Warrior Met Coal, Inc. (HCC) Q4 2018 Earnings Conference Call Transcript




  • In Business
  • 2019-02-22 06:28:05Z
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Warrior Met Coal, Inc. (NYSE: HCC)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon. My name is Jamie, 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 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Before we begin, I have 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.

Walter J. Scheller -- Chief Executive Officer and Director

Thanks, Jamie. Hello, everyone, and thank you for taking the time to join us today to discuss our fourth quarter and full year 2018 results. After my remarks, Dale will review our results in additional detail and then you will have the opportunity to ask questions.

Warrior performed exceptionally well and exceeded our expectations in the fourth quarter, which led to a record year in production and sales volumes for 2018. These operational records also drove strong financial performance. We're proud to announce that we achieved a record $1.4 billion in revenue, $601 million of adjusted EBITDA, and free cash flow of $458 million.

In addition, we continued our commitment of returning capital to stockholders. We concluded $400 million of cash dividend and stock repurchases over the course of 2018. Our strong fourth quarter and full year 2018 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 margins and free cash flow in the industry; and four, a highly talented workforce that drive safety, sales, production volume and efficiencies in the business.

Our operational successes 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 in 2018. 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. Production volume in the fourth quarter was 1.9 million short tons compared to 1.6 million produced in the same quarter of 2017, an increase of 20%. We successfully completed one longwall movement in the fourth quarter compared to three longwall moves in the fourth quarter of 2017 and achieved production levels that were better than expected.

Our better-than-expected results demonstrate the significant efforts made by our employees in anticipating and planning our fourth quarter longwall move and proactively driving production efficiencies and managing our equipment downtime. The company's strong performance in the fourth quarter propelled full year production volume to a record high of 7.7 million short tons, which exceeded our guidance target. This record high represents over one million more short tons in 2018 or 15% increase compared to 2017 and with 4 million more short tons than we produced in 2016.

The capital investment we made into the mines over the last two years is really paying off, as we strive to reach full capacity to improve production efficiencies and better equipment utilization with less downtime in a safe environment. Mine seven reached a new milestone in its history with a record-high production of 5.6 million short tons in 2018, which is its best year since it began production in the 1970s. Sales volumes in the fourth quarter were 2 million short tons compared to 1.4 million in the same quarter of 2017, an increase of 45%.

Demand from our customers continue to be strong during the fourth quarter, especially in South America. Our sales by geography in the quarter were 49% in Europe, 38% in South America and 13% in Asia. The mix shift from Europe to South America was primarily driven by higher penetration with existing customers in addition to new customer sales. Sales volumes for the full year 2018 reached a record high of 7.6 million short tons, which exceeded our guidance target compared to 6.5 million short tons in 2017, an increase of over one million short tons or 17%.

Our sales by geography for the year were 55% in Europe, 31% in South America and 14% in Asia. Strong demand for steel, coming mainly from construction, automobile sales and machinery, provide global producers with high operating rates and healthy steel margins, which in turn created a strong demand for our premium coals in 2018. Inventories decreased 116,000 tons to 369,000 short tons at the end of the fiscal year during the strong sales volume in the fourth quarter as I noted earlier.

In the fourth quarter, the Platts premium low vol index price continued to rise on the back of strong fundamentals. Solid demand came from most major global regions coupled with the supply chain that displayed tightness due to a continuation of logistical and production disruptions in Australia. The coal import restrictions implied by China late in November did not have a noticeable impact on the index price during the fourth quarter.

Our gross price realization for the fourth quarter was 93% of the Platts premium low vol FOB Australian Index price, reflecting a rising price environment during the quarter. In a rising price environment, Warrior generally experiences lower price realizations as we price with customers on some amount of lag time.

