Good afternoon, and welcome to the Hallador Energy Company Third Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I’d now like to turn the call over to Ms. Becky Palumbo of Investor Relations. Please go ahead.

Thank you, Nat, hello everyone, thank you for taking the time to join us today. As a reminder this event is being webcast live and there will available on our website later today. Yesterday afternoon, we released our third quarter 2021 financial and operating results on Form 10-Q and issued a press release containing certain financial metrics. Both documents are posted on our website. Today, we will discuss financial results and our perspective on market conditions and outlook. Following the prepared remarks, we will open up the call for questions. As a reminder, some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions contained in our filings from time to time with the SEC. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, we have no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise required by law to do so. With us today are Brent Bilsland, our President and CEO; and Larry Martin, our CFO. Now that we have the required preliminaries out of the way, Larry can start us off with the quarter’s financial overview. Larry, the floor is yours.

Good afternoon, everyone. Before I begin, I’d like to get some definitions defined. We define free cash flow as net income plus deferred income taxes plus depreciation, depletion and amortization, plus reclamation accretion, change in fair value of hedges 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, plus reclamation accretion and changes in fair value of hedges, less the effects of our equity method investments. Hallador obtained net income of $8 million for the quarter or $0.26 a share, $4 million year-to-date for the nine months or $0.13 a share. Our free cash flow for third quarter was $14.6 million, and $26.4 million for the nine months. Adjusted EBITDA was $20.5 million for the third quarter, $43.2 million for the nine months. We paid down bank debt of $15.2 million for the quarter, $22.8 million for the year. Our bank debt at 9/30 was $115 million, and our net debt at 9/30 was $110 million. Our debt-to-EBITDA leverage ratio was 2.29 times well within our covenants. I’d like to now turn the call over to our Hallador CEO, Brent Bilsland.

Thank you, Larry. 2021 began slowly, but we’ll finish very strong for Hallador. In the first half of the year, we shipped 2.6 million tons. And in the last half of the year, we anticipate shipping 3.6 million tons. This total shipments should come in around $6.2 million for 2021. This improvement in pace, when looking at third quarter results year-over-year, our revenue increased by 22%, and our shipments increased by 29% in the third quarter. Shipments outpaced coal production in Q3, and coal inventory was reduced by $21 million. We expect to produce 5.7 million tons to 5.8 million tons in 2021. We are currently ramping up production to 7 million tons for 2022 and 2023. We have all the equipment we need. We just need more people. We added 94 employees in the month of October, and we are focusing on hiring another 110 in the next two to four months. Once complete, new employees will represent roughly one fourth of our workforce. It will take a little time in training before this new workforce becomes efficient and cost decline. Focusing on costs, Q3 production costs were elevated at $33.15 per ton, which is $2.95 over the prior quarter and $3.85 per ton over Q3 of 2020. The reasons for these increases are as follows. The operating phase at Oaktown 2 is now 10.5 miles away from the portal, requiring long underground travel times for our workforce. To combat this, we’re finalizing the construction of an employee and supply hoist expected to be operational here actually today, which should reduce our labor expense substantially, particularly at Oaktown 2. Additionally, we’ve been developing new underground mines that have required a lot of additional support and labor. This work is necessary, but unfortunately, it’s not very productive from a coal…

[Operator Instructions] First question comes from Dustin Shapir, CastleKnight. Please go ahead.

Hi, and thank you for taking the question. You made the comment that in 2023, you’re selling some volumes at today’s market prices. Can you talk about today’s market price? And can you also talk about whether or not you’re seeing your customers extending the terms of their contracts?

