Q4 2023 Warrior Met Coal Inc Earnings Call
Participants
Walter Scheller; Chief Executive Officer, Director; Warrior Met Coal Inc
Dale Boyles; Chief Financial Officer; Warrior Met Coal Inc
Lucas Pipes; Analyst; B. Riley Securities, Inc.
Katja Jancic; Analyst; BMO Capital Markets Corp
Nathan Martin; Analyst; The Benchmark Company, LLC
Chris LaFemina; Analyst; Jefferies LLC
Presentation
Operator
Good afternoon and welcome everyone to the Warrior fourth quarter 2023 Financial Results Conference Call. (Operator Instructions) This call is being recorded and will be available for replay on the company's website.
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 releases 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.
I would now like to turn the conference over to Mr. Scheller. Please go ahead.
Walter Scheller
Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our fourth quarter and full year 2023 results. After my remarks, Dale will review our results and additional detail. You will have the opportunity to ask questions.
Our fourth quarter results reflect the culmination of a highly productive year for Warrior, where we made meaningful progress on our strategic priorities to build significant sustainable stockholder value, and we were very pleased to end the year.
On a strong note, we met or exceeded both sales and production volume targets for the year, supporting a 34% increase in sales volumes and a 21% increase in production volumes.
Seasonal run rates not seen since 2020. We also achieved record high annual production and mined for 2.5 million short tons. Our cash generation from operating activities was exceptionally strong, allowing us to fund a record high amount of capital expenditures and mine development. We further strengthened our balance sheet with the early retirement of debt.
As a quick aside, there is one Q4 metric total sales volume that could have been better by 129,000 short tons at our last two customers vessels mated to the terminal on time. As scheduled these contracted shipment delays lowered our adjusted EBITDA by approximately $23 million for the fourth quarter.
We know that some investors put a significant amount of emphasis on the MTO production data, equaling sales volumes, which can lead to expectation differences. So it's important to understand the impact of timing differences here and our strategic focus.
Our purchase spot volumes is working quite well. As we indicated on our third quarter earnings call, we took a more strategic approach to selling spot volumes in the fourth quarter, our goal was to leverage our high-quality brands, maximizing our cash margins and build inventories for optimal logistical operations as we prepared for 2024.
As a result, we increased our margin per short ton by 63% from $70 in the third quarter to $114 in the fourth quarter. In addition, we anticipate that this strategic approach of leveraging our high-quality steelmaking coal to maximizing our cash margins will benefit us in 2024 as we expect our spot volume to be lower with higher contracted volumes.
I'll share more about our 2024 outlook in a little later.
First, let's discuss the steel and steelmaking coal markets during the fourth quarter. As expected, steel output from China continued to slow down during the quarter, but net exports from the country remain higher than usual.
The additional volumes from China found their way into different geographies impacting the domestic markets of some customers and putting pressure on steel prices. Demand from India was strong and customers in India continued to indicate an interest in developing relationships with US-based producers like Warrior.
Although over all demand was stable from our contracted customers, we continued to see very little spot activity in our traditional markets compared to India, China and Southeast Asia, where spot demand remained more active. We also experienced higher than normal freight rates for our deliveries into the Pacific Basin due to a combination of market logistical and geopolitical factors.
The availability of premium steel making coals like Armand seven low-vol product remained tight during the quarter compared to the availability of second tier steel making coals like online buying for High-Vol A product, as evidenced by the price relativity between both qualities, which remains lower compared to previous years.
For example, in 2022, second tier steel making coals traded a price relativities in the low to mid 90s, whereas to 2020, '23 price relativities were closer to the mid 80s. Russian steel making coal exports into China and India have remained at historic highs and showed no signs of slowing down.
Likewise, imported coal from Mongolia and China remained strong, having secured a spot as larger source of new protocols for the country. US steelmaking coal exports in the Pacific Basin continues to increase as more suppliers targeted growth markets of India and Southeast Asia.
We expect the 2023 will be a record year for US exports into India as well as for exports in Indonesia, Malaysia, Vietnam, although US exports into China are lower than highs of certain 2021 during the ban of Australian coal, imports remained strong compared to historical averages. For major indices were fairly stable throughout the fourth quarter, with the exception of some upward volatility in October.
