Allegiance Coal Looking to Turn Operations Around Under New Leadership

• New CEO John Ronke recently joined Allegiance Coal to lead a turnaround of the company's operations. He moved to the US to be closer to the mines.
• Two key issues being addressed are equipment reliability, with overhauls of continuous miners, and workforce recruitment, with moves to a 7-day roster. This aims to boost production from 20,000 tons/month to 40-50,000 tons/month.
• Short-term plan is to pivot back to metallurgical coal market when prices improve. Longer-term focus on projects like Short Creek and Telkwa mines which produce metallurgical coal.
• Seeking to diversity coal sales so not reliant on one customer. Currently interim agreement with Marco for inventory financing but seeking better sales deals.
• Promises increased communication with shareholders. Will provide update after Christmas on whether operational improvements are delivering results as expected.

About Allegiance Coal

Allegiance Coal is a junior coal producer operating in the United States. The company has two operating mines - New Elk mine in Colorado and Black Warrior mine in Alabama. Allegiance also has two development projects - Short Creek project in Alabama and Telkwa project in British Columbia, Canada.

The company recently appointed a new CEO, John Rodke, to lead a turnaround in the operational and financial performance of its mines. John has significant operational experience in the mining sector in Australia and internationally.

Allegiance has faced several challenges over the past year relating to equipment reliability, workforce productivity, sales agreements, and financing. This has resulted in the company underperforming operationally and failing to meet previous market guidance. The share price has declined significantly as a result.

Interview with Jonathan Romcke, CEO of Allegiance Coal

Operational Issues and Turnaround Plans

According to John, the key issues at the New Elk mine are equipment reliability and attracting sufficient skilled workforce. The continuous mining machines at New Elk are very old and have outdated electrical systems, resulting in only 75% uptime compared to the expected 92%. Allegiance is spending $1.6 million to overhaul the continuous miners, upgrading them with modern electrical and control systems which should substantially improve reliability.

The New Elk mine is in a remote location which has made it difficult to attract and retain adequate workforce. John plans to introduce a 7 days on/7 days off roster to make working at New Elk more attractive. Additional skilled maintenance staff are also required to properly maintain the overhauled equipment.

At the Black Warrior mine, plans are underway to commission additional dozers and drills which will boost overburden removal capacity and lower operating costs. The aim is for Black Warrior to be profitable and have reduced costs by December.

Sales Agreements

Allegiance had previously announced a sales agreement with Marco for its coal. However Marco has been unable to deliver on the original terms. A new interim inventory financing arrangement has now been put in place with Marco but at lower pricing.

John stated that Allegiance is assessing other sales options for excess production beyond what Marco can take. The company aims to pivot back to selling metallurgical coal once thermal coal prices reduce from current high levels.

Funding Plans

Allegiance recently raised A$15 million from an entitlement offer to institutional investors, and the retail offer closes next week. Additional shortfall share placement may raise more funds if required. The funds will help with the mine improvements and equipment overhauls.

The new inventory financing deal with Marco will provide needed cashflow in the short term. The aim is for Allegiance's mines to be cash flow positive in 2023 without needing further equity funding.

Production Growth Plans

Current production is around 20,000 tons per month across both mines. The target is to lift this to 30-40,000 tons per month in the next 6-9 months through the various operational improvements.

Longer term, John aims to grow combined production to 60-80,000 tons per month during 2024 once the initial fixes have been implemented and some expansion projects commence. However, Allegiance will focus only on funded growth that does not require further equity financing.

Communicating with Shareholders

John acknowledged that communication with shareholders has been lacking recently. He commits to improving investor engagement and providing more regular updates on the company's turnaround plans and progress.

Conclusion

Allegiance Coal is implementing an operational turnaround under its new leadership. However, the company still faces some execution risks in delivering on these plans. Investors should watch for evidence over the coming 6-12 months that Allegiance can:

• Improve equipment availability and productivity
• Build a skilled workforce to sustain higher production
• Deliver on revised sales agreements at reasonable pricing
• Generate positive cashflow from its operations

If Allegiance can demonstrate success on these fronts by mid-2023, it may represent a turnaround investment opportunity. However, the company is not out of the woods yet - shareholders should monitor ongoing execution before considering increasing their exposure.