Likewise in the following price environment, we expect our realizations to be higher and reflect the timing shift of those realizations. However, as we have previously disclosed, this should even out through the cycle and over the long term, our price realization should be nearly 100% on the average index price. Average index prices rose each and every month during the quarter and gained over $25 a metric ton from the third quarter, reaching a peak of over $30 a metric ton in early December.

The company spent $26 million on capital expenditures during the fourth quarter this year compared to $30 million last year. For the full year of 2018, capital spending was $102 million compared to $93 million of previous year. Over the last two years Warrior has demonstrated a commitment to reinvesting significant amounts of capital into the business. More specifically, we spent almost $200 million to strengthen our operational platform by driving production efficiency and higher equipment utilization.

In addition, these higher-than-normal sustaining capital investments during high price environments provide the company with better flexibility to reduce our capital spending and lower price environment. As I will discuss later, we expect to continue that investment approach again in 2019 subject to a favorable market price environment.

At the same time, we set record high levels and exceeded our guidance targets for production and sales volume. Our financial results for the year also reached record highs. Moreover, while we invested over $100 million of capital into the business during 2018, we also returned capital to our stockholders of nearly $400 million.

We continually evaluate where is the strength in our business model and balance sheet as evidenced by our strong free cash flows, low leverage and minimal reclamation liabilities.

Warrior's record performance continues to demonstrate the unique value of a 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 price environment not just in the favorable conditions, we've experienced over the past couple of years. We have invested in the business where appropriate to support this strategy. We've also continue to reward our stockholders as conditions warrant.

In addition to our strong stock performance in 2018, I want to provide an update on our Blue Creek growth project. Blue Creek is one of the few remaining untapped reserves of premium High Vol A met coal in the United States. With strong and consistent performance from Mine 4 and Mine 7, we've began evaluating development alternatives for Blue Creek as we consider the next phase of growth for Warrior.

We're excited about the promising results from our early work and believe Blue Creek has the potential to deliver significant value to our stockholders. Our initial work has focused on the feasibility of the single long low wall operation with annual production of up to 3 million short tons.

While we continue to refine project parameters studies undertaken in the fourth quarter of last year demonstrated robust returns across the range of met coal prices. These studies estimated initial capital expenditures of $550 million to $600 million over 5 years and net present values between $842 million and $1.8 billion based on $150 per metric ton and $200 per metric ton coal prices.

These estimated net present value translate to $16.34 per share and $34.16 per share which we think highlights the significant value potential of Blue Creek to our stockholders.

Given the positive results of the work completed today, we plan to pursue a number of activities in 2019 to maintain project momentum and optimize Blue Creek's project parameters. These activities include additional core drilling finalizing the rail route design and permitting the slurry storage in coarse refuse areas.

Additionally, we planned to continue to explore potential offtake arrangements as well as project financing alternatives. We expect Blue Creek will be fully permitted and shall be ready by early 2020 at which point Warrior would be in a position to make a decision on development. We are extremely excited by the potential we see at Blue Creek and believe the project could become the cornerstone of our future portfolio. We look forward to providing updates to our stockholders over the next 12 months.

Lastly, before I hand things over to Dale, I'm pleased to note that Warrior has maintained a strong environmental record and is committed to further improvement. We're proud of our strong environmental compliance record with the EPA's National Pollutant Discharge Elimination System Program. We are also actively engaged in the EPA's voluntary programs to reduce greenhouse gas emissions.

Warrior also continues to improve its flame reclamation efforts which have yielded success across all sites and facilities and received approval from the Alabama Surface Mining Commission in 2018 for the final release of 667 reclaimed acres of land.

Finally, we are highly proactive in planning all ongoing and future activities to minimize negative impacts to wildlife and their habitats by facilitating thorough reviews by the U.S. Fish and Wildlife Office. We aim to build on these efforts in 2019 and continue to strive to be an industry leader in environmental stewardship.

I'll now ask Dale to address our fourth quarter and full year results in greater detail.

