the full year of 2019 was a story of two halves, the first half and the second half. The Platts Low Vol Index price began 2019 at $220 per metric ton, and averaged $205 per ton in the first half of 2019, on the back of strong demand for met coal by global steel producers.

Warrior recorded 75% of its full-year adjusted EBITDA in the first half of 2019, and 70% of its free cash flow as a result of high met coal prices. As steel production and demand softened outside of Asia during the second half of 2019, then steel margins continue to get pressure from high iron ore product input prices despite falling met coal prices. Price and volatility accelerated in the second half of 2019 as the trade and tariff war with China continued, and China began to impose increasingly tighter port restrictions on coal imports during the second half of the year. The third quarter began with the Platts Low Vol Index price at $194 per ton and declined $54 or 28% to the fourth-quarter index price $140 per ton.

For the full year, the Platt Low Vol Index price decreased $81 per ton or 37%. For the fourth quarter of 2019, net income on a GAAP basis was $21 million or $0.41 per diluted share, compared to net income of $374 million or $7.11 and per diluted share in the fourth quarter of 2018. Excluding the noncash adjustment to our asset retirement obligations due to a change in reclamation estimates, non-GAAP adjusted net income for the fourth quarter of 2019 was $12 million or $0.23 per diluted share, compared to $2.38 per diluted share in the fourth quarter of 2018. For the full-year 2019, net income on a GAAP basis was $302 million or $5.86 per diluted share, compared to net income of $697 million, or $13.17 per diluted share in 2018.

Excluding the noncash asset retirement obligation adjustment, loss on early extension of debt and other nonrecurring income non-GAAP adjusted net income for 2019 was $284 million or $5.52 per diluted share, compared to $459 million or $8.67 per diluted share in 2018. Adjusted EBITDA was $39 million in the fourth quarter as compared to adjusted EBITDA of $162 million in the same period of 2018, a decrease of 76%. The company's adjusted EBITDA margin was 19% in the fourth quarter, compared to 45% in the fourth quarter of 2018. The quarterly decrease was primarily driven by a decrease in average net selling prices of 33% and a 16% decrease in sales volumes, partially offset by lower production costs.

For the full-year 2019, Warrior recorded adjusted EBITDA of $479 million, compared to $601 million in 2018, a decrease of 20%. The yearly decrease was primarily driven by a 12% decrease in average net selling prices, partially offset by a 4% increase in sales volumes and lower mining production cost. Adjusted EBITDA margin was 38% in 2019, compared to 44% in 2018. Total revenues were $205 million in the fourth quarter of 2019, compared to $360 million in the same period last year.

This decrease was primarily due to a 33% decrease in average net selling prices and a 16% decrease in sales volumes. For the full-year 2019, total revenues were $1.3 billion on record sales volume of 8 million short tons, compared to $1.4 billion in 2018 on sales volume of 7.6 million short tons. Total revenues in 2019 decreased $110 million or 8% over 2018, primarily due to a 12% decrease in average net selling prices, partly offset by a 4% increase in sales volumes. The average net selling price for short term decreased 33% in the fourth quarter compared to the same period in 2018.

The Platts Low Vol Index price remained flat during the fourth quarter beginning and hitting at $140 per metric ton, while hitting a three-year low of $132 per metric ton in November. Our gross price realization was 97% in the fourth quarter. The wedge and other charges reduced our gross price realization to a net average selling price of $120 per short ton in the fourth quarter of 2019, compared to $178 in the same period last year. For the full-year 2019, average net selling prices decreased 12% to $155 per short ton.

Cash cost of sales was $142 million or 72% of mining revenues in the fourth quarter of 2019, compared to $183 million or 52% mining revenues in the fourth quarter of 2018. Cash cost of sales per short ton, FOB port, was approximately $86 in the fourth quarter compared to $93 in the same period of 2018. The primary drivers of this decrease were lower transportation and royalty costs, which are variable and price-sensitive to met coal pricing. These costs were lower on 15% lower sales volumes and a 33% lower average net selling prices.