Our primary index PLV FOB Australia ended the fourth quarter at $294 per short ton, which was $8 lower than its October first value. In sharp contrast, the PLD CFR China increased by $47 per short ton during the same period, closing the fourth quarter at a price of $301 per short ton.
It's worthwhile pointing out that the East Coast High-Vol A price averaged $250.5 per short ton during the fourth quarter, which is one of the primary indices used to price our mine for of all eight products. According to the World Steel Association monthly report, global pig iron production increased by approximately one half of 1% for the full year 2023 as compared to prior year.
The positive growth was mainly driven by higher Chinese steel production, which grew by 0.1% in 2023. India's steel production, although lower in absolute terms compared to China, continued to grow at impressive rates increasing by 7.3% for the same period, most other large steel producing regions of the world experienced production declines compared to 2022.
Now turning back to our results. Our fourth quarter sales volume of 1.5 million short tons were 6% higher than the comparable quarter last year. The increase was primarily driven by the additional production volumes through the end of the labor strike. The improved performance by our transportation partners and the McDuffy terminal, which enabled us to export more product last year.
Our sales by geography in the fourth quarter breaks down as follows 56% in Europe, 16% in the South America, 25% into Asia and 3% into the U.S. market. As we've previously noted, demand from the Asian spot market has been growing this year, resulting in full year Asian sales up 9% year over year to 29% of total sales, while European sales are down 12% year over year to 48% of total sales, primarily due to weak spot markets.
Our spot volume 38% in the fourth quarter, which was much lower than the 44% in our third quarter as we took a more strategic approach to selling our premium products into the spot markets to maximize margins. As we previously indicated, our spot volume was higher in 2023, primarily due to incremental volume resulting from the end of the labor strike earlier last year.
And to a lesser extent, the change in mind for quality from a mid-vol High-Vol A product in the second half of the year. With these dynamics in mind, it's important to understand pricing in the Pacific markets and how it differs from our traditional spot markets depending on market conditions. Typically, the Pacific markets are priced based on a CFR basis rather than the PLV FOB Australia basis, which is more common in our traditional markets, the freight differentials borne by the supplier on a CFR basis whenever the buyer has market leverage, which was the case in the fourth quarter.
Turning now to other details of our fourth quarter performance. Production volume in the fourth quarter was better-than-expected and totaled nearly 2 million short tons compared to 1.5 million short tons in the same quarter of 2022, representing a 34% increase.
This was the highest quarterly production output since the first quarter of 2021 and contributed to a record-setting year for Mine four. Both mines operated at higher capacity levels in this quarter and for the year as a result of the additional employees returning from the labor strike, increasing production volumes, 21% year over year.
Our head count was 36% higher at the end of this year compared to the prior year for higher production over sales volume in the fourth quarter drove our coal inventory up to 968,000 short tons from 489,000 short tons at the end of the third quarter. We're well positioned heading into 2024 to create incremental value from the global demand for our premium products in the current high price environment.
During the fourth quarter, we spent $182 million on CapEx and mine development. Capex spending was $181 million, which includes $128 million on the Blue Creek project, which I'll discuss more in a moment. Mine development spending on Blue Creek projects was almost $2 million for the fourth quarter.
Moving on to the development of a world-class Blue Creek growth project during the fourth quarter. We continued to make excellent progress on the project, and I'm pleased to share that our work remains on schedule and within the cost estimates we outlined previously last year.
During the fourth quarter, we continued to make progress on the production flow service shaft ventilation shaft, which will be fully connected in the second half of 2024 to allow our continuous miners to start development.
In addition, we continue to make good progress on the construction of the preparation plants. The mine built structure, the best house the warehouse and developing the rail and barge loadout sites during the fourth quarter.
Capital expenditures for the development of Blue Creek were $128 million for the fourth quarter and$ 319 million for the full year, we've spent $366 million on the development of Blue Creek since the beginning of the project. We remain on track for the first development tons from Blue Creek continuous miner units in the third quarter 2024, and the longwall scheduled startup in the second quarter of 2026.