Dale Boyles -- Chief Financial Officer

Thanks Walt. 2018 was a record year in operational financial performance for the company. The company exceeded guidance targets recorded over $600 million of adjusted EBITDA, generated $458 million of free cash flow, and distributed returns to stockholders of nearly $400 million.

For the fourth quarter of 2018, net income on a GAAP basis was $374 million or $7.11 per diluted share compared to net income of $97 million or $1.83 per diluted share in the fourth quarter of 2017.

Excluding the non-cash income tax benefit recognized upon the release of the valuation allowance on deferred tax assets associated with Warrior's net operating losses and a non-cash adjustment to our asset retirement obligations due to a change in reclamation estimates, non-GAAP adjusted net income for the fourth quarter of 2018 was $125 million or $2.38 per diluted share compared to $1.83 per diluted share in the fourth quarter of 2017.

For the full year 2018, net income on a GAAP basis was $697 million or $13.17 per diluted share compared to net income of $455 million or $8.62 per diluted share in 2017. Excluding the non-cash income tax benefit, non-cash asset retirement obligation adjustment, incremental stock compensation expense, and transaction and other expenses, non-GAAP adjusted net income for 2018 was $459 million or $8.67 per diluted share compared to $468 million or $8.86 per diluted share in 2017.

Adjusted EBITDA was $162 million in the fourth quarter as compared to adjusted EBITDA of $86 million in the same period of 2017, an increase of 87%. The company's adjusted EBITDA margin was 45% in the fourth quarter compared to 36% in the fourth quarter of 2017.

The quarterly increase was primarily driven by a 45% increase in sales volume an increase in average net selling prices and lower cash cost.

For the full year 2018 Warrior recorded a record-high adjusted EBITDA of $601 million compared to $518 million in 2017, an increase of 16%. The yearly increase was primarily driven by 17% increase in sales volume.

Adjusted EBITDA margin was 44% in each of the last two years. Total revenues were $360 million in the fourth quarter of 2018, compared to $240 million in the same period last year. This increase was primarily due to a 45% increase in sales volume on strong customer demand and a 5% increase in average net selling prices.

For the full year 2018, total revenues were a record high at $1.4 billion on sales volume of 7.6 million short tons, compared to $1.2 billion in 2017 on sales volume of 6.5 million short tons.

Total revenues grew -- total revenues in 2018 grew $209 million or 18% over 2017, primarily due to a 17% increase in total sales volumes. The net -- the average net selling price per short ton increased approximately 5% in the fourth quarter, compared to the same period in 2017. The price environment continued to be strong with index prices rising in the fourth quarter to a record -- to a high of $236 per metric ton.

Our gross price realization of 93% was reflective of the rising price index throughout the fourth quarter. Demurrage and other charges reduced our gross price realization to a net average selling price of $178 per short ton in the fourth quarter of 2018, compared to $169 in the same period last year. For the full year of 2018, average net selling prices increased 2% to $176 per short ton.

Mining cash cost of sales was $183 million or 52% of mining revenues in the fourth quarter, compared to $137 million or 60% of mining revenues in the fourth quarter of 2017.

Cash cost of sales per short ton, FOB port was approximately $93 in the fourth quarter, compared to $101 million in the same period in 2017. Decrease is primarily due to higher sales volumes, lower spending offset slightly by higher transportation and royalty cost, which are price sensitive to met coal pricing.

Cash cost of sales per short ton, FOB port was approximately $94 for the entire year of 2018 was in line with our guidance and was approximately $3 per short ton higher than 2017. This increase in the cash cost per short ton is primarily due to higher spending associated with a higher sales and production volume in 2018.

Cost of other revenues, which was primarily composed of our gas and land operations was income rather than expense in the fourth quarter of 2018, resulting from the previously mentioned non-cash adjustment of $21 million to our asset retirement obligations. This large non-cash adjustment reflects changes in estimates of spending required to reclaim the stirred above and below ground property and gas wells and the timing of future cash outflows of approximately $20 million and a change in discount rates of approximately $1 million.