As Walt indicated earlier, we flexed our production volumes down in the fourth quarter, while managing our cash cost to the lowest quarterly cost per ton amount since the second quarter of 2017 or nine quarters ago. Cash cost of sales short term, FOB port, was approximately $90 for the entire year of 2019 and approximately $4 per short ton lower than 2018. I this was a record-low amount for Warrior in the last three years. These strong results were in the lower end of our guidance range for the year.

The decrease in the cash cost per short ton is primarily due to 12% lower average net selling prices, partially offset by a 4% increase in sales volumes and lower mining production costs for the full year of 2019. SG&A expenses were about $8 million or 4% of total revenues in the fourth quarter of 2019 and approximately the same dollar amount in the same period last year. SG&A expenses were $37 million for the full-year 2019, flat compared to 2018. Depreciation and depletion expenses for the fourth quarter of 2019 were $24 million or 12% of total revenues, compared to $25 million in 2018.

For the full-year 2019, these expenses were $97 million and approximately, the same amount in 2018. The full-year 2018 expense included $4 million of accelerated depreciation on equipment beyond its economic repair. Net interest expense was about $7 million in the fourth quarter and included interest on our outstanding debt plus amortization of our debt issuance costs associated with credit facilities, offset by interest income. For the full-year 2019, net interest expense was $29 million or $8 million lower than 2018 and slightly better than our guidance for the full-year 2019.

The decrease in the fourth-quarter net interest expense and full-year 2019 amount over the same periods in 2018 were primarily due to the early retirement of $132 million of our debt in the first quarter of 2019. The company recorded a noncash income tax benefit of $3 million during the fourth quarter of 2019, reflecting the utilization of the company's NOL and a benefit of $7 million as a result of recognizing additional alternative minimum tax credits, general business credits, and net operating losses available to the company in connection with the settlement agreement between Walter Energy and the IRS. For the full-year 2019, the company recorded noncash income tax expense of $65 million or an effective income tax rate of 17.8%, which is primarily related to the utilization of our NOLs. In the fourth quarter of 2018, the company recorded a noncash income tax benefit of $226 million primarily reflecting the release of the valuation allowance on deferred tax assets associated with the company's net operating losses.

We paid no cash taxes in 2019 or 2018 and as indicated in our guidance and continue to expect the utilization of our NOLs will reduce our federal and state income tax liability to zero until the NOLs are fully utilized or expire. Turning to cash flow, during the fourth quarter, the company used $9 million of free cash flow, which was a result of cash flows provided by operating activities of $25 million less cash used for capital expenditures and mine development of $34 million. Free cash flow would have been $25 million higher and positive for the fourth quarter had one customer's accounts receivable balance been paid on the due date by year-end. This quarterly result compared to $105 million of free cash flow in the fourth quarter of 2018.

This lower result was primarily due to lower net income in the fourth quarter, plus an increase in working capital of $27 million from the third quarter of 2019. This working capital increase was primarily due to lower pricing and higher inventories. Our cash flows from operating activities for the full-year 2019 were $533 million and were $27 million or 5% lower than 2018. These lower results were driven by lower net income in 2019 compared to 2018 and partially offset by a decrease in working capital of $30 million.

The company generated free cash flow of $402 million in 2019, a decrease of $56 million or 12% over 2018. Free cash flow conversion was 84% this year, compared to 76% last year. Cash used in investing activities for the purchase of capital expenditures and mine development costs was $34 million during the fourth quarter and totaled $131 million for the year. Cash flows used in financing equities were $7 million in the fourth quarter of 2019 and consisted of the payment of the quarterly dividend of $3 million plus $4 million of capital lease payments.

For the full year of 2019, cash flows used in financing activities were $412 million and consisted primarily of repayments of debt of $132 million, capital lease payments of $17 million, distributions of dividends of $240 million and stock repurchases of $13 million. The company exhausted its first stock repurchase plan in early 2019 and announced a new $70 million stock repurchase plan beginning in 2019. Under the new plan, the company has repurchased 500,000 shares of common stock, totaling $11 million. Total cash distributed to stockholders in 2019 through dividends and stock repurchases totaled $253 million.