We're extremely excited to begin the journey of producing coal from this new asset later this year. We expect approximately 200,000 short tons of production of High-Vol A steelmaking coal from the continuous monitoring units in 2024 since the new preparation plant will not be operational until sometime in the middle of 2025. We do not anticipate selling any of those tons until 2025 due to the incremental cost of transport the tons to another preparation plant to be washed.
I'll now ask Dale to address our fourth quarter results in greater detail.
Dale Boyles
Thanks, Walt. For the fourth quarter of 2023, the company recorded net income on a GAAP basis of $129 million or $2.47 per diluted share, representing a 29% increase over the net income of $100 million or $1.93 per diluted share in the same quarter of 2022.
Non-gaap adjusted net income for the fourth quarter, excluding the nonrecurring business interruption and other expenses, was $2.49 per diluted share. This compares to adjusted net income of $1.90 per diluted share in the same quarter of 2022.
These increases quarter over quarter were primarily driven by 6% higher sales volumes and a 3% higher average net selling price, which were offset partially by lower results from our gas businesses. We reported adjusted EBITDA of $164 million in the fourth quarter of 2023 compared to $148 million in the same quarter of 2022.
Our adjusted EBITDA margin was 45% in the fourth quarter of 2023 compared to 43% in the same quarter of 2022. These increases were driven primarily by the previously mentioned higher sales volumes and higher average net selling prices, offset partially by the lower results from our gas businesses.
Total revenues were $364 million in the fourth quarter compared to $345 million in the fourth quarter of 2022. This increase was primarily due to the 6% increase in sales volume, plus a 3% increase in average net selling prices and lower Demurrage and other charges.
Demurrage and other charges were $3 million lower compared to 2020 two's fourth quarter. As you may remember, the higher demurrage and other charges in the fourth quarter of 2022 were the result of temporary delays in vessel loadings due to severe weather and port congestion.
Imergent other charges reduced our average net selling price to $235 per short ton in the fourth quarter of 2023 compared to $227 per short ton and the same quarter of 2022. Other revenues, primarily from our gas businesses, were 72% lower in the fourth quarter of 2023, primarily due to a 55% decrease in natural gas prices between the periods.
Yes, Platts premium low-vol FOB Australian Index price was relatively stable for much of the fourth quarter. The index price averaged $303 per short ton for the fourth quarter, which on average was $50 per short ton higher compared to the same quarter of 2022.
We primarily target pricing on line seven premium product from this index, which represents about 70% of our volumes. For mine pours High-Vol A product, which is about 30% of our volumes. We primarily target using the East Coast High-Vol A index price for our traditional markets.
As we mentioned, we transitioned mine for from a mid-vol High-Vol A. product in the second half of 2023. As a result of the demand and balances between the Pacific and Atlantic basins. This past year we have at times used other indices to price our mind for High-Vol A product such as the CFR China Index, CFR India index or the low-vol HCC index.
Price relativities between these indices and the PLV FOB Australia can be and have been significantly different depending upon market conditions. In addition, as noted earlier, the Pacific Basin markets usually require the producer to cover the freight cost to these markets, which lowers our average net selling prices.
Cash cost of sales in the fourth quarter of 2023 was $185 million or 51% of mining revenues compared to $179 million or 54% of mining revenues in the fourth quarter of 2022. Of the net $6 million increase in cash cost of sales, $10 million was due to the 6% increase in sales volumes, offset partially by $4 million of lower transportation costs due to timing.
Our headcount was 36% higher at the end of 2023 compared to last year due to a focus on hiring workers during the labor strike and the addition of employees who returned from the labor strike in the second quarter of 2023. Cash cost of sales per short ton FOB port was approximately $121 in the fourth quarter compared to $123 in the fourth quarter of 2022.
Transportation royalty costs were slightly lower in the fourth quarter of this year as compared to the same quarter of 2022. Our cash cost of production per short ton was slightly higher in the fourth quarter as compared to the same quarter 2022, despite the incremental cost associated with the 36% higher headcount.