So as far as market prices are substantially higher for any new business. I think the thing that we want to point out here, why we talked about the future is, we have a small open position for next year. We’re in negotiations with the customer to fill that. We’re very confident we will get that done. And if we don’t, quite frankly, we’re confident we’ve got other buyers behind them that would like to have that full. We just didn’t get the deal completely before earnings. But the issue is we have. So, we’re going to ramp up production. We have the equipment to do that. But for a price increase, we will see a price increase. We’re seeing some cost increase. So, we think our margins are slightly better next year. But we think our margins are much, much bigger out in 2023, because we just have so much open position, right? So, we’re replacing – we’re pricing up a much larger percentage of our sales versus what we’re doing here in the third quarter or here in 2023. We’ll see more pricing increase in the quarter [ph] of 2021. But we just didn’t have a huge open position in 2022. So, we’re seeing volume increases. That will help our EBITDA. You have inflationary pressure on one hand. We had some condition issues here in the third – and will carry a little bit into the fourth quarter. That will dissipate, and we’re already basically coming through those issues. But – and then as our volumes increase, we’re hopeful that our cost structure come back down. So we think margins are slightly better next year. We know volumes will be higher. We know volumes will be higher in 2022. We also strongly believe that our margins have significant increases out in 2023. 2024, we really haven’t spent a lot of time pricing out there. We have – we are about to book some business out in 2024. And we – again, gas prices are kind of what our competitor and the curve still looks really good out there. So we feel good. Our business has materially improved, looking out over the next three years. And we feel that from a de-leveraging scenario, we did a good job of de-leveraging in this quarter, but we see much clearer visibility in free cash flow and paying down debt over the next three years just because the market is so much stronger. So we’re happy about that.

Got it. Very helpful. And where are today’s spot prices?

Well, again, we’ve got ongoing negotiations. So we don’t really spend a lot of time on talking about what spot prices are today. I would say, in what time period are you talking about, there seems to be dramatic differences. I would say what’s unusual about this period of time is, I think the market is still very short coal going into winter and pretty much. We believe the market to be pretty much sold out, and we believe buyers will still be short. You’ve got MISO saying that if it gets cold and there’s an unsuspected outage of a generator and anywhere in their system, they’re going to have an emergency situation. The capacity is tight, right? We’ve seen a lot of headlines about replacing generation, but I don’t see how you do that when they’re so tight now. So we feel that pricing is much stronger. And quite frankly, we think these assets have to run for many, many years. And MISO agrees with it. Unfortunately, MISO doesn’t hold press releases every week and say it very loudly. But that’s what they’re saying. And if you look in their publications, you can find that.

Got it. That’s very helpful. And then just thinking about again on 2023, you sold it roughly a little under $4 million, you’re expecting to produce in or sell $7 million. Around $3 million you haven’t sold as of today tons. Is it fair to think on those – on that $3 million of volume, we could think 50% to 100% prices higher than today’s levels? 50% higher in today’s levels?

Well, that’s – not quite sure how to answer that. I’m not sure what you mean from today’s level – today’s average price? I think that – again, we’re still negotiating that. So I don’t really want to speak to what that price is. We just know that that’s going to be significantly higher. What does that do to our average price? I think you’ll see our average price move up somewhere in that 10% to 15% range out in 2023.

Thank you very much.

You’re welcome. Thanks.

[Operator Instructions] Our next question comes from Lucas Pipes of B. Riley FBR. Please go ahead.

Hey good afternoon gentlemen and thanks for taking my question. Brent, I wanted to – I also wanted to touch base on the pricing side and maybe hone in a little bit on Q1 versus 2022. If I recall correctly, you mentioned there’s going to be that $3 per ton price increase in the fourth quarter. And then in 2022, the average contract price today would drop again a little bit. What led to that dynamic that’s a little unusual kind of given where we are in the market and would appreciate your perspective on that.

Well, I think what we’re seeing is, we have some spot tons in the fourth quarter. We thought some of that would fit in the third quarter. I guess a little of it did, but not as much as we thought we ship in the third quarter. So we just have a higher concentration of those higher prices hitting the fourth quarter to the mix of when those coal tons got shipped. When we look at the first quarter of next year, you’re going to have kind of a mix of carryover tons of 2021 and 2022, you’ve got new contracts beginning. So the mix is just different, Lucas. I mean that’s kind of what we see there.