Since the company's IPO in April of 2017, the company has distributed approximately $1.3 billion to stockholders consisting of dividends and stock repurchases. The company's balance sheet continues to be strong with a leverage ratio of 0.38 times adjusted EBITDA plus ample liquidity. Our total available liquidity at the end of the year was $310 million, consisting of cash and cash equivalents of $194 million and $116 million available under our ABL facility, net of outstanding letters of credit of approximately $9 million. In summary, we faced the fourth quarter as expected, and that contribute to our record production and sales volumes for the full year and another strong year of financial performance.

Now turning to our outlook and guidance for 2020, as a result of our strong production in 2019, we expect to complete four longwall moves in 2020, compared to the five moves we had in 2019. Our guidance for the full-year 2020 is subject to many risks that may impact performance, such as market conditions in the deal and met coal industries and overall global economic conditions, all as more fully described under our forward-looking statements in our SEC filings and is as follows: oil sales of 7.3 million to 7.8 million short tons, oil production of 7.0 million to 7.5 million short tons, back half of sales at FOB port of $88 to $93 per short ton, capital expenditures of $125 million to $145 million, mine development cost of $10 million to $14 million, SG&A expenses of $32 million to $36 million, interest expense net of $25 million to $27 million, noncash deferred tax expense of 18% to 20%, and a cash tax rate of zero. We're approaching 2020 with continued optimism, although with a cautious and conservative approach until further market economic information is available. Our estimates reflect some conservatism because of the inherent risk of underground mining.

Several factors may affect our outlook, including the Platts Premium Low Vol Pricing Index, the number of planned long-wall moves and the timing of those moves between quarters. Before I turn it back over to Walt, I want to comment on our other announcement today regarding the development of our Blue Creek project. We are very excited about this transformational growth project. After completing our project work and analyses in 2019, the net present value, at assumed net coal price of $150 per metric ton, which is approximately today's market price, significantly increased over our initial estimates primarily due to higher expected production volumes and lower estimated production costs.

We project that the net present value of this transformational growth project is over $1 billion, and you can do the math for yourself on what that could mean on a per-share basis. We expect an after-tax internal rate of return of nearly 30% and a short payback of two years from the initial longwall production. Order a strong free cash flow generation, current liquidity, as well as the ability to finance $110 million to $120 million of capital expenditures through equipment leases, allows water to be opportunistic as it evaluates funding options for Blue Creek. These strengths, combined with a strong balance sheet, provides a comp significant flexibility in how we choose to finance Blue Creek development.

I'll now turn it back to Water's final comments.

Walt Scheller -- Chief Executive Officer

Thanks, Dale. Before we move on to Q&A, I'd like to make a few more comments about the year we just completed and our Blue Creek announcement today. We're very pleased with the company's record operational performance and strong financial results in 2019, and we appreciate the support and engagement that we have received from our stockholders and, of course, our employees. Global steel production finished 2019 in an upward trend but almost entirely on the strength of Chinese production, while South America and Europe continued producing steel at reduced levels.

Notwithstanding the global uncertainty posed by the coronavirus outbreak, Warrior has observed signs of improvement across all of our geographic markets as the year starts. Indications are that most steel producers have stopped reducing operating rates, while several of our customers have raised their production or in the process of planning for incremental increases in the current and upcoming quarters. As a result, we're expecting our sales orders to return to expected levels sometime in the first half of 2020. We're also expecting spot opportunities to increase over the same period.

Despite these improvements, we prefer to remain cautious and confirm that recent developments in steel pricing and steel demand can be sustained, especially due to the effects of short-term uncertainty lingering in our markets. We recognize that certain macroeconomic factors, such as a potential slowdown in regional GDP growth rates and the trade and tariff war with China, the coronavirus outbreak, as well as the reduction in steel demand Europe, have the potential to create a soft pricing environment for hard coking coal. The coronavirus outbreak to be the largest threat to seaborne met coal prices until we can get more clarity on containment of the virus from China and the businesses get back to operating as usual. However, barring any unforeseen material events, we believe current fundamentals should remain relatively healthy for our markets.