SG&A expenses were about $13 million or 3.6% of total revenues in the fourth quarter of 2023 and were slightly higher than 2022 fourth quarter of 3.4%, primarily due to an increase and report employee related expenses.
Interest income earned on cash investments will exceed the interest expense on outstanding notes and equipment leases during the fourth quarter of 2023, primarily due to lower interest expense from the early retirement of nearly 50% of our senior secured debt in the third quarter of 2023. Our quarter income tax expense reflects expense on pretax income and includes an income tax benefit for depletion expense and foreign-derived intangible income.
Turning to cash flow, during the fourth quarter of 2023, free cash flow was $63 million. This was a result of cash flows generated by operating activities of $245 million less cash used for capital expenditures and mine development of$ 182 million. Free cash flow was $34 million lower than 2022 fourth quarter, primarily due to higher Blue Creek CapEx spending.
Free cash flow in the fourth quarter of 2023 was positively impacted by a $90 million decrease in net working capital from the third quarter. The decrease in net working capital was primarily due to a decrease in accounts receivable on lower sales volumes, partially offset by higher inventories and lower net Accounts Payable and accrued expenses.
Despite the higher capital spending associated with the Blue Creek project growth projects this year, we generate full year free cash flow of $176 million, of which $61 million has been returned to stockholders in the form of a special dividend earlier last year on top of the regular quarterly dividend, which increased 17% last year.
Our total available liquidity at the end of the fourth quarter of 2023 was$ 846 million, representing an increase of $36 million over the third quarter and consisted of cash and cash equivalents of $738 million and $107 million available under our ABL facility.
Fourth quarter of 2023 capped off a robust year of building stockholder value as full year. Volumes returned to levels not seen since 2020, and market pricing for our premium products was high. This combination led to another year of strong cash flow generation from operations of over $700 million that enabled us to fund an all-time record, high amount of capital expenditures and mine development of $525 million for the future growth of our business.
It also allowed us to retire early $162 million or nearly 50% of our senior secured debt. These results demonstrate the significant cash flow generation of our existing operations that we expect to grow tremendously in the near future with the addition of our new Blue Creek mine.
Now let's turn to our outlook and guidance for the full year 2024. We expect the demand from our contracted customers to remain stable, while we also expect spot demand to continue to be stronger in the Pacific Basin compared to our traditional markets in the Atlantic, we will continue to pursue our successful strategy of focusing on contracted customers with value added to spot activity.
We believe the current tightness in the supply of premium coals like our Mine seven, low-vol will persist for some time, which should support higher pricing relative to the second tier steelmaking coal. Our full year outlook encompasses this favorable landscape, and we believe 2024 should be another strong operational year for Warrior, primarily driven by higher volumes.
We expect sales volumes may exceed production volumes using the midpoint of the ranges by up to 0.5 million short tons in 2024 as we take advantage of market pricing and the higher inventories on hand we anticipate our contract to spot volume ratio will be better in 2024 than last year at about 75% contract and 25% spot. This compares to 59% contract and 41% spot in 2023.
In addition, we expect to hire approximately 250 new employees in 2024 to fill in gaps in the existing mines and ramp up our hiring for the Blue Creek mine later this year.
Inflationary costs in the mining sector continues to persist and pressure cost structures for labor, supplies, materials and equipment purchases. These additional costs are expected to drive up our cost per short ton in 2024, as outlined in our targeted range for cash costs per short ton.
Lastly, after considering our total liquidity and our favorable outlook for 2024, we recently announced that the Board of Directors has decided to increase the regular quarterly dividend by 14%. We expect to distribute the dividend on February 26th.
This marks the third consecutive year the Company has raised its quarterly dividend while developing this world-class Blue Creek reserves. In addition, we recently announced our plans to distribute a special cash dividend of $0.5 per share in March, demonstrating our continued commitment to returning excess cash to stockholders while driving long-term growth of the business.
I'll now turn it back to Walt for his final comments.
Walter Scheller
Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments as Dale just loaded with a favorable outlook for 2024 as orders from customers in our traditional markets suggest stable demand for our coals for at least the first half of the year.