Got it. That’s helpful. And how many tons do you have left to sell for 2022?

Well, quite frankly, we’re trying to figure that out, and that’s part of what the negotiation is about. So we’re producing – we’re going to produce 5.7 million tons to 5.8 million tons for the year. We’ve got – we’re in that ramp period now. We’re probably at about 6.5 million ton pace as we speak. We just hired 94 employees in the last 40 days. So we’re trying to get those people training, put in position. We’ve got the equipment to ramp to 7, maybe a little more. But the question comes down to how fast can we hire, which has really been strange because we actually bought through September. So we were unsuccessful in our hiring practices through September. And then we had a fantastic October by getting the word out. Perhaps some of the government money finally drying up in early September, allow those people to take a few weeks and then come back to the employment lines. So we feel much happier because we’ve hired so many people in the last let’s just call it, five weeks, right? So extrapolating that out, you would say, well, gosh, you hired almost 100 people in a month, you ought to be able to hire another 100 people in another month. We just don’t know the answer to that. right? Is that going to take us – we’ll hire all tomorrow if we find the right candidates and we feel that we’ve got the work. We’ve got the sales, we’ve got the equipment. We’re just trying to get the right people in seats and get them trained and keep a safe and efficient operation. So we don’t have great certainty as to will we be able to do that over two months. Will we be able to do that over four months. That’s what we’re trying to gauge and that will drive how many tons that we have to sell next year. But we’re targeting 7 million tons, so.

Got it. And so should I understand your – like is the figuring out process, is that on the kind of capacity line, meaning how much can you scale up? Or is that also on the revenue line and dependent on negotiations with customers.

I’m sorry, Lucas, could you repeat the question? I didn’t quite catch all that.

Is it really only the – so is what you have left to sell only dependent on scaling up getting labor in place? Or is it also dependent on getting the right price, when you’re talking to your customers? So the question is like, are this additional production capacity, bringing on additional people, contingent upon a certain price level, for example, from your customer?

No. The price level is more than sufficient to justify bringing on additional employees. And this market is going to be strong for a while because we don’t think – we think our customers are going short in the winter. We don’t think they’re getting all the coal bot that they need for 2022. So they’re not going to be – it doesn’t look like to us they can build inventory in 2022 to 2023 is probably the first chance they get to have a building here. Now all this – it’s whether dependent and market dependent, and I sat here in November 2019, and had never heard of COVID. So things happen to change that. But from what we have today is we have the strongest market that I have seen in the history of my career, we’ve got Elliott Batson here, who leads up all of our sales has been doing this for three decades. I think you would argue is the strongest market we have ever seen. So will that dissipate? Yes, it will dissipate in time. Well it dissipate tomorrow? It can’t. There’s just – there simply isn’t enough tons. The capacity – nobody is putting in new mines, right? So the capacity is you’re seeing people go out and kick the tires of old closed high-cost mines and said, well, gosh, could I permit it? To kind of reopen this? Could I get equipment? It’s kind of hard to get? Could I get labor? Labor is hard to get. And then how long a contract can I get? So those are all the things that people are weighing. And we’ve looked at other projects that we wouldn’t even thought about six months ago because they were so far out of the market, but the market is strong enough that it justifies it. So as we looked at it and as we’ve looked at other projects, we have said, look, the number one thing we can do is hire people, right? We have the equipment, we have the infrastructure. We have all that in place. The quicker we get people in place, the quicker our cash flow comes up and the more tons we had to sell. So we’d like to provide more color on that. Unfortunately, we’re right in the middle of some pretty significant negotiations, so we can’t elaborate too much other than to say the general trend is we’re going to finish strong in 2021. We’re going to run more tons in 2022. We’re going to run more tons and see significant margin appreciation in 2023. And there’s nothing right now that tells us that 2024 won’t be healthy. It’s just we’re not pricing a lot of tons out in that period. So we’re still seeing the market be two to three year commitments is what we have seen so far. – it of other markets going to 10-year contracts, but we have not experienced that.

