Ladies and Gentlemen, thank you for standing by. And welcome to the NACCO Industries Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your speaker today, Ms. Christina Kmetko. Please go ahead.

Good morning, everyone, and welcome to our 2020 Fourth Quarter Earnings Call. I am Christina Kmetko, and I'm responsible for Investor Relations at NACCO Industries. Thank you for joining us this morning. Joining me today are J.C. Butler, President and Chief Executive Officer of both NACCO and North American Coal; and Elizabeth Loveman, NACCO's Vice President and Controller. Yesterday, we published our fourth quarter and full year 2020 results and filed our 10-K. Copies of our earnings release and 10-K are available on our website. Anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. These risks include, among others, matters that we have described in our earnings release issued last night and in our 10-K and in other filings with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. In a moment, I'll discuss our fourth quarter and full year results. But first, let me turn the call over to our President and CEO, J.C. Butler, for some opening remarks. J.C.?

Thank you, Christy, and good morning, everyone. As we put 2020 behind us, I'm pleased to be looking forward to the future. That said, I'm a big believer that changes make us stronger. And I definitely believe that the challenges we faced in 2020 make both our team and our business stronger. I have to start today by recognizing our employees who are doing an incredible job for our customers and for the company. While a portion of our employees have been working remotely, a vast majority of our team has been coming to work to do their jobs every day since the pandemic started. As essential workers, they needed to come to work and they did. And those working remotely seem to be putting in more hours and producing more output than ever before. I could not be more pleased with how well our entire team has managed through this situation and adapted to these constantly changing work environments. I truly appreciate our employees' commitment to supporting our customers while also working to keep themselves and others safe. I simply cannot thank our team enough for their great work. In addition to managing changes associated with the pandemic, we also dealt with disappointing news from some of our customers in 2020, which affected both our fourth quarter and full year results. Christy will cover this more in detail -- in more detail in a moment, but it's safe to say that our 2020 financial results were disappointing. In our Minerals Management segment, we expected lower royalty income due to the natural decline in production of existing natural gas wells in Ohio, but the COVID-related collapse in natural gas prices made this worse than expected. Prices have recovered quite a bit from the lows in early 2020, but the pace…

Thank you, J.C. I'll start with the consolidated quarter and full year results and then provide additional detail at the segment level. As J.C. mentioned, we faced many challenges in 2020, which culminated in disappointing fourth quarter and full year results. For the fourth quarter, we reported a consolidated operating loss of $8 million and a net loss of $5.4 million or $0.77 per share. There were $9.8 million of charges taken during the 2020 fourth quarter, which I will cover in more detail in the individual segments that contributed to the losses in the quarter. For the 2020 full year, we reported consolidated operating profit of $13.4 million and net income of $14.8 million or $2.10 per diluted share, and that compared with consolidated operating profit of $38.8 million and net income of $39.6 million or $5.66 per share for the 2019 full year. Now, let me provide a bit more detail on certain segment results. In the 2020 fourth quarter, the Coal Mining segment had an operating loss of $400,000 compared with operating profit of $6.4 million in the 2019 fourth quarter. The current year operating loss includes the following: a noncash charge of $2 million for the write-down of Mississippi Lignite Mining Company's coal inventory to net realizable value, a $1.5 million charge for costs associated with our voluntary separation program implemented in the fourth quarter of 2020 and a $1.1 million noncash asset impairment charge for a legacy database acquired in the 1990s with information on coal reserves. If we exclude these charges, the Coal Mining segment's operating profit still declined from last year's fourth quarter, primarily because of substantially lower results at Mississippi Lignite Mining Company resulting from a reduction in tons delivered during the fourth quarter. This reduction in tons contributed to an increase…

[Operator Instructions] Your first question comes from Andrew Kuhn from Focused Compounding.

My first question is, because you entered a new mine area, capital expenditures at Mississippi Lignite Mining Company were high in 2019, 2020, and will be high again in 2021. Since you're not expecting to enter another new mine area between now and the end of that contract, how much lower do you expect annual CapEx at MLMC to be starting in 2022?

I mean, the trick to the question is the how much, right? I mean we don't provide forecast that far out with any specific numbers, but I will tell you that the spending that's been going on to develop that mine area has been very, very substantial, as you obviously know. If you look back to some prior years and sort out where we've called out some other capital projects, I think you can see the capital spending at Red Hills drops to a pretty low level. And as I've mentioned before, from time to time, you have to replace things. We don't see much of that once we get into this new mine area with regards to equipment or anything else. But if you need to buy a new haul truck, I mean, they're expensive. And if you need to add a significant new piece of equipment, that takes a fair amount of capital. But otherwise, it's going to be pretty low maintenance capital expenditures going forward at Red Hills.

