Rebecca Palumbo - IR, Director Lawrence Martin - Corporate Secretary ,CFO & CAO Brent Bilsland - President, CEO & Chairman

Lucas Pipes - B. Riley FBR, Inc.

Thank you, Rocco. Thank you, everybody, for taking your time out today and joining us for today's call.

We are going to be discussing our third quarter 2018 results. We did file our third quarter Form 10-Q yesterday afternoon, and it is now posted on our website.

This call is being webcast, and a replay will be available on our website, along with the transcript later this week. Participating on today's call with me are Brent Bilsland, our President and CEO; and Larry Martin, our CFO.

Larry will begin with the financial overview of the quarter, followed by Brent with comments on operations. After management completes their opening remarks, we will open the line for Q&A.

Our remarks will include forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially, for example, our estimates of mining costs, future coal sales and regulations regarding the Clean Air Act and other environmental initiatives. We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by law.

Now I will turn the call over to Larry to go over our second quarter highlights. Larry?

Thank you, Becky, and good afternoon, everybody. Before I get into the review of the operating results for the quarter and the year, I would like to go over a couple of definitions.

We define free cash flow as net income plus deferred income taxes, plus depreciation, depletion and amortization, plus ARO accretion and stock compensation, less maintenance CapEx and the effects of our equity method investments. We define adjusted EBITDA as earnings before interest taxes, depreciation and amortization plus stock compensation and ARO accretion, less the effects of our equity method investments and Hourglass Sands.

Now for the quarter, we had net income for the third quarter of $2.9 million or $0.09 a share, and for the year ending September 30 -- 9 months ending September 30, $5 million, $0.16 a share. Our free cash flow for the quarter was $9.3 million, $28.2 million for the 9 months.

Our adjusted EBITDA was $18.2 million for the quarter, $55.4 million for the year. We decreased our debt by $0.5 million for the quarter and $2 million for the 9 months ended September 30.

We paid dividends for the quarter of $1.2 million or $0.04 a share, a total of $3.7 million or $0.12 a share for the year. Our bank debt at 9/30 was $200 million, and our net debt was $180.7 million.

Our debt target for the end of the year is $190 million, and our debt-to-EBITDA for our covenant calculation with our bank debt was 2.73x for the rolling 12 months, which is well within our covenant of 3.75x. I'd like to now turn over the call to our CEO, Brent Bilsland.

Thank you, Larry. We have spent the bulk of 2018 positioning our company to grow our sales, with our main focus being on gaining access to new markets.

In frac sand, Hourglass has begun shipping sands to test wells in Colorado. Our goal is to develop the first local frac sand mine in the DJ Basin.

For coal, we completed development of our new Princeton Rail Loop, which enabled us to sell into the NS rail market for the first time in our company's history. Additionally, we have tweaked our export strategy, improving the cost structure by which our coal will potentially flow to the export market.

And finally, we restarted production at our Carlisle Mine, giving us a slightly different quality to offer the market, while at the same time, increasing Hallador's production capacity by 2.5 million tons or roughly 1/3. This gives us the ability to quickly ramp our coal production up should the market need it.

And fortunately for Hallador shareholders, the market is strengthening and acting as if it may need our increased production. This summer was 4 degrees warmer than average, but with the highly populated areas of the country experiencing the brunt of the heat, this increased power load occurred at a time when many utilities had previously planned to draw down their coal inventory levels.

Thus, demand exceeded purchases more than expected, forcing several utilities to search for additional tons just to finish the year. Furthermore, export demand has increased dramatically.

This has led customers, particularly in the Southeast, to add Hallador as a new supplier. We began the year counting 9 power plants as customers but have added an unprecedented 6 new customers this year, and we'll finish the year with at least 15 customers in total.

These new customers are located in Indiana, North Carolina, South Carolina, Georgia and Alabama. Finally, despite record natural gas production, gas inventories have been unable to fully replenish, creating a situation where natural gas inventories measured in days of consumption are at historic lows.