SG&A expenses were about $8 million or 2% of total revenues in the fourth quarter and approximately $6 million lower than the same period last year, primarily due to lower stock compensation expense and performance related bonuses. SG&A expenses of $36 million for the full year 2018 were within our guidance than flat compared to 2017.

Depreciation and depletion expenses for the fourth quarter of 2018 were $25 million or 7% of total revenues, compared to $18 million in 2017. The increase in the fourth quarter was primarily due to the relatively higher rate of capital spending over the last two years.

For the full year 2018, these expenses were $22 million higher than last year, primarily due to higher capital spending plus $4 million of accelerated depreciation on equipment beyond its economic repair, reported earlier in 2018. Net interest expense was about $9 million in the fourth quarter and included interest on our outstanding debt, plus amortization of our debt issuance costs associated with our credit facilities offset by interest income.

This was higher than last year's fourth quarter due to the 8% senior secured notes offering completed in March 2018. For the full year 2018, net interest expense was $37 million and inline with our guidance. The increase of approximately $30 million over 2017 was due to the timing of the issuance of the senior secured notes in November 2017 and March of 2018.

The company recorded non-cash income tax benefit of $226 million during the fourth quarter of 2018 primarily reflecting the release of the valuation allowance on deferred tax assets associated with the company's net operating losses. The release of the valuation allowance reflects Manager's Belief as of the end of 2018 that more likely than not the company will fully utilize, its net operating losses before they expire based on its past trend of earnings and projected future taxable income.

We paid no cash taxes in 2018 as indicated in our guidance and continued utilization of our NOLs will reduce our federal and state income tax liability to 0 until the NOLs are fully utilized or expire. We expect this will continue to drive significant free cash flow conversion over the next several years.

Turning to cash flow, during the fourth quarter the company generated $105 million of free cash flow which was result of cash flows provided by operating activities of $131 million, less cash used for capital expenditures of $26 million. This compares to $61 million of free cash flow in the fourth quarter of 2017. These higher result is primarily due to the higher operating results in the fourth quarter offset by an increasing working capital of $39 million on higher accounts receivable and income tax receivable.

Our cash flows from operating activities for the full year 2018 were $550 million and were $125 million or 29% higher than 2017. These higher results were driven by higher operating results in 2018 offset by a modest increase in working capital of $11 million.

The company generated free cash flow of $458 million in 2018, an increase of $116 million or 34% over 2017. These results demonstrate the strength of free cash flow conversion of our adjusted EBITDA margins of 76% this year compared to 66% last year.

Cash used in investing activities for the purchase of capital expenditures was $26 million during the fourth quarter and totalled $102 million for the year. For the year we spent $69 million on sustaining capital and $33 million on discretionary capital. The discretionary spending in 2018 was primarily for the completion of a new portal for Mine 7, development of infrastructure in Mine 4, a hoist upgrade and various other operational improvements which we expect will increase efficiency, increase the production and lower cost over time as these projects become fully operational.

Cash flows used in financing activities were $27 million in the fourth quarter of 2018 and consistent with the payment of the quarterly dividend plus $25 million of repurchases of the company's common stock. The company repurchased 1.1 million shares of its common stock during the fourth quarter.

For the full year of 2018, we repurchased a total of 1.6 million shares, which was 3% of outstanding shares for $38 million. As we previously stated, the company remains committed to returning excess cash to stockholders in various forms.

For the full year of 2018, cash flows used in financing activities were $282 million, which include the net proceeds of a tack-on notes offering in March 2018 of $125 million, repayments on outstanding debt of $3 million, distributions of dividend of $361 million and stock repurchases of $38 million.

Total cash distributed to stockholders in 2018 through dividends and stock repurchases totaled $400 million. This amount is on top of the approximately $800 million distributed to stockholders in 2017.