Very helpful, Brent. I’ll have another question and I’ll jump back in queue. And on the labor side, you said you had a successful month of hiring. How is it integrating this new workforce into the mine is what’s the scale level? What’s the impact of productivity scaling up with new folks?

Well, we’re trying like I said, we add about 630 employees, we’re trying to hire, I think, 610. If you’re looking at the end of September to where we’re trying to that 840. Half of that, let’s say, 100 are new people that have never been underground before and 100 are experienced people. And of that 100 experienced people, probably 50 of those that work for us, thought the grass was greener somewhere else and has come back. So we’ve done this before. We just don’t expect them on day one to be really clicking. Does that take a quarter? Does that take two quarters? It’s somewhere in there. Just personally we’ve got another to cut on some odd employees that are very well experienced, very much in line with what – how we would think. And it’s blocking and tackling. It’s not something that we’re afraid of. It’s just we don’t have the clear crystal ball on how quickly we can hire another 110 people. Would that be 30 days or that could be 120 days. It’s somewhere in there. We got Thanksgiving coming. We got Christmas coming. We’ve got New Years coming, people not as active switching companies or coming to work for us during the holidays and say, well, I’ll start after the first of the year. We just don’t know the answer to that. And this is a very, very tight labor market. Feel much better today than I did a month ago. So we were trying to hire and August to September, and we just – we weren’t having the success. We think we found a winning combination. We hope we found a winning combination. But until we’ve delivered it, we don’t want to overpromise anybody.

Very helpful Brent. I appreciated. Thank you for your color and comments and best of luck.

Thank you.

Thank you. [Operator Instructions] Next question comes from Henry Schlett [ph] from Ocean Capital. Please go ahead.

Good afternoon guys. Congratulations on a great quarter. You’ve done a really good job of explaining how the not-too-distant future has improved the outlook of the company and accelerated the debt pay down schedule is the explicit goal to be debt free?

Yes, I think it is. I mean I say that, we were net debt free in 2014. We went out and bought a company for roughly $300 million. So we know that if we de-leverage our balance sheet, that we can be more aggressive on opportunities that we see come in front of us, right? So we focus every quarter, every Board call on reducing debt. And that’s something very much that our Board feels strongly about, that’s something I feel strongly about. We know that this company will last for 100 years to come as long as we do not get over-levered. And so – and that’s part of the reason why we have always been longer – well hedged, right? If you think about Hallador, we’re the company that has been well hedged through this process, right? And we’ve seen a lot of competitors go out of business because they weren’t well hedged. Now do I wish that we had nothing sold this year and we were pricing everything on the spot market? Absolutely. Would I have slot very well doing that. No, I’d probably be out of a job. So we view it as our Board owns a 30-some percent of this company. I own a significant portion of this company. We work very hard at it every day to figure out how we’re going to generate positive cash flow, reduce debt and at the same point in time, look at opportunities, right? We were able to transact this year. On acquiring Duke Energy’s interconnect. We think that is a very material asset that is now on our balance sheet or will be starting in 2023. And it gives us a platform that as we get down the road and as we de-lever our balance sheet. Now…

So because – something a lot very familiar with the past is that – is the history with the $300 million transaction with bank debt going to inform future transactions of that type? And are those being mapped into the current valuation, which you guys eloquently point out in all of these calls is quite low. I mean, you’re at three times free cash flow for the last nine months, that’s a pretty high bar for a negotiated transaction on the investment side, return-wise.

Yes, I think what you’re saying is that we should buy in stock. What I’m hearing you.