We expect sales and production volumes in the first quarter of 2020 to be more like the fourth quarter of 2019, in which inventory levels could rise even further if macroeconomic factors continue to pressure steel demand. In light of these expected market conditions, we're establishing our 2020 guidance targets with cautious optimism. As I've said on previous calls, we run the business as if the next pricing downturn and geological issue are just around the corner, with conservative targets and flexible operations that allow us to adjust to the market environment as it changes throughout the year. We expect to update our 2020 guidance during the year as necessary to adapt to changing market conditions and changes in the business.

Lastly, I want to provide some additional color on our announcement to develop the Blue Creek project. The new single longwall mine at Blue Creek is expected to produce an average of 4.3 million short tons per year of premium, high-volume met coal for the first 10 years of production. Once we've developed Blue Creek, we expect that this new mine could result in a 54% growth in our annual production capacity, that will total, nearly, 12.5 million short tons per year. We believe that premium high-vol A coals will become increasingly scarce, driven by a decline in supply and a lack of significant new project development, which should support strong pricing fundamentals in the future.

Another attractive feature of this new mine that we expect production costs should be in the first quartile of the U.S. and global seaborne cost curves. We believe the combination of these factors will generate some of the highest met coal margins in the U.S. The company will begin developing the mine this year and expect to spend approximately $25 million in 2020.

With that, we'd like to open the call for questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question will come from Daniel Scott with Clarksons. Please go ahead.

Daniel Scott -- Clarksons Platou Securities -- Analyst

Thanks. Congratulations, guys. Good quarter in a tough environment and finally an exciting news on the mine. I've noticed, and correct me if I'm wrong, that the estimated cost of Blue Creek, $550 million to $600 million, I think that's the same now that you had last time that the budget for it a few years ago.

Is there anything -- any puts or takes that have changed the profile, or did just nothing really move?

Walt Scheller -- Chief Executive Officer

This is Walt. Thank you. Yes, things change around a little bit, but all in all, it's kind of a wash. So we come back to about the same number, just a different way of getting there.

Daniel Scott -- Clarksons Platou Securities -- Analyst

OK. What really, I guess, jump at is clearly that cost structure being significantly lower. Can you talk about what it is about that mine, in particular, other than it's just brand-new, that really pushes the cost down that much?

Walt Scheller -- Chief Executive Officer

Well, part of it is the fact that it's brand-new. The other part is, as we get more exploration drilling, the coal seam thickness through at least the first 10 years is a little thicker than we had modeled. And that's why we're seeing the increased volume, which will drive the cost.

Daniel Scott -- Clarksons Platou Securities -- Analyst

OK. That makes sense. And then just one more. I know having you on the road that you talked about being able to sequence the construction of this mine.

It is a fairly large number. Even over five years, maybe you could just kind of comment on that at what point, if the market stayed soft, you could pause.

Walt Scheller -- Chief Executive Officer

Right now, what we're starting is the slope for the mine, and it really takes -- I think it's about three years before you get to the bottom of the slope. And at that point, that is where you would begin the continuous miners development. And that's really an obvious breakpoint is, once you start that slope development, you're going to want to complete it. So the purchase of that equipment and the development of the underground mine would be a clear breakpoint.

Also, you have the development of the preparation plants and a few things like that that have very well-defined timing to get those constructed, and you're going to base that timing up what you see as market and whether or not you have moved forward on some of the other things. So it's those types of things that, I think, made clear breakpoints in the development.

Daniel Scott -- Clarksons Platou Securities -- Analyst

So it's fair to say that probably year 4, the shield's in the longwall, that the max spending here in the first three are much more modest?

Walt Scheller -- Chief Executive Officer

That's probably not inaccurate.

Dale Boyles -- Chief Financial Officer

Yes. Dan, in the slide presentation that we did on our website, we've kind of laid out the spending by year. Really, your third and fourth years are kind of around 20%, 25% in midyear, so the bulk of the spending is pretty much for the last three years.

Daniel Scott -- Clarksons Platou Securities -- Analyst

That's awesome. Great. Thanks, guys.