The company's balance sheet continues to be strong with a leverage ratio of less than 0.5 times adjusted EBITDA plus ample liquidity without the fixed cost associated with legacy liabilities that some competitors have on the balance sheet. Our total available liquidity as of year-end was $326 million, consisting of cash and cash equivalents of $206 million and $120 million available under our ABL facility, net of outstanding letters of credit of approximately $5 million.

We believe our strong balance sheet and significant free cash flow generation will give us flexibility if we decide to pursue our Blue Creek gross project. In summary, we finished with another strong performance in the fourth quarter that drove record operational and financial performance for the entire year.

Now turning to our outlook and guidance for 2019. As a result of strong production in 2018, we expect to complete two additional longwall moves for a total of five longwall moves in 2019, compared to the three moves we had in 2018. Despite additional longwall moves, we are increasing the upper end of our guidance for coal production in coal sales for 2019 compared to the guidance provided for 2018.

Our guidance for the full year 2019 reflects our view of continued operational strength and expected market conditions and as follows: coal sales of 7.1 million short tons to 7.6 million short tons, coal production of 7.1 million short tons to 7.6 million short tons, cash cost of sales FOB of $89 per short ton to $95 per short ton. Capital expenditures of $100 million to $120 million, SG&A expenses of $32 million to $36 million, interest expense net of $40 million to $42 million, non-cash deferred tax expense of 23% to 25%, and a cash tax rate of 0%.

We're approaching 2019 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 Platt's premium low vol index pricing, the number of planned longwall moves and the timing of those moves between quarters.

It's worth noting the addition of guidance for non-cash deferred tax expense of 23% to 25% beginning in 2019. After the release of the valuation allowance on deferred tax assets associated with the company's NOLs, the company will be recording non-cash tax expense each quarter in 2019 that represents the utilization of the NOLs and the corresponding balance sheet decrease in deferred tax assets. The company still expects to pay no cash taxes until the NOLs are fully utilized or expire.

Before I turn it back over to Walt, I want to comment on our other announcement today of the commencement of offers to repurchase up to $150 million of our senior secured notes. A restricted payment offer and concurrent tender offer are being made to provide the company with the ability soon to declare a special dividend and/or stock repurchase program of approximately $150 million, which, of course, is subject to change depending upon the results of a restricted payment offer, the tender offer and market conditions.

We believe this action further strengthens the company's balance sheet by delevering the company and returning capital to stockholders that we have committed. Let me reiterate that Warrior has demonstrated commitment to returning excess cash to stockholders that is beyond the current requirements of the business, while allowing flexibility to pursue very selective strategic growth opportunities that can provide compelling stockholder returns.

To that end, we expect to have excess cash of $300 million available at the end of March in our 2019 capital allocation plan, so that cash is expected to be split between the repurchase of bonds and return of capital to stockholders in various forms.

I'll now turn it back to Walt for his final comments.

Walter J. Scheller -- Chief Executive Officer and Director

Thanks, Dale. Before we move on to Q&A, I'd like to make a few more comments about the company and its prospects. We're very pleased with the company's strong operational and financial performance in 2018 and we appreciate the support and engagement that we've received from our stockholders and of course our employees.

As our production volumes have increased, we benefited from the increased operating leverage and by investing in the long-term projects that will benefit the operations in the future. 2018 was a record year for global steel production with key regions like China and India displaying strong year-over-year growth, while South America and Europe continued producing steel at high levels.

Although, we've seen overall conditions temper off in early 2019, mainly due to concerns around the potential slowdown in certain major economies, as well as the implicit uncertainty of the China-USA trade discussions and the Chinese New Year.

We anticipate another good year for steel production. Indications from our global customers reflect this premise with their current forecasted production volumes nearing closely to those observed this past year.

With the expectations of strong steel production volumes at or near 2018 levels, coupled with the absence of material changes in the supply of hard coking coal, we believe that demand for our premium products will also remain consistent throughout the year.