All these factors enable us -- enabled us to add 4.1 million tons of contracted sales since our last earnings call, giving Hallador's 19.6 million tons of coal to be delivered through 2022. Additionally, our sales success has led us to raise our 2018 and 2019 sales guidance from 7 million tons to 7.3 million tons for both years, of which we anticipate shipping 2.1 million tons in the fourth quarter, an impressive 8.4 million tons annualized pace.

Assuming our revenue increased run rate of 7.3 million tons annually, Hallador is now 63% committed through 2022, and I believe more sales are coming. RFP season is in the early stages, and several entities seem to be interested in multiple-year contracts.

For 2019, we have 6.1 million tons sold, representing 84% of our 73 million-ton forecast. But with 9.5 million tons of capacity and much more active sales market than in years past, higher production rates are quite possible.

Our positioning efforts and growth in sales has come at a cost of less cash provided by operations for the quarter and a temporary elevated operating cost. The start-up of the Princeton Loop requires that we build a base of coal inventory at the loop.

The restart of Carlisle necessitates that we move personnel from Oaktown 1 and retrain them at Carlisle. Restarting production takes a little time, and it also requires that we build some coal inventory at the mine.

Additionally, Hourglass Sands -- our Hourglass Sands subsidiary has increased production in Colorado during the quarter, which also takes additional inventory. Thus, cash provided by operations was $30 million for the first 9 months of 2018 compared to $48 million for the first 9 months of 2017.

The decrease in cash generation was due to increasing inventory levels at all the locations previously stated. However, due to large coal shipments in the fourth quarter, we expect our inventories to decrease by approximately $7 million by year-end, increasing our cash provided by operations.

Looking at our costs. We started the third quarter with a 1-week production shutdown as our company celebrated the Fourth of July holiday.

As miners return, we transferred 1 unit of employees from Oaktown 1 to Carlisle, completed mine-specific retraining and restarted Carlisle after a little less than three years of being idle. Thus, production for the quarter was 14% lower than prior quarters, and costs were elevated at $30.65 a ton.

As Carlisle regains its form, we fully expect fourth quarter costs to return to our $28 to $30 a ton guidance. At Hourglass, we have completed 1 of our 4 anticipated test wells in the DJ Basin and expect to complete the remainder by the first quarter of 2019.

In Colorado, we continue to work towards being part of the industry trend of switching to locally produced sand versus frac sands produced roughly 1,000 miles outside the basin. As I've stated before, we believe frac sand mining is well within our core competency, exceeds our investment criteria.

And though we do not expect it to be profitable in 2018, we expect Hourglass to meaningfully contribute to Hallador's earnings in future years. As Larry previously mentioned, our debt now stands at $200 million, a reduction of $2 million when compared to end of year 2017.

Our leverage ratio has increased slightly to 2.73x, as our leverage ratio is now being measured at the Hallador level versus previously at the Sunrise level. Our leverage remains well within our 3.75x covenant.

Our liquidity has increased by $1 million during the quarter to a healthy $75 million, and our CapEx budget for the remaining three months of 2018 is $6 million, of which $4 million is for maintenance CapEx. With that being said, that finishes our pre-prepared remarks, and I will open the call up to question.

My first question is on the pricing side. So it looks like you had a fairly nice pick up in Q3 versus Q2.

And I wanted to ask kind of if there was anything specific that was driving that price increase. And as we look into the fourth quarter and then also into next year, should we anchor our expectations around your realizations in the third quarter or maybe a little bit higher or lower than that?

Well, as we -- Lucas, this is Larry. As we stated in the Q, in the second quarter, it was just a matter of product mix.

We had shipped to lower-priced contracts more than the higher-priced contracts in the first 2 quarters. In the third quarter, I mean, I think we had estimated in 40 to 40, 50, and hit it right in the range.

And pretty sure, we say that it's going to be a little above 40 in the Q for the fourth quarter. So I think that answers the question.

And next year, I think we're going to be right in that same range, maybe a little higher.

And to what extent does bringing in Carlisle changed the pricing for better or for worse?