Dale Boyles -- Chief Financial Officer

Thank you.

Operator

The next question will be from David Gagliano with BMO. Please go ahead.

David Gagliano -- BMO Capital Markets -- Analyst

Great. Thanks for taking my questions. I think you may have just touched on the question that I had, but based on some rough math, it looks like you could probably fund most of the Blue Creek development on an annual basis with internal cash flows, assuming kind of a 150 met environment or better. So two questions, actually.

That seems relatively accurate – that does seem accurate to you, not relatively. That does seem accurate to you, number one. And number two, so why and what kind of external funding options are you guys considering?

Dale Boyles -- Chief Financial Officer

Thanks, David. I think we have a lot of flexibility here. And one of the things that we did point out in our disclosures is there's a large amount of equipment that you got to purchase for this mind as well that we could look at leasing. So when you think about cash flows, since the IPO, just in two and a half years, we generate over $1 billion of free cash flow.

So if you look forward in a pricing environment of, call it, 150, we're going to generate in excess of $1.2 billion in operating cash flows. And let's just say capex, you spend $100 million a year for five years, which I think is on the high side, you still have more than $100 million of cushion even if you spend the max amount of capex here. So I feel very confident that -- look, this could be done on free cash flow if we want, but I think we do have other options at our disposal, and we plan to take advantage of any market opportunities that may come to us. So we're going to be flexible on how we look at financing the whole project.

David Gagliano -- BMO Capital Markets -- Analyst

OK. And then just related question. Obviously, historically, there's been some very chunky special dividends that were paid out. Can you comment on expectations -- or not expectations, essentially, but thoughts moving forward on the potential for additional special dividends during this period of high capex?

Dale Boyles -- Chief Financial Officer

Well, like in the past, we really have not changed our capital allocation policy with the announcement of this project. We've always said to the extent we determine -- the board determines that there is excess cash flows, we will return that to shareholders in various forms. And we've done that and shown that throughout our history so far. Now most of those big special dividends have occurred in very, very high price environments, so if you're going to be in a 150 environment, that's substantially different than $200.

So no, we tend, and we're still committed to returning capital to shareholders, but we're going to have to balance the two, just depending upon price environment during this five-year construction period.

David Gagliano -- BMO Capital Markets -- Analyst

That's helpful. Thanks.

Operator

The next question is from Curt Woodworth with Credit Suisse. Please go ahead.

Curt Woodworth -- Credit Suisse -- Analyst

Yes. Thanks. Yeah. Hey, Walt and Dale, I just wanted to say congratulations on a really remarkable sort of operational turnaround you guys have achieved at this asset.

I think a lot of us remember back in the Jim Walter days, some of the variability in the mine, and it's pretty amazing what you guys have accomplished. First question is just with regard to or calculations for NAV for Blue Creek. Are you assuming that the high-vol A production is priced at parity with low vol and then on the cost performance being so much lower? Is that a fully loaded number at the port? Because I was of the view that maybe logistics could be a little bit higher. So that's my first question.

Walt Scheller -- Chief Executive Officer

Yeah. I guess the answer to your last question first. I mean, that all-in cash cost is in FBO port. It's going to be very low cost on mining production side, and then the transportation should be similar to the rates we have today.

And sorry, your first part of that question was...

Curt Woodworth -- Credit Suisse -- Analyst

The pricing assumptions in terms of the relative discount.

Walt Scheller -- Chief Executive Officer

Well, the way we laid it out, Curt, here in all of our metrics is just saying, look, if prices are 150 for high-vol A, right? You're going to have some variability. And it's a little bit hard to predict what those differences are going to be, even though we've seen historical trends recently be near the low vol index price, so we didn't want to assume that. We just did more around -- OK, if you're looking at an assumed high-vol A price, 150, then this is the amount of the returns and the payback.

Curt Woodworth -- Credit Suisse -- Analyst

Great. And then I guess when you look at this project and the NAV that you're running at, I think it's a very conservative 150 number. It's equivalent to the entire market cap of the company. I don't think I've ever seen like a single project where you could correlate that to the value of the entire market cap.

