Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report, as well as the financial statements and related notes appearing elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Quarterly Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and in our Annual Report under the heading “Item 1A. Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
Our revenue producing activities consist principally of the sale of coal we produce and coal we purchase from third parties for our own account. We began commercial production of coal in January 2017. Starting as new mine projects, we developed and opened four mines during 2017 at our Elk Creek mining complex and completed construction of the preparation plant and rail loadout facility. We also began development mining in late 2017 at our Berwind property.
Results for our first quarter of 2018 reflect the continued increase in production and sales volumes. During the first quarter of 2018, we sold 522 thousand tons of metallurgical coal, including 119 thousand tons of purchased low volatile metallurgical coal. Of this, 58% was sold in domestic markets and 42% was sold in export markets, principally to Europe.
Our price realizations were significantly higher in the first quarter of 2018 as compared with the fourth quarter of 2017. These higher realizations were partially offset by a higher-than-expected cash cost per ton sold during the first quarter of 2018. Higher cash cost per ton sold was primarily driven by higher surface mining costs caused by unexpected geological challenges. Costs during this period were negatively impacted by winter weather at our mines as well. We faced port issues and rail transportation delays, particularly for export sales. Higher demurrage penalties were incurred as a result of these delays.
Metallurgical coal markets and pricing remained strong in the first quarter of 2018. Supply constraints in Australia served to strengthen demand for U.S. exports of metallurgical coal. Exports by U.S. producers, while significantly higher, were hindered by East Coast port and rail traffic delays caused by higher volumes and weather-related issues.
In March 2018, President Trump signed proclamations imposing a 25% tariff on imports of steel mill products and aluminum. Generally, some increase in domestic demand for metallurgical coal is expected as a result of the proclamations. Our export customers include foreign steel producers who may be negatively affected by the tariffs to the extent their production is imported into the U.S. At this time it is too early to know the impact these tariffs will have on longer-term demand or pricing, if any.
Our capital expenditures totaled approximately $12.8 million during the first quarter of 2018. We expect to incur $29 million to $34 million of capital expenditures for 2018. Newly approved capital projects include paving the main Elk Creek haulroad which will reduce costs and increase trucking reliability, especially during winter weather.
Results of Operations
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Three months ended March 31,
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2018
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2017
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Consolidated statement of operations data:
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Revenues
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$
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55,943,148
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$
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11,538,272
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Cost and expenses
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Cost of sales (exclusive of items shown separately below)
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44,330,847
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10,845,912
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Other operating costs and expenses
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—
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17,300
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Asset retirement obligation accretion
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123,468
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101,277
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Depreciation and amortization
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2,437,500
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156,127
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Selling, general and administrative
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3,431,144
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3,601,363
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Total cost and expenses
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50,322,959
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14,721,979
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Operating income (loss)
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5,620,189
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(3,183,707
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)
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Interest and dividend income
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1,237
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116,429
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Other income (expense)
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489,317
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(3,257
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)
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Interest expense
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(101,159
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)
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(22,608
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)
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Income (loss) before taxes
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6,009,584
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(3,093,143
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)
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Income tax expense
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743,307
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—
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Net income (loss)
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$
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5,266,277
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$
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(3,093,143
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)
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Adjusted EBITDA
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$
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9,221,279
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$
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(784,227
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)
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Three Months Ended March 31, 201
8
Compared to Three Months Ended March 31, 201
7
Revenues
. Our revenues include sales to customers of Company produced coal and coal purchased from third parties. We include amounts billed by us for transportation to our customers within revenues and transportation costs incurred within cost of sales. Coal sales information is summarized as follows:
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Three months ended March 31,
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2018
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2017
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(Decrease) /
Increase
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Company Produced
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(tons in thousands)
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Coal sales revenue
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$
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36,852,932
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$
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3,744,413
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$
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33,108,519
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Tons sold
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403
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53
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350
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Purchased from Third Parties
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Coal sales revenue
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$
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19,090,216
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$
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6,107,565
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$
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12,982,651
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Tons sold
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119
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35
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84
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Coal sales in the first quarter of 2018 were approximately $33.1 million higher than in the first quarter of 2017 due to substantially higher volumes sold and higher realized prices. In the quarter ended March 31, 2017, we also recognized $1.7 million of revenue for the processing of coal for third parties. We ceased processing third-party coal in April 2017 and have no current plans to begin those operations again.
Cost of sales.
