Core Natural Resources, Inc. Q2 FY2025 earnings call

• Capital return program: Returned $194 million to shareholders in the first two quarters, with a $0.10 per share quarterly dividend and $1 billion share repurchase authorization. - Leer South mine: Progress on resuming longwall production in Q4, with equipment in good condition despite minor damage. - Market dynamics: Domestic thermal markets strengthening, seaborne thermal demand recovering in Asia, coking coal markets soft; Core well-positioned. - Government support: Appreciation for executive orders and legislation aiding the U.S. coal industry. - Merger synergies: Increased annual synergy target to $150 million to $170 million.

In Q2, Core demonstrated significant cash-generating capabilities. The high CV thermal segment saw increased sales volumes and lower unit costs. The metallurgical platform, with the Leer mine achieving a second straight quarterly production record (exclusive of Leer South outage), executed well. The Powder River Basin segment had a strong performance as power generators accelerated shipments. Financials: Adjusted EBITDA was $144 million, free cash flow was $131 million, net loss was $37 million or $0.70 per diluted share, and $89 million was spent on capital expenditures.

• Metallurgical: Maintaining sales volume guidance, increasing cash cost guidance due to Leer South restart delay. - High CV thermal: Lowering projected pricing range on committed tons to $60 to $62 per ton, maintaining sales volume and cash costs. - Powder River Basin: Increasing sales volume guidance to 45 million to 48 million tons, lowering cash cost guidance. - Synergies: Projecting $150 million to $170 million annual synergies.

• Market uncertainties: Fluctuations in coking coal markets, trade tensions, macroeconomic factors. - Leer South mine outage impact on production and costs.

Q: Just quickly on the buyback. I mean you generated good cash flow in the quarter, but the buyback on total capital return was below the 75% target. And I was wondering, in light of the fact that your share price have been weak and there's pretty good outlook for most of your segments. I would think that now would be a very good time to accelerate the buyback. I'm just wondering why it wasn't an impressive scale to buy back, I'm just wondering why it wasn't even bigger in light of where your share price is and how good the outlook is?

A: Chris, this is Mitesh here, and thank you for that question. I think generally, our guidance on the buybacks have been that we'll return approximately 75% of our free cash flow back to the shareholders. I think if you look at first half of the year, we have done just over 100% of shareholder returns. So I would say we have been a little bit more aggressive than what we have guided to. Having said that, I think we continue to monitor the markets and everything around it with all the uncertainties on the macro side. We generate free cash flow from our business, and we'll continue to deploy cash. I think to the extent we have cash flow generation coming in from our operating segments, which we do and working capital improvements that a big portion of that is going back to shareholder returns. So I would say every quarter is going to be different. Some quarters are going to be higher than what we generate in terms of free cash flow, some might be lower. But I think that's how I would think about it from a -- as a guidance perspective in the coming quarters.

Q: Congrats on a strong quarter here. First, I wanted to ask about your overall level of confidence at Leer South and ultimately returning to normalized levels of production. Should we think about that return as occurring over a number of months? Or maybe said differently, could we see Leer South run below normalized levels until market fundamentals improve?

A: Nick, this is Paul. Look, I think first and foremost, I think the mine overall is not at risk, and I have a real high confidence in the ability to get back up and running. I think what we were able to do in June, even though we got pushed out, we saw that -- we got our eyes on the longwall. We were actually able to repressurize the seal. So while there's some minor damage, as you would expect, the longwall is in good shape. So with the plan we have before, which is to go back in here when reading is stabilized and try and recover the longwall equipment sometime in early fall. I feel pretty good that so long as the atmosphere cooperates, we'll be able to do it. The plan then will be to move the longwall equipment to the new phase, which is about 500 feet from the existing phase and seal the area behind us. My expectation is that while we'll have to do some repairs on the longwall, I'm not expecting anything major, and this could, in fact, just look like a very extended longwall move of a couple of weeks. So at this point in time, I'm still fairly confident about the ability to get up and running relatively quick, particularly heading to Q1.

Q: Nice update here. Can I start by asking, have you run any studies on rare earth potential at any of your mines like some peers in the sector?

A: Yes. We have -- we've talked a few times in the past drilling and continue to look at the various potential. As you know, the Powder River Basin geology is fairly same mine to mine to mine. And so like many of the peers of the basin, we're all looking at the same thing. And look, I think it's worth pursuing the analysis where it will lead, I'm not sure, but look, it's time to continue to look at it. And obviously, others have had good success with it. So we're interested, like everybody else.

Q: Just one more for you. Working capital, like it was a pretty big outflow in Q1, nearly half of that unwound this quarter. How should we think about working capital in the second half? Is that potentially say, $50 million more unwind? I know it's early, you're not going to know timing, but a bit more to come potentially there?

A: Yes, George. So we are expecting some more working capital here, but just recognize that the vast majority of that has been reversed in Q2 with respect to the receivables. I think in Q3 and Q4, I think there's some work being done on inventory reduction. We have said earlier that, we have some metallurgical coal inventory due to strong performance at some of our mines that is going to flow through as well. So I think there is some reversal coming. It's not going to be of the same magnitude as you saw in Q2.

Q: Maybe just to start, Bob, you just mentioned that the 2026 PRB tons priced, I think, in the mid-$14 range. Any thoughts on the pricing for the 13 million tons or so of the high CV thermal coal you guys have for '26?

A: Yes. So the 13 million, Nick, is broken down really 6.5 domestic, 6.5 export and about 4 million is linked to different API2, call it, 2.5 fixed on the export side, balance obviously to be domestic. I will tell you, we're using a $110 API2 price and we're looking at low 60s.

Q: Appreciate that, Paul. And then maybe it would also be good to get your thoughts around some of the recent increase in trade tensions with India, especially given Core's, it's important export market for Core, I should say.

A: Yes, I'll start off and let the others jump in. I mean I -- the following of the tariffs and the reciprocal tariffs is becoming morning obsession, I think, with a lot of us to try and understand where it's going. I think the -- one thing I take some solace in is that most of these have been resolved, although it's been a little messy. But Japan and the EU getting resolved, it would sure nice to be have -- for us to have India resolved because India remains a huge trading partner of Core. Any other thoughts from the group?

Q: Just one more as well. On the met coal segment, realized price for the thermal byproduct was up nearly 40% Q-on-Q. But that seems very good given the pricing, soft environment at the moment. Like how much higher can that get with blending and so forward and maybe a bit more color, like should we assume that higher price from this quarter is a more reasonable assumption going forward?

A: Yes. So George, this is Bob. So as you mentioned, I think in Q1, we were mid-30s; Q2, mid-40s on the thermal byproduct from a pricing perspective. And what we've done since the merger is took -- we've been able to take advantage of that product and blending it in with PAMC. And I will tell you that on a go-forward basis, we're looking to continue to maximize doing so. So when you look at Q3, Q4, I'd say it's going to be a lot similar to Q2. It's also market-driven because it depends on what the realization you're getting back on the international market is as well. So as the international market continues to improve, then you'll see the mids pricing improve. But for sake of where we stand today, I'd say you're closer to Q2 realization than you are Q1 on the mids product.