Well, no. I just – I know you can’t talk specifics, but color-wise as far as the frustration level on the Board for the current valuation of the stock itself, I know I don’t think buying back stock with $100 million in bank debt is wise when your market value is at $80-plus million. I’m firmly in support of the pay down of debt. I wondered where that was the goal to go to zero. And I would say, as a significant shareholder for – on behalf of our customers, wouldn’t want to see that debt replaced on a negotiated transaction when the valuation of the company is where it is. And on a question basis, what is the level of frustration on the part of the Board with the current valuation of the company? Is there a discussion being had on a transaction to possibly take that out of the market’s hands?

I think that our Board, a frustration would not be the right word, I guess. I think our Board feels that they own a large percentage of a company that has a future of free cash flow. I think our number one focus has been to pay down debt. Would the Board want to take out the existing shareholders. That’s not something that we’re talking about. I’ll put it that way at this time. And I think that, again, the good news here is, we have high certainty of being able to pay off the company and still having an asset that’s going to generate positive free cash flow. We have an investment that can provide in the solar and battery business that we think provides an investing opportunity long into the future. So as we get two years down the road, let’s say, we will be evaluating what is the best use of our capital at that point in time? Is it to buy in shares of the company? Is it to issue dividends to the shareholder? Is it to invest in this platform or just be the developer and use other people’s money for this solar battery platform? Or is it to buy something that’s not even on the radar today? I think that for now, we are in the mode of putting together a contract position that ensures our security and cash flow for the next three years. And as we continue to de-lever, we’ll start to look more aggressively at those options. I still – I hope that answers your question.

It does. Thank you.

Thank you.

[Operator Instructions] Next question comes from Andrew Lo of Hallmark Investment Corp. Please go ahead.

Hello, Brent. I’m returning to the question of pricing. Obviously, it’s a little disappointing that our prices have gone down this year, obviously, exacerbated by the fact that our costs have gone up. Fortunately, we got rescued at least for the time being by the – forgive us so the PPP, but that can’t be replicated. And I guess it’s a little bit disappointing to see the book of business for 2022 at only a slightly higher price than what we’re getting for 2021, but I understand a lot of that was booked before the market heated up. But really more disappointing to me is that if you look back at our earnings report, for the second quarter, there was nothing booked for 2023. And now we’re reflecting 3.8 million tons booked at $41.30. Well, that’s a little better than what we’ve been doing, but not much. And it certainly doesn’t reflect in my mind, the hottest market in memory. I’m in the gas business, and we’ve had a hard market on our commodity prices, more than doubled in that period of time. And my understanding is that coal prices somewhat reflect what’s happening in the gas market. And I’m not seeing it in 2023, and I’m kind of baffled as to why that price increase for those recently booked tonnage doesn’t reflect the improved market very much.

Well, 2023, what you’re seeing let’s report in 2023 was not reported in 2020 in the second quarter. And we have those tons booked, it just wasn’t reported. We didn’t go out that far in our sales book. We have sales out to – now as far as 2026, we have some tons. And the market gets a little confused on that because sometimes we have tons booked, but unpriced. It gets a little tricky sometimes, and we get a lot of confusion over, well, you see these tons, and I see these prices and then the prices change, but the tons in price didn’t change. So, we have commitments to certain customers particularly out in the later years to or tons that just aren’t on price. So, we added the year 2023 from a reporting perspective here in the third quarter, but those are legacy tons. And so you’ll see the pricing improvement on the unsold portion of that business.

So it’s only 3.8 million – is that all that’s been booked for 2023?