No. It was pretty standard to what we'd already sold, Lucas.

The thing with bringing on Carlisle, as Brent mentioned, is we thought the market was going to take off, and we can't just start up an underground coal mine and shut it off. So we planned that and opened that in July, and Carlisle is a little better sulfur, so we can deliver and use less of our Ace mine with Carlisle, so -- but the pricing is very similar to the Oaktown mine, the two pricings.

Got it. Got it.

That's very helpful. And then just to follow up on the cost side.

Brent, I think you mentioned $28 to $30 in Q4. How should we think about costs longer term?

And maybe specifically for 2019, what's a good cost range to think about?

When, I think, we've come out and forecasted $28 to $30, our volumes are increasing. We've increased our forecast.

We think that the potential -- there's potential for our volumes to increase beyond our forecast. Higher volumes typically lead to a better cost structure.

So as our volumes continue to increase, I think our costs will be towards the lower end of our guidance. And if we don't hit our forecast on sales, then our costs will be towards the higher end of our guidance.

I think what was unusual about the third quarter is that we typically take a week off for the Fourth of July. That helps us align, a, the holiday; and b, it helps us align our employees' vacations.

So it just helps from a scheduling perspective. Most people want off that week.

But there's a solid week there of no production. And then when you come back, this transition of people from 1 mine to the other and then starting up a mine that has set idle for 3 years, it just takes a little while to get production in sync.

And we're seeing that happen now as production has improved in, quite frankly, all the mines, but Carlisle specifically. So we're very excited about the fourth quarter.

We're very excited about when you look at our company, the sales book over the next a little over 4 years through 2022, we just have a large book of sales, and we think we'd come out of this RFP season with an even larger book of sales. And there seems to be a willingness from utilities to once again transact in multiple year contracts.

And that's -- I'm not -- we're not 100% sure why, but I think it leads to there's -- the export market has sucked a lot of capacity out of the U.S. And I think that, again, what an unusual time, an exciting time when we can grow our customer base from 9 to 15 in a 9-month window.

I think that speaks volumes about this market, the strength of it and how our product is traveling to locations it's never traveled to before. Part of that is the loop, part of that is the export market, and part of that is the warm summer.

But anyhow, we're really excited about what we think can happen in this RFP season, which is going on now and will conclude itself by year-end.

Yes. Yes, no, this is -- congratulations on that.

That is really exciting on the customer front. Maybe one last question before I turn it over.

Earlier this week, one of your peers guided to 6% to 10% of volume growth in the Illinois Basin. Are you worried that too much supply is going to come back too soon?

Or would you say it's going to be more the small limited number of producers such as yourself that have some low-hanging fruit to bring back and take advantage of this market? Or do you maybe see a wider supply response?

I just don't really think there can be a wider supply response. You're seeing a few mines that were either idled or capacity had come back.

Those are returning just because there's a lot -- we're shipping a lot of coal to export versus year-over-year. But in general, there's been so little investment in the space.

We think it's going to be hard for most people to ramp up production. Hallador made that investment.

We made that investment by spending $5 million, $6 million a year to keep Carlisle in idled status, keep it to where it could return for -- to production for us, and that is happening now. And we think it puts us in a unique situation.

Certainly, there's a couple of others. I mean, Alliance, I think that's who you're talking about, kind of came out this week and said they're adding production at River View, and they're adding production at Gibson County, North.

But those aren't huge gains. I mean, those are unit here and unit there.

We think as you look at it as a percentage of our company, we can bring 1/3 more capacity on in very short notice because those mines are all actively running today. So we think that puts us in a little bit of a unique position.

I don't know of a lot of others we compete against that can do that because it looks like to me, a lot of assets, especially in the state of Indiana, have been starved for capital for a very long time. And so unless we start to see some recapitalizations of mines, I think it's going to be hard for them to significantly grow their volumes.

Well, hey, I thank everyone for their time today, and I apologize for interrupting the -- on everyone's schedules on Election Day. Please go out and vote.

And with that, we'll talk to you on the next earnings call. Thank you.