The recent decline in the Australian premium low-vol index from the highs achieved in the fourth quarter of 2018 was mostly within expectations and remains at favorable values. Additionally, while spot prices have declined recently forward prices remain robust and are above forward prices seen at this time last year. This provides us with confidence that pricing should stabilize in the near term at or near current levels and remain within a reasonable range for the rest of the year.

We recognize that certain economic indicators such as the potential slowdown in regional GDP growth rates, as well as a reduction in steel demand in Europe have the potential to create a softer pricing environment for hard coking coal. However, barring any unforeseen material events, we believe current fundamentals should remain relatively healthy through our markets.

In light of these expected market conditions, we're establishing our 2019 guidance targets with cautious optimism. As I 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 2019 guidance during the year as necessary to adapt the changing market conditions and changes in the business.

As Dale indicated earlier, we expect our 2019 capital spending to range from $100 million to $120 million consisting of sustaining capital spending of $70 million to $87 million including our gas business requirement and discretionary capital spending of $30 million to $33 million. The sustaining capital range includes new ventilation chest that are necessary every few years and other key equipment rebuild projects that occur every few years. The discretionary capital spending is primarily for the future development of Mine four and the completion of the some smaller projects that began in 2018.

Lastly, I want to comment on our other news release today. We continue to generate significant free cash flow despite significant investment in our operations. We plan to use the excess cash of $300 million available at the end of March to repurchase a portion of our senior secured notes from our bondholders on one hand and return capital to stockholders of special cash dividends and/or stock repurchases on the other. We believe these actions will allow us to continue to maximize value and drive returns for our stockholders.

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

Questions and Answers:

Operator

(Operator Instructions) And our first question today comes from Lucas Pipes from B. Riley FBR. Please go ahead with your question.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, good afternoon gentlemen. I wanted to first ask a little bit about capital returns throughout the prepared remarks. It sounded like you made a couple of references to your intention of returning capital to shareholders again in various forms. I think that's what you said. Could you maybe elaborate on that? Obviously you're tendering for the $150 million on the debt side is that the right size to think about? And how soon could something like $150 million be returned to shareholders?

Dale Boyles -- Chief Financial Officer

Lucas thanks for your question. Yes as I said in my remarks, we're looking to distribute a total of $300 million of cash that we should have on hand by the end of March and that would be split $150 million in the restricted payment offering to bondholders and the other $150 million for special cash dividend and/or stock repurchases. So that's the plan. Depending upon the results for the restricted payment offer and tender offer, if there are amounts that are declined in the restricted payment offer those amounts could be potentially added to the special dividend and/or stock repurchase returned. We'll just have to wait and see how those results turn out, but that's our plan that we have right now.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. No that's very helpful. Thank you for that additional clarity. And then you disclosed a lot about Blue Creek. I appreciate that and I appreciate the level of detail that you provided. How do you think about this project at this time? Is it more like permitting seeking investor feedback? Or do you intend to maybe come out with a date at which you might sanction this growth project? I would appreciate your thoughts? Thank you.

Walter J. Scheller -- Chief Executive Officer and Director

Well right now as we said we've been doing some work some further engineering work. We've got a lot of permitting that's already completed. We intend to do some additional permitting this year on things such as the slurry -- refuse areas slurry disposal and rail loop.

So, those are the areas we'll be focused on this year. We'll do some additional engineering studies, do some core drilling. And again our goal is to put the work into this year that we are ready to start if we decide to pull the trigger that we're ready to start in early 2020.

Lucas Pipes -- B. Riley FBR -- Analyst

And how do you -- so you've been very -- you've returned a lot of capital to shareholders and I think you stand out among your peer group. So how do you balance returning capital to shareholders with a growth project such as Blue Creek? Thank you for your thoughts. Thank you.