Got it. Next question is, you said you believe the current market for mineral and royalty interest in the U.S. is a buyer friendly market. I was wondering if you could maybe tell us why you think that, maybe what you're seeing? And do you think that buyer-friendly market is reflected in the price you paid for your Permian Basin investment?

Well, I mean, I'll answer the last question first. Yes, we think the current market environment is good compared to where it was a year ago -- well, we're now a year into the pandemic, right? So you got to say more than a year ago, 2 years ago. But the combination of COVID that affected demand for oil, primarily, and gas and the OPEC price war, which crushed demand for -- or which crushed prices for oil, slowed down development of both oil and gas and really put a damper on that market. Those 2 things, plus if you read kind of popular press, The Journal, I think, does a pretty good job. The Wall Street Journal does a pretty good job covering this. The amount of money that's being poured into oil and gas development in the United States right now is quite a bit lower. We're entering at a point -- we're entering the business with a strategy that we are not competing with people that are out looking for acquisitions that are hundreds of millions of dollars. We're smaller bite-sized than that. But we are bigger than the things that individual investors are looking for. So we're -- we've got a very small, very small team but a sophisticated team who is, I think, really coming at this in a pretty strategic surgical way in thinking about what we acquire. The other thing, I think, is helping us is a lot of people make investments in oil and gas in a kind of do or die approach. They buy -- they're looking to buy things that need to service debt or have immediate needs for production coming out of those. And as you know, the nature of our company, we take a very long-term view. And I think we're able to acquire some things that are attractive to us that might not be as attractive to some other investors. Is that helpful?

Yes. No, I think that's a great explanation, actually. And then my last question is, if you could talk a little bit about Mitigation Resources of North America, like what it does, what successes it has had so far. And why you think it could grow? And whether you think that business will ever be material to NACCO's overall results? And then I'll jump back in the queue.

Okay. So Mitigation Resources of North America is a business that we created to develop stream and wetland initially, stream and wetland mitigation banks. If you think about anybody that's building a road or expanding a road or building an apartment complex or a shopping center or anything else that might, in any way, disturb a stream or wetland, in order for them to get a permit to do that construction work, they need to acquire -- and this is true of most states, not every state. But in most states, they have to acquire stream or wetland mitigation credits somewhere else. This is all managed by the Army Corp of Engineers on both sides of the ledger. And so we've got a very, very strong history, over decades, for the quality of our environmental work at our mine sites. And this business was really born out of the quality of the work that we've done there. And our own experience seeing when we or our customers have needed to go buy stream or wetland mitigation credits, it's a market that needed -- but it's in a market that provide an opportunity for somebody to come in with really good technical capabilities, really thinking about doing what's right and being sensitive to how we can best serve customer needs. So we established this business a few years ago. The response, I think, has been kind of universally terrific from potential customers, from people we have relationships with. We've received very positive feedback from the Army Corp of Engineers themselves about our participation in this market. So what Mitigation Resources does is, they've got 3 business models. One is, we will acquire a piece of land that has -- the best way to do this is to buy a piece of…

[Operator Instructions] Your next question comes from Trey Henninger from DIY Investing.

I would like to ask my first question around your overall sentiment going into 2021. When I read the earnings release that you put out yesterday, if I had to describe the tone of it from an outsider's point of view with one word, I would describe it with the word bleak. And so the first question is, do you consider the future of NACCO bleak? Or is that maybe, was I reading it wrong, or what am I missing there?

Well, I mean, I can see why you would say bleak, right, if you look at the outlook, which really just kind of looks at 2021 and no further. Sure. There's a lot of things that are going to be down in 2021. But what you -- what is not in there and what we are not going to predict an outlook is what can come from our business development opportunities. We talk a lot in our earnings release and in our -- as you will see when you -- when our annual report comes out in a couple of weeks, we are talking a lot about what we're doing to transform the business, building these 3 new businesses. And each one of them is already contributing significantly to this transition that we're in. And I really see great opportunities in all these businesses to continue to grow. And when you look on the -- at the face of it, North American Mining made a little bit of money -- made actually decent money in 2020. That business, if you really look at it, has grown a lot in the last few years. We've kind of got over the -- covering our overhead cost hurdle. So anything we add to that business now is largely going to be accretive on top of that. And we're not -- none of the benefits of business development are in outlook directly with respect to results. So the extent that we can be successful signing new projects for North American Mining, buying more reserves in Minerals Management or expanding Mitigation Resources will all contribute to upside in the growing diversified side of our business. I think it's too early to tell exactly how the situation in Texas that we're all still reading about plays out. But I'm sheer hopeful that people are going to see that they -- that all of these RTOs across the country, like ERCOT, that manage the grid on a regional basis, need to think very carefully about how they're managing their capacity reserves. And I got to believe that's not a bad thing for coal as you look into the future. There's just not enough remaining capacity in a number of these markets. And it's not just in ERCOT, around the country. So you describe it as bleak. I'm incredibly optimistic. You know that we take a very long-term view of our business. And I really think the long-term prospects of this company are great. Is that helpful? Did I touch on what you were looking for?