While we expect markets like India and Southeast Asia to continue to experience an increase in demand with new projects coming online, we're closely monitoring the door logistical challenges posed by low water levels in the Panama Canal system as well as the geopolitical tensions in the Red Sea.
For now, the impact for your has been higher freight costs, especially into the Asian markets, which continue to be above historic averages. While the impact of some of our customers have been longer transit times difficult to predict, if this will improve or deteriorate during the next few quarters.
We believe that steelmaking coal pricing will remain bifurcated as the availability of premium low-vol steel making coals, say tighter than the availability of second tier still making calls. And as such, we believe the lower price relativities of the second tier. So making calls will continue for the near future and also depend upon the geography of spot volumes.
While we are well prepared to address a variety of market conditions, we are also extremely excited and laser focused on the disciplined development of our world-class Blue Creek reserves. We expect another year of high capital spending on the project ranging from $325 million to $375 million, which can be funded out of cash on our balance sheet if the market should turn unfavorable in 2024.
As mentioned earlier, we continue to make excellent progress in developing Blue Creek. We are on track for the first development tonnes from continuous miner units in the third quarter of 2024, with the longwall scheduled to start up in the second quarter of 2026, we expect approximately 200,000 short tons of production of High-Vol A product from the continuous miner units in 2024.
This lower coal production has been included in our production guidance and conclusions. Our full year outlook encompasses a favorable landscape, and we see 2024 representing another strong year of operational success and growth capital deployment driven by expected higher steelmaking coal production and sales.
With that, we'd like to open the call for questions. Operator?
Question and Answer Session
Operator
(Operator Instructions)
Lucas Pipes, B. Riley Securities.
Lucas Pipes
Thank you very much, operator. Good afternoon, everyone. On my first question, Walt and Dale is on on the sales mix for 2024 I wondered if you could maybe provide a rough breakdown of anticipated sales kind of on a percentage proportional basis on High-Vol A FOB port PLV, FOB port and then also High-Vol A, PRB on kind of CFR China. So we can get a better sense of how these higher freight costs on impact impact realizations? Thank you very much.
Walter Scheller
It was generally -- I'll start with the our expectation is with the Mine seven more probably 70% to 80% contracted, and those will be sold FOB port, the remaining 20% to 30% will be spot tons and those could go either into our traditional markets of those customers or end up going into some big markets where we have the CFR issue going into Asia for Mine four were, I think about 55% contracted this year, some of it into traditional markets.
But I would say from mine for you're probably going to look at at least 50% of that coal going into CFR sales and income in total. So probably 70% mine, seven, 30% mine, four tons, if all that, I've answered your question I hope so.
Lucas Pipes
There were a lot of helpful tidbits in there may follow up on some of it, but I wanted to circle back on Mine Number four, kind of it sounds like a High-Vol A product today. Does that cover it? Does that description cover all of the output of my number four? And should we kind of think of on a, call it a Platts or similar indexes, the best approximation for FOB pricing for my number for today?
Dale Boyles
Yeah, Lucas, this is Dale. That is pretty much a High-Vol A. product now and a transition in the second half. And I think it's about 30% of our volume and we would typically target the East Coast High-Vol A index for our traditional markets. Now when you go into the spot markets, it could be a combination of those different indices that I outlined in my remarks, which is it just depends on where it's going geography-wise these days.
So the markets have really changed with a lot of demand combined with Pacific Basin's this time over the last six months. And we see that as kind of the future is where a lot of demand is going to continue to come. So we're probably looking at about 65% of our volume going into the Pacific Basin in '24 and about 35 into our traditional Atlantic markets.
Lucas Pipes
Very, very helpful. Thank you for that update squeeze one in here on the sales side in terms of the cadence of shipments in 2024, could you provide a little bit of color? It sounded like you had some it tons delayed here at the end of Q4. I assume they come through in Q1, so maybe Q1 is a bit of a stronger shipment quarter? But would appreciate if you could frame that up and when I when I think when we think of more high level about on the production output in Q4 versus tons sold, is that that a reflection of weakness in your traditional markets or were there any other complications moving those tons? Thank you very much.