Our cost of sales totaled $44.3 million for the first quarter of 2018 as compared with $10.8 million for the same period in 2017. Cost of sales for the first quarter of 2017 includes $1.0 million of costs associated with the processing of coal for third parties.
The total cash cost per ton sold (FOB mine) for the first quarter of 2018 was approximately $65 for our own produced coal and approximately $89 for coal we purchased from third parties. Sequentially, cash costs of approximately $65 per ton for our produced coal was up from approximately $58 in the fourth quarter of 2017 due in part to unexpected geological challenges with our surface mine and weather-related impacts restricting on-site transportation. These issues resulted in lower than anticipated surface mining production volumes, as well as reduced washed and shipped tons during the first quarter of 2018.
Our cost of sales in the three months ended March 31, 2017 reflect the costs incurred at our first operating mine, the Alma Mine, which began commercial mining activities in that period.
Other operating costs and expenses.
This includes costs and expenses which are not directly related to a specific mining operation. It typically includes general land management costs and some permit and license fees.
Asset retirement obligation accretion.
Asset retirement obligation accretion in the three months ended March 31, 2018 was $123 thousand as compared with $101 thousand for the same period of 2017. Our operations have increased significantly over the past year as several mines and our Elk Creek preparation plant were developed and became operational.
Depreciation and amortization.
Our depreciation and amortization costs for the first quarter of 2018 was $2.4 million as compared with $156 thousand for the first quarter of 2017. Increased depreciation and amortization costs result from our significantly expanded operations over the past year.
Selling, general and administrative.
Selling, general and administrative expenses were $3.4 million for the quarter ended March 31, 2018 as compared with $3.6 million for the same period in 2017. The total for the first quarter of 2017 includes $2.1 million of equity-based compensation expense for the accelerated vesting of stock options which became fully vested upon our initial public offering. Equity-based compensation expense for the 2018 period totaled $551 thousand.
The remaining increase reflected the growth of our organization as we began producing and selling coal and fulfilling our responsibilities as a publicly-traded company.
Income tax expense.
For the three months ended March 31, 2018, we recognized income tax expense of $743 thousand. Our estimated full year effective tax rate for 2018 is comprised of the expected statutory tax expense offset by changes in valuation allowance and tax benefits for percentage depletion. Cash taxes paid for 2018 are expected to be less than $400 thousand. Significant depletion and depreciation expense and utilization of net operating loss carryforwards combine to substantially reduce our expected cash taxes.
We did not recognize any income tax expense or benefit for the three months ended March 31, 2017 because tax losses incurred for the year were fully offset by a valuation allowance against deferred tax assets.
Net income (loss) &
Adjusted EBITDA.
For the three months ended March 31, 2018, we reported net income of $5.3 million as compared with a net loss of $3.1 million for the same period of 2017. Adjusted EBITDA was $9.2 million for the first quarter of 2018 as compared to an adjusted EBITDA loss of $784 thousand for the same period in 2017.
Non-GAAP Financial Measures
Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.
We define Adjusted EBITDA as net income (loss) plus net interest expense, equity-based compensation, depreciation and amortization expenses and any transaction related costs. A reconciliation of income (loss) from continuing operations, net of income taxes, to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies. The table below shows how we calculate Adjusted EBITDA:
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Three Months Ended March 31,
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2018
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2017
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Reconciliation of Net Income (Loss) to Adjusted EBITDA:
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Net income (loss)
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$
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5,266,277
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$
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(3,093,143
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)
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Add (Subtract):
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Depreciation and amortization
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2,437,500
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156,127
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Interest and dividend income, net
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99,922
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(93,821
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)
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Income taxes
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743,307
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—
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EBITDA
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8,547,006
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(3,030,837
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)
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Add:
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Equity-based compensation
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550,805
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2,145,333
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Accretion of asset retirement obligation
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123,468
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101,277
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Adjusted EBITDA
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$
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9,221,279
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$
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(784,227
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)
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Liquidity and Capital Resources
Our primary source of cash is proceeds from the sale of our coal production to customers. Our primary uses of cash include the cash costs of coal production, capital expenditures, royalty payments and other operating expenditures.
Cash flow information is as follows:
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Three Months Ended March 31,
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2018
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2017
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Consolidated statement of cash flow data:
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Cash flows from operating activities
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$
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3,436,361
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$
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(6,194,204
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)
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Cash flows from investing activities
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(7,569,103
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)
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(15,862,256
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)
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Cash flows from financing activities
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5,522,270
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30,827,592
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Net change in cash and cash equivalents
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$
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1,389,528
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$
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8,771,132
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Cash flows from operating activities in the three months ended March 31, 2018 increased from the three months ended March 31, 2017 principally due to increases in our earnings. Significantly increased operations in the first quarter of 2018 required a greater investment in working capital.