In an environment, if the equity market seems to almost penalize you for this, would you evaluate strategic options or look at monetizing part of this project to crystallize that value?

Dale Boyles -- Chief Financial Officer

Well, it's hard to imagine someone is going to argue with a 30% IRR. If you have something better, please call me. You're talking about EBITDA margins greater than 50% payback of two years. If you've got a better project, something quicker, please give me a call.

It's just an incredible project, one high-quality product that is well desired by our customers already, low cost, very, very low cost. As you can see in the materials, we think on a combined basis with the existing business that will take us well into the first quartile of the cost curve and what better returns can you get in that in today's environment.

Curt Woodworth -- Credit Suisse -- Analyst

No, I agree. I guess the question is if the equity market tends to disagree, one way to solve for that would be to sell an interest in the project. And we've kind of seen it in copper, where strategic buyers tend to award maybe better value. So I guess the question is, are you contemplating at all de-risking the project or trying to monetize the project?

Dale Boyles -- Chief Financial Officer

Well, again, that would say that you're projecting that we do not have a proven track record on execution risk. I think over the last three years, since 2016, as you lead off here, we've proven, we've demonstrated that we can grow this business. We manage risk, and we believe we can do this, look at the cash flow generation over the last few years, the strength of our balance sheet, we feel highly confident that we can do this on our own without a partner. And I think the results are there, as well as just looking at, as I mentioned earlier, the organic cash flows that we can generate to do this on our own.

So we're very confident in this project.

Curt Woodworth -- Credit Suisse -- Analyst

Makes sense. Thanks very much.

Operator

The next question comes from Lucas Pipes with B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

Good afternoon, everybody, and I want to echo some of the earlier congratulations on truly outstanding operational performance since you've emerged from new restructuring. I want to piggyback on some of Curt's questions. Specifically, if you think about kind of the cost, the capital cost for Blue Creek relative to the market cap versus the alternative of buying back your shares, how did you evaluate that opportunity cost? Would appreciate your thoughts on that. Thank you.

Dale Boyles -- Chief Financial Officer

Well, just buying back shares in general, well, I will say that that doesn't seem to work too well recently in this sector. As just looking across the sector, the publicly traded coal companies, a lot of money has been spent on buybacks, and I don't think the results show that that's worked very well. And I think it's difficult in this sector to say that that's an absolute these days. So as we've done in the past, we've tried to use every tool in our tool belt with special dividend, quarterly dividend, buybacks.

And we're going to evaluate those with funding this project. But as you can see in all the metrics, the growth, the size of this opportunity is enormous, so to say, a buyback is better. It's going to have to have an incredible return to it.

Lucas Pipes -- B. Riley FBR -- Analyst

OK. And then just two more clarification questions. First, the $65 to $75 cost guidance, is that per short ton at the port?

Dale Boyles -- Chief Financial Officer

Yes. At the port, FOB port.

Lucas Pipes -- B. Riley FBR -- Analyst

Great. Very helpful. And then back to the quality side. So I think of Mine No.

7 is kind of premium low vol of the equivalent, Mine No. 4 more into a mid-vol and then Shoal Creek in the same vicinity, where it's kind of a high-vol A. Would you be able to kind of put Blue Creek on that spectrum, where it would fit in from a quality standpoint?

Walt Scheller -- Chief Executive Officer

Very similar to Shoal Creek. It's a very similar quality product that Shoal Creek offer has. So it's a low-sulfur, high-CSR, high-vol A.

Lucas Pipes -- B. Riley FBR -- Analyst

Very helpful. Well, those are my questions, and I appreciate it. And best of luck.

Walt Scheller -- Chief Executive Officer

Thank you, Lucas.

Operator

Our next question is from Alex Hacking with Citi. Please go ahead.

Alex Hacking -- Citi -- Analyst

Hi, good evening. I also have a few questions. I guess first, do you need any additional port capacity at Mobile? Because you talk about the expansion there in the slides. Or is the port -- is current capacity sufficient to handle additional volume?