Correct. We are in discussions for 2023. And we think we will have – we think it’s very likely we’ll be able to put together a sales book for 2023 of 7 million tons. So, that’s why we’re trying to say, Andy that we expect both price improvement and margin improvement significantly in that 2023 year. It’s not going to see as much in 2022 because we have contracts that – legacy contracts that customers can flex up their tonnage at the old prices. We have some carryover tons that will come from 2021 into 2022. And then we have an open position, part of what goes into our math is how fast will we be able to add people, right? Will we be able to produce more tons in 2021 than we think or will it take us longer to hire people, and we won’t be able to produce quite as much. So that’s why we can’t give you absolute certainty on what 2022 pricing is going to look like. But at the end of the day, I’m trying to communicate to everyone that we see slight margin improvement in 2022. We’re really going to see volume improvement, right? So, we’re going to run the same margins roughly, maybe a little better at higher volumes than 2022, and 2023 is when we will see margin expansion at these higher volumes. 2024, again, our sales position is even open more so. What will pricing be out there? We just don’t have great clarity. The gas market is strong. And you’re in the gas business. So, if you guys ramp up lots of production, that will drive prices down. We think that the gas market is tougher to get capital than it was a couple of years ago. We think there’s…

Hope so. Thanks.

Thank you.

[Operator Instructions] Our next question is John Moran, Robotti & Company. Please go ahead.

I just wanted to follow up on that last question and clarify that. So of the 3.8 million tons booked in 2023. Is anything above that unencumbered by any contract you have with existing customers. In other words, that would be subject to a price negotiation that’s not encumbered by something in an existing contract.

No, those will be new sales.

But not subject to any pricing mechanism in an existing contract?

No. We’ll we be looking to sell another 3.2 million tons out there.

And you have a couple of competitors selling into your markets? Do you have any read or visibility into what an unencumbered ton being sold in 2022 is right now or 23%. That’s – I guess, if you can see that, there’d be no reason you could not disclose that. Is there or?

Again, we don’t – we may not have it and not getting into discussing prices, particularly when we are in active negotiations with our customers on significant.

Trying to get sense. If you – and I don’t want to know anything about your ongoing negotiations with your customers. I’m just wondering if that’s something you have visibility into? Somebody else’s contract or tonnage sold in a freely negotiated transaction for 2022 or 2023. I just – is there any sense of what that’s...

Yes, we have a gate on the market. We do not know what our competitors are negotiating or what their terms are, right? I mean that de collusion, but definitely. We definitely have. Okay, thank you.

One other question on that renewable business in the mid-2023 access to the grid. Is that – can you remind me or has it been disclosed? Is that a legacy interest that you own? Or is that something that you recently acquired?

So, we have a joint venture development relationship with the company we acquired it from, not a legacy asset. I mean, basically, they have a coal-fired power plant and the place where it plugs into the grid, the interconnection to the grid, we have obtained the – we obtain no physical assets, but we’ve obtained the rights to when they unplugged from the grid, we have the right to plug in.

And then when did you acquire that right?

We announced that transaction, I believe, June 2 of this year.

But that was a transaction? Like I can’t – was there a consideration for that? Or why did they select you? Or what was the consideration?

So there’s – I can’t get into the details of that transaction, but there was no money paid upfront.

Is there anything that you can say about why they would – like why you had the edge there? Why you were selected?

I would prefer not to. We think there’s – we think we have some insight on how to do that, and how to help a customer been value out of one of their legacy assets. We think that potentially is repeatable. And so we don’t really want to give away the secret sauce on our earnings call, so.

No, I understand. I’m just trying to understand if there’s something proprietary there or it’s just, I guess, the project that you guys have been working on for a while and it came together. I don’t – anyway, I hear you. I just thought I’d ask.

I appreciate to answer. Thank you.

Thank you.

[Operator Instructions] We have a follow-up question from Dustin Shapir from CastleKnight. Please go ahead.

My question was answered. Congrats, guys.

All right. Thank you, Dustin.

Thank you. [Operator Instructions] This time, we have no further questions. I’ll return the call back to Mr. Brent Bilsland for final comments. Please go ahead.

I thank everyone for their interest in Hallador, and taking time to join us for the call today. And look forward to talking to you again after the first of the year. Thank you very much.

The call is now concluded. Thank you for attending today’s presentation. You may now disconnect.