Yes. No, that's helpful. I think -- so both Andrew and myself, we spend a lot of time thinking about this business. And of course, we're outside of the business, while you're inside of it, so you have some insights that we don't? And I think my next question really to kind of -- you led into it really well, is about guidance. So you say you take a really long-term view. But at the same time, you give pretty regular quarterly and annual guidance that's just looking forward to the next 3 months, the next 12 months. And so it's really around -- do you -- what is the purpose of providing that guidance? Who do you -- what's the target audience? Is that helping you as a manager plan for it? Or is it potentially a distraction? Because when I look at it, I see, at the same time you say we're thinking long term, but we're only going to forecast the next 12 months. And when I look at my needs as an outside shareholder, I don't need the short-term guidance. What I want to see more of is what are your long-term plans? How do you see this business 5 years from now, 10 years from now, how many limestone mines do you want to have in 5 years? How many lithium mines do you want to have? What do you want to do? How many minerals do you want to be mining? Those sorts of things. And so I'm just trying to understand, maybe why do you have the current strategy on guidance? Would you consider changing it? Or do you not think -- or I guess, I hope that provides the background to kind of understand where the question is coming from.

Yes. That's a good question. So the short-term guidance, I think there are very few of us that like surprises. So I think the short-term guidance, whether it's the next quarter or the balance of the year or the coming year, depending on what quarter we're in. I think the short-term guidance is there to help people understand what we're seeing in the short-term and not be surprised by it. This is what we are seeing based on what we know. Obviously, if you go a year ago, right, I mean I think in January and February, nobody could really predict what was going to happen with this pandemic that's been going on. You can't predict that. But can you predict what you know about the business? Sure. So I think I do believe that the purpose of our near-term financial guidance is, so that people aren't surprised. We, for some time -- I'm going to tie this answer to the prior answer. You talked about bleak. One of the things we've been saying for a while is that operating profit in the Coal Mining segment is going to be significantly affected by the increased level of depreciation at MLMC. There's no question that's coming. We wanted people to understand that operating profit is going to be going down. But we're also talking about where we're headed with cash flows, where we, for some time, have been saying we're in this cash flow -- this capital expenditure bubble there that's going to come to an end. And if you can look past operating profit, I happen to be an EBITDA guy, I think it's a good measurement, you get past some of those things. So that's -- I mean those are really my thoughts about the short-term outlook. As for…

That's very helpful. Yes, I think what I was trying to differentiate between is, I'm not seeking a forecast. I don't want you to forecast and try and pigeonhole yourself. But I think what is helpful to me and might be helpful to other outside investors is just understanding your vision. And not necessarily projecting certain numbers, but kind of just saying, we want to hit certain things. And I think while the current talk of the future is quite vague, and that's okay, I think just a little more clarity of kind of where we're going as a business can be helpful. So that's the only way to close that piece out. I had one question about Thacker Pass, specifically. Can you give any idea of -- and I understand you might not, but can you give any idea of perhaps the magnitude of this impact to the business? Are we talking about, is this the size of a Freedom mine? Is it the size of a Falkirk Mine? Or perhaps a Sabine mine in terms of impact to the operating profit of North American Mining, if it's online, if it becomes online?

When it's up and running and kind of it's full, fully operating mine, it's going to be similar to kind of a modest midsized mine. It is not going to be a Coteau or Falkirk. Those are very, very large mines. It's going to be a modest midsized mine in terms of -- really in terms of the operation and in terms of its impact on our financials.

Okay. That helps. So last question -- go ahead.

No, go ahead.

Yes. I mean, if you have more color on that piece, feel free. But I'll just give the last question I had before jumping back in the queue, which was around the Mississippi Lignite Mining Company. And it's basically just, is there any prospect or interest on the side of management in selling the Mississippi Lignite Mining Company and only operating unconsolidated coal mines? Because you talk about how you wouldn't take on a new consolidated coal mine. And so I wonder if there's any interest in moving quicker to only operating unconsolidated coal lines?

I mean, with respect to Red Hills, which is our one operating consolidated coal mine, I would just say the nature of all of the contractual relationships that are in what is actually a pretty complex structure would make selling it nearly impossible. It is a very complex structure that makes the ability to do that very unlikely.

There is no further question at this time. You may continue.

Okay. Thank you very much for your interest. J.C., did you have any closing comments? Okay.

No. Thank you.

Thank you. If you guys have any follow-up questions, please feel free to reach out. My phone number is at the top of the earnings release. Have a great day.

Ladies and gentlemen, this concludes today's conference call. For encore replay, it will be available up until 11th of March, and you can access it by dialing (800) 585-8367 or (416) 621-4642, with conference ID 3263907. Again, thank you for joining. You may now disconnect.