Dale Boyles -- Chief Financial Officer

Yes, Lucas, I think nothing's changed from a capital allocation standpoint. We remain committed to returning excess cash to our shareholders in the various forms and so until we make a final decision none of that has changed but I will tell you look we're really excited about this. This is really the future growth of the company as we have been working our way up to the nameplate capacity. This is reserve that we already control 114 million short tons. So clearly it makes a lot of sense to really start working on this project now and looking at when do we make those -- take those next steps.

So, we'll take a holistic approach, returns based approach kind of the capital allocation once we get to that point of making a decision on Blue Creek. As we said look once, we complete these things in 2019 some additional core drilling and things like that we think this project is shovel-ready early 2020 and we can make a decision at that point.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. very helpful. I applicate your comments. I have more questions. so I'll jump in the queue. Thank you.

Operator

Our next question comes from Jeremy Sussman from Clarksons. Please go ahead with your question.

Jeremy Sussman -- Clarksons -- Analyst

Hi thanks for taking my questions, and congratulations on another very strong quarter guys.

Walter J. Scheller -- Chief Executive Officer and Director

Thanks Jeremy.

Dale Boyles -- Chief Financial Officer

Thanks Jeremy.

Jeremy Sussman -- Clarksons -- Analyst

I guess from the production standpoint, I guess, obviously a very strong year in 2018. I assume the reason for the modest downtick in 2019 is the five longwall moves. And I guess along those lines should we still think of Warrior as an 8 million ton per annum producer when fully ramped? Or I guess how should we be thinking about the production profile?

Walter J. Scheller -- Chief Executive Officer and Director

Jeremy this year yes the fact that we have five longwall moves is going to play a factor and how successfully we can complete those longwall moves will drive whether or not we see where we end up in our range or exactly where we finish the year from a production standpoint.

I still do think our production potential we say is 8 million tons and there is going to be years where we should be able to get there and there is going to be years where with things like five longwall moves where we have to step back and say that doesn't quite make sense this year.

I'm real proud of the progress our operations have made. I think they had a fabulous year last year and I expect them to perform very well again this year.

Dale Boyles -- Chief Financial Officer

Jeremy, just -- let me add to that. If I remember from the last two years, our production levels have well exceeded our expectations. So what's happened with that strong performance, we've actually pulled these moves in sooner. So if you remember we pulled in an extra move in 2018 that was scheduled for 2019, because we've done so well. So we've pulled some of these forward, but that's because things had been going well.

Jeremy Sussman -- Clarksons -- Analyst

That makes perfect sense and maybe Dale just a follow-up. So, the restricted payment offer is obviously I think at 103% and then you've got the tender offer at 104.25%. So, assuming the maximum amount is ultimately tendered between the restricted payment and the tender offer, can you just remind us is there any difference between the two in terms of what your ability to pay a special dividend would be? Thank you.

Dale Boyles -- Chief Financial Officer

Well, what we try to do is provide optionality to the bondholders and to allow the company to economically increase the amount of cash that we could share with our equity holders as well. So, to the extent under the restricted payment offer, they are declined amounts and I will point you to like page two of that particular press release where it gives you an example.

If there are declined amounts in that that essentially creates capacity for your return of capital. And if you look on that second page where we've given example of the $300 million and where actually $95 million of that gets paid because it's still on a pro-rata basis create capacity of $55 million for extra capital returns. So, you could increase your $150 million by another $55 million there, Jeremy.

Jeremy Sussman -- Clarksons -- Analyst

Understood. Thank you very much, Dale.

Dale Boyles -- Chief Financial Officer

Thanks.

Operator

(Operator Instructions) Our next question comes from Matthew Fields from Bank of America. Please go ahead with your question.

Matt Castellini -- Bank of America -- Analyst

Hey, guys. Matt Castellini here on for Matt Fields. So I just want to clarify one thing. In aggregate those two tender offers are basically referred to $300 million of the 8% of 24. I know you mentioned excess cash flow, $150 million I believe you said would go to fund that, but I guess what else would that be funded with beyond excess cash flow?