Dale Boyles
No, all the of all the contracted tons moved to those customers as expected. What we did as we said in the third quarter, we moved more into the spot market and we said in the fourth quarter to take a little more strategic approach and maximize our margins. So we held off on any business that we felt that would hinder that. So that's how we ended up there in terms of cadence for sales, Lucas, here that the problem with that is in any given quarter.
You can have something happen in one week at the end of the quarter that can adjust that downward by as much as 200,000 tons from, I think the best year, the we tried to match production and sales of that. That's about I can't give you much more guidance than that. And if you look for the year, we kind of give you what we think for the year, but I can't tell you which quarter any reduction in inventories will come in.
Walter Scheller
Yes, we're just we're really focused focused on just what the year is and the quarters just kind of fall as they have for the ships arrive and as complications arise and with bad weather, deport and everything. That's yes, that's less important to us in our full year targets. We really don't manage to the quarter results, we managed long term.
Lucas Pipes
Understood. That's helpful. So maybe maybe to just put it a little differently to help me with the modeling. You have one longwall move in Q1. So kind of fair to assume that production maybe touch lighter than in Q4? And then and you mentioned you're looking to match sales with production as has that occurred if more for Q1, are you currently match?
Dale Boyles
Our we're right on target for where we wanted to be year to date.
Lucas Pipes
And with the longwall move kind of slightly less than Q4 production makes sense?
Dale Boyles
It does makes sense.
Lucas Pipes
All right. Well, this is helpful. Thank you. I'll turn it over.
Dale Boyles
Thank you.
Walter Scheller
Thanks, Lucas.
Operator
Nathan Martin, The Benchmark Company.
Dale Boyles
Nathan are you there?
Operator
Apologies.
Katja Jancic
Katja Jancic, BMO Capital Markets.
Hi, thank you for taking my questions. First, starting on the Blue Creek CapEx, our original project, a cost is about $700 million and then adding the scope gets you to $820 million, $830 million. Now on top of that, there is inflationary pressure, so I get up to about $1 billion. Are my calculations correct?
Dale Boyles
That's a general trend and there's really been no update or change to those initial updates we had back in the summer. So yes, targeted inflation, we haven't seen any reduction in labor, labor, materials, supplies, equipment purchases, that inflation is pretty much stuck in this sector. It depends on what particular item, but our range at 25% to 35% if you just take the midpoint of 30% on your $700 million plus $130 million in scope change. Yes, you're right around 1 billion.
Katja Jancic
Okay. And I think Dale, you said you're going to be hiring more miners later in the year for Blue Creek. Is that already included in your costs guide?
Dale Boyles
Yes.
Katja Jancic
And how many miners do you have to add this year?
Dale Boyles
We're adding in total 250 to the Company and somewhere around 100-ish for Blue Creek of that.
Katja Jancic
Okay. I think I'll hop back into the queue. Thank you.
Operator
Nathan Martin, The Benchmark Company.
Nathan Martin
Operator, guys, can you hear me okay now?
Dale Boyles
Yes.
Nathan Martin
Okay, perfect. What I was trying to say is I think you were talking to Lucas' questions around logistics. And obviously you guys pointed out the two blood vessels in the fourth quarter affecting shipments there on you mentioned, I think in a low low water in the Panama Red Sea issues.
We also have the Demopolis lock outage right now. So I guess would be great to hear how these are not affecting where obviously it sounds like transportation costs are elevated, but how you guys are working through are around some of these issues?
Walter Scheller
The issue around Demopolis has not impacted us today. We have our rail service has been very, very strong. Hope that continues, and we have other options to get the coal to market. If we start to run into issues with the rail, our expectation of Demopolis right now, the Corps of Engineers has been down. There, looked at the problem they're estimating may start-up in Demopolis, I don't know if that's reasonable or not, but we're making sure that we have options to get our coal to market otherwise.
In terms of the increased costs that we were talking about for even if we're talking about CFR, it shifts the with the potential additional distances coal has to travel, transportation costs are just up. And it's also on what the issues in the US Red Sea, it's caused freight costs to go up considerably.