Net cash used in investing activities was $7.6 million for the three months ended March 31, 2018 as compared with $15.9 million for the same period of 2017. Our capital expenditures totaled $12.8 million and $11.4 million in the 2018 and 2017 periods, respectively. We received proceeds of $5.2 million from maturing investments during the 2018 period.
Cash flows from financing activities were $5.5 million for the three months ended March 31, 2018 as compared with $30.8 million for the same period of 2017 and principally resulted from proceeds from debt and equity issuances.
Indebtedness
In February 2018, we borrowed $6 million under a six-month credit facility in order to manage accounts receivable. The credit facility is secured by a portion of our mobile mining equipment. Interest accrues monthly at 8.5% or 30-day LIBOR plus 6.9%, whichever is greater. Principal and interest are due on August 31, 2018 but may be prepaid without penalty at any time. We anticipate securing another credit facility before the maturity of our present facility.
Liquidity
As of March 31, 2018, our available cash was $7.3 million. We expect to fund our capital and liquidity requirements with investments and cash on hand, borrowings discussed above and projected cash flow from operations. Factors that could adversely impact our future liquidity and ability to carry out our capital expenditure program include the following:
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Timely delivery of our product by rail and other transportation carriers;
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●
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Timely payment of accounts receivable by our customers;
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●
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Cost overruns in our purchases of equipment needed to complete our mine development plans;
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●
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Delays in completion of development of our various mines which would reduce the coal we would have available to sell and our cash flow from operations; and
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●
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Adverse changes in the metallurgical coal markets that would reduce the expected cash flow from operations.
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Capital Requirements
Our primary use of cash currently includes capital expenditures for mine development and for ongoing operating expenses. We expect that we will be required to spend another $72 million through 2022 to fully develop our current projects.
Management believes that current cash and investments on hand, along with cash flow from operations, will be sufficient to meet its capital expenditure and operating plans through 2020. We expect to fund any new reserve acquisitions from cash on hand, cash from operations and potential future issuances of debt or equity securities.
If future cash flows are insufficient to meet our liquidity needs or capital requirements, we may reduce our expected level of capital expenditures and/or fund a portion of our capital expenditures through the issuance of debt or equity securities, the entry into debt arrangements or from other sources, such as asset sales.
Off-Balance Sheet Arrangements
As of March 31, 2018, we had no material off-balance sheet arrangements.
Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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In addition to the risks inherent in operations, we are exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding our exposure to the risks related to changes in commodity prices, interest rates and foreign exchange rates.
Commodity Price Risk
Our primary product is metallurgical coal. Our coal is sold under short-term fixed price contracts, term transactions utilizing index pricing or on a spot basis. As such, we are exposed to changes in the international price of metallurgical coal. We attempt to manage this risk by keeping tight control over our mining costs.
Interest Rate Risk
As we have limited debt, we are not generally exposed to interest rate risk. Should we incur debt in the future or increase our cash position, the general level of interest rates will begin to take on greater importance. At that time, we will manage our exposure through a variety of financial tools designed to minimize exposure to interest rate fluctuations.
Foreign Exchange Rate Risk
Our export sales of coal are typically denominated in U.S. dollars. As a result, we do not have direct exposure to currency valuation exchange rate fluctuations. However, because our coal is sold internationally, to the extent that the U.S. dollar strengthens against the foreign currency of a customer or potential customer, we may find our coal at a price disadvantage as compared with other non-U.S. suppliers. This could lead to our receiving lower prices or being unable to compete for that specific customer’s business. Consequently, currency fluctuations could adversely affect the competitiveness of our coal in international markets.
Item 4.
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Controls and Procedures
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Disclosure
Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.
During the first quarter of 2018, we completed the implementation of an enterprise financial accounting and reporting software system. Transitioning to this new platform offers many benefits which we believe will position us well for our long-term growth through improved functionality to numerous business processes. The implementation involved changes in systems that included internal controls, and accordingly, these changes have required changes to our system of internal controls. We reviewed the system as it was being implemented and the controls affected by the implementation of the new system and made appropriate changes to affected internal controls during the implementation process. We believe that the controls as modified are appropriate and functioning effectively. There were no other changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.