Walt Scheller -- Chief Executive Officer

The port is doing some upgrades over the next several years. One of them is deepening and widening the channel, which will allow bigger vessels to command to operate in the area. And we believe the port capacity will not be an issue once the project is bought online.

Alex Hacking -- Citi -- Analyst

OK. I guess my question is do you need that project -- that port project to go ahead or the port could handle the tons today as it is?

Walt Scheller -- Chief Executive Officer

As is, they might need to tweak a few things but not a lot. I think their designed capacity is within the range of what we intend to produce. But I think they'd have to tweak a few things, nothing major.

Alex Hacking -- Citi -- Analyst

So I'm looking at your Slide 13 here from the Blue Creek presentation. You talked about the large majority of high-vol A demand within your target markets. If I add all that up, it looks like a bit less than 30 million tons of high-vol A demand around the world. And then above that, you've got a bunch of projects that add up to 10 million tons, right, including Blue Creek.

It seems like a lot of supply for that market size, or am I like misinterpreting like the slide, I guess?

Dale Boyles -- Chief Financial Officer

Well, we just highlighted the biggest markets. We didn't identify the entire marketplace demand for the high-vol A.

Alex Hacking -- Citi -- Analyst

So you're confident that you can -- that you're going to secure uptick?

Dale Boyles -- Chief Financial Officer

Oh, yes. We're confident that the large majority of this will go into our existing markets. Probably, we do think that with the demand that's going to grow out of India. And as we all know, have talked to in the past, India has been talking about the growth for quite some time, but we do believe we've seen that recently, and that opportunity for us as a market is something we can -- will happen over the next several years.

Alex Hacking -- Citi -- Analyst

OK. And then just on to the 2020 guidance. Maybe I missed this in the comments at the beginning because I was just a minute or two late. Obviously, your sales guidance for 2020 is lower than 2019.

How much of that is market-driven and could be adjusted higher if we see a pickup in coal demand? And then how much of that is production and operationally driven?

Walt Scheller -- Chief Executive Officer

Well, as I stated, we looked at the first quarter and projected the first quarter to be similar to Q4 of last year, in which we could not have our foot fully on the accelerator pushing the mines as hard as we could. And if we would see the market justify pushing these mines at full speed, we would do that, so I think there is upside from there based on what the market conditions are. As an example, last year through the first nine months of the year, we ran just about every Saturday. So we pushed these mines pretty hard.

And in the fourth quarter, we slowed down a bit. And in the first quarter with inventory levels, we're maintaining that pace.

Alex Hacking -- Citi -- Analyst

OK. Thank you very much.

Walt Scheller -- Chief Executive Officer

Thank you.

Operator

The next question is from Chris Terry with Deutsche Bank. Please go ahead.

Chris Terry -- Deutsche Bank -- Analyst

Hi, Walter, and thanks for taking my questions. First question just around Blue Creek. And just relating it to the update, you put out the other day around the net operating loss carryforwards. Do you assume -- what are the tax rates do you assume within the project economics to get to NPV? And the second part of that is you're saying no cash tax, obviously, in 2020.

How long do you think that situation lasts for on your math?

Dale Boyles -- Chief Financial Officer

Yes. Chris, as far as the NOL, no. In these particular metrics, we have not assumed any use of the NOLs in the project economics. What we have assumed is a 14% tax rate.

We believe that will be approximately the rate in that project because of the incentives that we will be able to get related to that project, so I think our mix there was a little over 17%. So it will drop down more than that 14% to 15% range once this project is up running full production. So if you look at the expected life of our NOLs, as you know, in these last two or three years, price has been growing really high, so the life of the NOL can certainly come down. But if you assume a 150 price over the next several years, we probably got six to eight years of NOLs still available to offset the cash taxes.

So that kind of coincides with the timing of the project.

Chris Terry -- Deutsche Bank -- Analyst

OK. So it is possible, depending on the pricing, whether that may overlap into Blue Creek and, therefore, improve the economics beyond that 30%, which is obviously at 150 met coal. But if you believe that pricing, you could get upside to that?

Dale Boyles -- Chief Financial Officer

That's correct.