Nathan Martin
Appreciate that Walt. And then maybe sticking with the costs for a second. Again, just mentioned, obviously that the the one, 25 to one and $35 cost per ton guidance for the year include some of that additional labor. I'm just curious, is there a net price or net price range that you guys are assuming in that our full year cost guidance range?
Dale Boyles
Yes, we are around between 50 to 60 gross index, PLD debt.
Nathan Martin
Very helpful. Dale, I appreciate that. And then maybe just one more kind of going back to the capture rate. And you guys had a good idea and you guys did a great job kind of explaining the shifts you've seen in contract to spot back to maybe a normal higher level of contract coal this year versus '23. Home also talked about, obviously, the High-Vol A shift that mine for Palm. But with the increase in the Pacific Basin sales you guys called out versus typical Atlantic markets, or how should we think about and your capture rate going forward as the last few quarters, it has lagged and been below your kind of historical level, let's call it, 90% plus or minus?
Dale Boyles
Yes, I think, Nathan, as you know, it's a little hard to predict just given all the different things that are happening. But what we're targeting is call it at 85% to 90% of the PLD index and if I could do something simple because obviously with mind for pricing at all these other indices, you get a you get a different result than it does the price of the PLD anymore.
So you know, and that's been exacerbated by those price relativities that we talked about earlier, where they were closer to the 90s, mid 90s. Now they were more like in the 80s this past year. So some of that has been the demand imbalances, some of the supply issues, but we think those relativities will come back. It just might take a long time, but think of it as 85 to 90 when we tried to maximize our margins like we did in the fourth quarter where we increased our margin 63% from Q3.
Nathan Martin
Thanks, Dale. I appreciate that. I'll leave it there. Best of luck to you guys in 2024.
Dale Boyles
Thank you.
Operator
Chris LaFemina, Jefferies.
Chris LaFemina
Hey, thanks, guys, for taking my question. So I wanted to ask about mine number seven, but first on the CapEx profile. So if we have $1 billion of total CapEx for Blue Creek. Based on your 2024 guidance, by the end of this year, you'll have spent a little more than $700 million. Does that mean $300 million more in 2025?And then in addition to kind of general sustaining CapEx, looking at a 2025 CapEx budget of between 404 hundred million dollars. Is that roughly correct?
Dale Boyles
It's probably a little aggressive in '25. I think you'll have some of that spending will play out in '26, completion of the project but that's you're right, we'll be up over $700 million by year end and probably north of $200 million or so next year and finishing up in '26.
Chris LaFemina
And is there a reason why you haven't explicitly change to the CapEx guidance for Blue Creek? And when you've talked about a 25% inflation, but you haven't actually formally adjusted the numbers or are you are you working on specific contracts around that or are there other reasons why you might not have formally changed that number yet?
Dale Boyles
Well, that is the number pretty much, Chris. So I mean that's the math, but there are cash dozens of contracts that have yet to be signed to finish grading work and all kinds of different things. I mean, we're only just barely 2.5 years into this thing. So we've got a long way to go and there's hundreds of contracts on this thing. So right now we're just that's the trend and that's where we're headed.
Walter Scheller
And I think that's a story that's based on a current expectation in terms of inflation. And I think one of the reasons we haven't given a real update is because we don't we can't determine exactly what the inflationary pressures will be. So we've kind of left that we recognize that that could change in either direction right now.
Chris LaFemina
Understood. So my question on Mine number seven. So at what point does the depletion of reserves there start to impact your production volume? And unit costs, you have seven or eight more years of production there. Is it later this decade where you start to see kind of more cost pressures and potentially lower volumes as a result of depletion? Or is it possible to even extend the life beyond that timeframe?
Dale Boyles
Yes, our life actually what we have right now is just in reserves. We're probably 13 years. I believe it is time and resources beyond that. And we continue to look at what we have and what we can get to continue. The of the total reserve for that coal mine project.
Chris LaFemina
Great. Thank you very much. Good luck.
Operator
(Operator Instructions)
Lucas Pipes, B. Riley Securities.