Dale Boyles -- Chief Financial Officer

Well, as we said, we expect to have $300 million on hand at the end of the first quarter. We have already over 205 -- I think it's $205 million at the end of December. And so the way the RP and tender offer work is you participate in either/or. So again we will fund the payment, which is a maximum amount to the notes of $150 million and then $150 million to capital returns for stockholders.

Matt Castellini -- Bank of America -- Analyst

Okay, understand. Thank you very much.

Dale Boyles -- Chief Financial Officer

All right. Thanks very much.

Operator

And our next question is a follow-up from Lucas Pipes from B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, good afternoon, again and thank you for taking my follow-up question. I wanted to circle up a little bit on the cost guidance for 2019. It appears modestly lower at the midpoint, compared to 2018, despite the lower production guidance. So I wonder, if you can maybe just provide a little bit more color as to the drivers for the 2019 cost guidance? Thank you.

Dale Boyles -- Chief Financial Officer

Yes. I think we're going to start to see some of the capital investment paying-off Lucas. And we expect to kind of get some of the efficiencies of these projects that we've been spending on. So that's the reason for driving that down primarily. We did spend a lot this year on particular improvement projects. One was the portal that we've talked about and reducing overtime, but we're starting to see that these projects really pay-off not just better equipment utilization, but also incremental volume and lower cost.

Lucas Pipes -- B. Riley FBR -- Analyst

Okay. That's helpful. Thank you. And you're spending a little bit more as you noted in the prepared remarks in 2019. What's the list of projects that you're trying to tackle with additional capital? And could we be thinking about a similar return on those? Or as you kind of capture some low-hanging fruits the return maybe a little bit lower than what you saw on the 2018 capital spend? Thank you.

Walter J. Scheller -- Chief Executive Officer and Director

Well, this is Walt. On the sustaining projects, what we said is, we've got a -- we got more shafts this year than normal. So that's accounting for some of that additional sustaining capital spend. The discretionary capital spend is the development of the future for mindful and we've always called that Cassidy, but I think we're not calling it Fournier, so it's really about the development of the mine toward that project and the beginning of sinking the shaft in that area that'll be the mine life for Mine 4 for probably the next 20 years.

So on those -- on that project that's really a several-year project that will enable the continuation of long-term success in Mine 4. And the rest of the sustaining capital is pretty standard in some of the smaller discretionary capital projects. Yes, we hope to see some benefit from those, but we haven't banked on that.

Lucas Pipes -- B. Riley FBR -- Analyst

Very helpful. Thank you. And Mine No. 4 in North, when do you plan to transition into that mining area? And what's roughly the capital spending for this new section?

Walter J. Scheller -- Chief Executive Officer and Director

We have about five years of mining left in what's we consider to be the kind of the eastern part of Mine 4. And when we need to have develop the area in Cassidy from now until that is completed so actually be mining longwall coal at that side of the mine, full north side of the mine probably in five or six years. It could be a little earlier, but probably about that timeframe.

Lucas Pipes -- B. Riley FBR -- Analyst

This is very helpful. I will leave it here and best of luck. Good job.

Walter J. Scheller -- Chief Executive Officer and Director

Thank you.

Operator

(Operator Instructions) And at this time it is showing no further questions. I'd like to turn the conference call back over to Mr. Scheller for any closing comments.

Walter J. Scheller -- Chief Executive Officer and Director

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

Operator

Thank you. And that concludes today's conference call. We thank you for participating. You may now disconnect.

Duration: 48 minutes

Call participants:

Walter J. Scheller -- Chief Executive Officer and Director

Dale Boyles -- Chief Financial Officer

Lucas Pipes -- B. Riley FBR -- Analyst

Jeremy Sussman -- Clarksons -- Analyst

Matt Castellini -- Bank of America -- Analyst

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