Chris Terry -- Deutsche Bank -- Analyst

OK. And I just wondered if you could comment just a little bit more on that announcement from the other day, I think Feb. 14, the loss carryforward announcement.

Dale Boyles -- Chief Financial Officer

Yes. What we did is adopted an NOL rights plan. Just another layer of protection for our NOLs based on the cumulative ownership change. The tax rules around Section 382 are very complex.

And as you may remember, we have this charter restriction in place. It was three years from the IPO, and it expires in April. So last year, we put it up for a vote to extend it through April of 2023, and there were a few shareholders that voted against that proposal. And under Delaware law, they cannot be held to that chart restriction.

So in order to kind of plug that hole, you had to put in place this NOL rights plan to just prevent that, so really just another layer of protection. It has sunset provisions. It's not a poison pill. It's just to protect those NOLS, just another layer of protection.

Chris Terry -- Deutsche Bank -- Analyst

OK. And the last one for me. Just coming back to the project and how the market is interpreting. Just interested in your feedback.

Is most skepticism around the met coal market itself and, therefore, the market not wanting you to add additional tons and rather to keep the market tight? Or is the skepticism around the project itself?

Dale Boyles -- Chief Financial Officer

Well, I will start, and I'll let Walt add some comments here. I think there's always a lot of risk around large projects like this that take time, right? You have execution risk. You have price risk. You have a lot of different risks.

And $550 million to $600 million is a lot of money. And over five years, projects have cost creep, things go wrong. I would just say, look back at our history. Since the first of 2017, I think what you will see is we really have a good, strong, and proven track record.

We went from just under 3 million tons produced to now 8.5 tons produced this past year. We've grown that capacity each and every year. We continue to do things to keep our costs low and increase the production. As we noted in our comments, this year was our lowest annual cost per ton amount in three years.

The fourth quarter in itself demonstrates how we can control our cost by flexing production. That was our lowest quarterly cash cost in nine quarters. All that to me should demonstrate that, really, we can handle this. We know what we're doing.

As I said earlier about the cash flows, we feel very comfortable that we can do this without anyone else. And we think this is just an incredible opportunity for this company and that we can manage those risks sufficiently and deliver.

Walt Scheller -- Chief Executive Officer

Yes, I'll just echo what Dale said. I think it's purely execution risk and getting through the project and coming out the other end of it, ready to operate.

Chris Terry -- Deutsche Bank -- Analyst

Thanks so much, guys. That's it for me.

Walt Scheller -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Next question comes from Matthew Fields with Bank of America Merrill Lynch. Please go ahead.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, guys. I wanted to focus on the capex and the funding of it for Blue Creek. Appreciate that you sort of put out that kind of guidance about equipment financing for a little over $100 million. But with your bonds trading well above par and sort of callable at the end of this year, what's the calculus on doing a kind of terming out that and increasing the size of that issue to sort of help prefund part of Blue Creek and kind of make your maturity now outside of the project completion?

Dale Boyles -- Chief Financial Officer

Thanks, Matt. Yes, certainly, we're looking at those options. We're just going to have to see what's available and what we have access to, as I said earlier, be opportunistic in the capital markets. They change every day, so certainly looking at extending those maturities possibly increasing the size or even just taking it out together.

Those are all options that we'll continue to look at because we do want to optimize our capital structure. And we'll be continuously monitoring that, but we feel very good about this year. It's $25 million of spend, which we can handle very easily with our free cash flow.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. That's it for me. Thanks again and good luck.

Dale Boyles -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, at this time, there are no further questions. I would now like to turn the call back over to Mr. Scheller for any closing comments.

Walt Scheller -- Chief Executive Officer

That concludes our call for this afternoon. Thank you again for joining us today. We appreciate your interest in Warrior Met Coal.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Walt Scheller -- Chief Executive Officer

Dale Boyles -- Chief Financial Officer

Daniel Scott -- Clarksons Platou Securities -- Analyst

David Gagliano -- BMO Capital Markets -- Analyst

Curt Woodworth -- Credit Suisse -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

Alex Hacking -- Citi -- Analyst

Chris Terry -- Deutsche Bank -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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