Lucas Pipes
Thank you very much, operator, thank you for the follow-up question. I wanted to ask come kind of and on capital returns and how you think about that. And why not maybe do a little bit on the buyback side versus versus a special would be kind of interest interested? How do you think about that?
Dale Boyles
Yeah, Lucas, it's really nothing's changed their capital allocation priority is Blue Creek. And to the extent we have excess cash, we'll continue to do it in the manner we have. I don't see that changing until Blue Creek is up and running at the earliest. Again, we have significant state NOLs and all the rules and restrictions that I've talked about for the last seven years still apply to those rule to the state NOLs, and we'd have about $900 million of state NOLs left.
So we still have that plenty of runway on some of these NOLs to utilize them. So again, right now, Blue Creek is the focus distributor. To the extent we have a lot of extra cash, we'll spend that. So and most likely it will be in a more like specials until we get further along with Blue Creek.
Lucas Pipes
That's very helpful. And Dale, just to make sure I understood you right, you have about $900 million of state NOLs and at the current level of profitability, call it, Q4, how long would you expect those those NOLs?
Dale Boyles
It's kind of well, that's not the $64,000 question there, Lucas depends on what prices are, you know, and profitability over the next several years. So we know them well, go out until like 2034, something like this when they start expiring. So yes, they they have a long life on them right now. But if we have more profitable years like the last two years, yes, we'll burn through some really fast, potentially with Blue Creek up and running.
Lucas Pipes
Got you. And so in terms of like when I think about, call it, 2024 cash flow impact from the NOLs. I like what is what is the kind of net impact on your effective tax rate? Like how much how much cash benefit are you seeing from the NOLs this year, 2024 versus not having?
Dale Boyles
Well, I mean, the benefit is basically what your state tax rate is five, 6%. So that's your benefit on the state side.
Lucas Pipes
Got it. That's that's very helpful. Thank you. And thank you for that. And then maybe just one quick follow-up on the on the Blue Creek CapEx front. You mentioned earlier that lot of things are kind of still still to be finalized. You have that range of 25% to 30%. What gives you the confidence in that number given given that you still have to finalize contractors and such would appreciate the additional color. Thank you.
Dale Boyles
Yes, I think if you go out there and look at any construction index, you'll see that labor supplies and materials, pretty much been averaging that. And that's that's what stuck in this sector. It's easy to read the Wall Street Journal and say, well, it's come down to 3.4%?
Well, it has nothing to do with the mining sector where there's been a tremendous increase in labor and supplies of materials. And just we've talked about it over the last three years, just quarter-after-quarter of the inflation in this sector. So and I don't see that changing and it's possible that we go through a period where there's a little less inflation or there's a little more.
We just can't predict at this point. We're only halfway into this thing barely, and we still got a lot of runway to go this is not but a handful of fixed price contracts. That's just not the way these contracts are developed. No contractors will sit there and say well, and we'll fix my steel prices at X and then they go wildly higher and now he is not going to do that.
So you have those pass-throughs, I mean, which kind of limit that and work with them on those contracts. But there's just a whole lot of things going on here to manage a project of this size. And it's quite frankly, be kind of unwise of us to go say as well, it's going to be $968 million and $538,000. I mean, if you buy can predict that in a little bit of a fall back and says, yes, I think you got to be reasonable in what can happen over the next 2.5, three years and know that there's going to be some changes. But to the extent there is an update we'll give people enough by. But we said, look, there is no update at this point. The trend and the trend continues.
Lucas Pipes
Well noted. I appreciate that. And maybe just to put a bow on it. With all of that, you feel 25% to 35% is the range?
Dale Boyles
For now. Yes.
Lucas Pipes
All right. Well, I appreciate a good, good luck.
Dale Boyles
Thank you.
Operator
At this time, there are no further questions. I would like to turn the call back over to Mr. Scheller for any closing comments.
Walter Scheller
That concludes our call this afternoon. Thank you again for joining us today, and we appreciate your interest in Warrior.
Operator
Thank you. Thank you all for participating. You may now disconnect.
