Q4 2019 Earnings Call

Good day and walk to the arch coal fourth quarter 2019 earnings Conference call. Today's conference is being recorded I would now like turn call over two decades Sloane Senior Vice President strategy. Please go ahead Sir.

Good morning from Saint Louis Thank you for joining us today.

Before we begin let me remind you that certain statements made during this call including statements relating to our expected future business and financial performance, maybe considered forward looking statements. According to the private Securities Litigation Reform Act.

Forward looking statements by their nature address.

Is that are two different degrees uncertain.

These uncertainties, which are described in more detail in annual and quarterly reports, we file with yes, you see may cause our actual future results to be materially different than those expressed in our forward looking statements.

We do not undertake to update our forward looking statements, whether as a result of new information future events or.

Otherwise, except as may be required by law.

I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investor section of our web site at arch coal Dot com.

On the call. This morning, we have Johnny Sarvis CEO.

<unk>.

Hey, arches, President and COO, John Drexler, our senior Vice President and CFO.

Well begin with some brief formal remarks and thereafter, we'll be happy to take your questions John.

Thanks, Dan Good morning, everyone I'm pleased to report that arch continues to deliver on its well defined strategy for value creation and growth.

Our core metallurgical portfolio, excluding the transitioning Mount Laurel mines turned in another outstanding operational performance in the fourth quarter.

With an average cost below $60 per tonne metallurgical segment margins are more than $30 per ton.

Our Leer mine, which were in a process of replicating at Leer Sal had cost in the mid 40.

Our range, placing it once again at the bar left or the U.S. metallurgical cost curve.

Just as importantly, we made significant strides Reorienting mountain Laurel Toronto or operation They expect to complete that process in the current core.

We believe this transition sensor metallurgical segment up for even greater success in the future.

Yes.

Previously discussed Mount Laurel was recently progressed into reserves that are more suitable for continuous miner than long haul development.

We expect to shift a room and pillar mining to translate into appreciably lower cost enhanced product quality and more consistent operating performance going forward.

At the same time, we continue to make excellent progress on the development of layer. So.

So what should increase the value of our metallurgical portfolio dramatically.

As indicated we're developing layer south is a near carbon copy of the Leer mine, which continues to hit on all cylinders and see minute standing as one of the industry's premier assets.

As a reminder, 2020 will be the biggest year of cat Capex spend at Leer South.

With more than 200 million budgeted, we're comfortable and in fact enthusiastic about this level spending.

Given that it reflects a tremendous and rapid progress we're making in the build out of this world class assets as discussed we expect to start up along all just six quarters from now on time on budget.

In fact of their south.

On the earnings and cash generation should be profile even.

Even at today's relatively depressed metallurgical pricing levels, we would expect yourself to contribute an estimated $150 million, an incremental EBITDA annually and substantially more than that during other points in the cycle.

That kind of step up will be transformation overarching.

Okay.

In short, we're retooling and upgrading our metallurgical portfolio in multiple ways.

The result of these effort should be even more powerful cash generating cash generating profile in the future across a range of market scenarios.

As you know since launching our capital return program in May of 2017.

We have returned most of our excess cash to shareholders via buybacks and dividends in the quarter. Just ended we returned another 18 million to shareholders, bringing the total sense of programs launched a $913 million.

Perhaps more impressively, we had bought back 40% of our initial shares outstanding over that timeframe, which.

As a rare feet.

[laughter] as we head into 2020, we expect to slow down or capital return program for the time being indirect most of our excess cash to the build out of Lear, South and doing so we expect to build an even more powerful platform for cash generation with the potential to feel an even stronger capital return program in the future.

Should the board view, such a program as desired.

Turning now to the marketplace seaborne metallurgical markets appear to stabilize somewhat in recent weeks. Despite ongoing concerns about the extent severity of the Corona virus outbreak in this potential impact on the global economy.

The price of Highball, a coal which will comprise nearly.

30% of our metallurgical product mix and 2020 has rebounded 10% or so since the first of the year and other metallurgical products have strengthened as well.

In addition, metallurgical producers have now closed her idle 8 million tons or production counting what should deliver a healthier supply demand balance over time.

Finally.

Progress and global trade talks lifting of import restrictions in China, and the continued build out of integrated steel capacity in India and the rest of southeast Asia, all appear constructive and could ultimately translate into a stronger market environment wants macro economic concerns begin to diminish.

Most importantly, we're confident that arts as well equipped to where the current market downturn and just as well equipped to capitalize on the next market upcycle whenever it occurs.

In summary, heading into 2020, we plan to drive forward with our efforts to reduce or mental or Joe costs. Further set the stage, even greater cashed generation the future through the build that of Lear, south generate significant levels of free cash flow from our thermal portfolio.

Pair those thermal assets for increasingly challenging market environment through the completion of the synergistic J.V. with Peabody.

And maintain our industry leading balance sheet strict.

With that alternative call over to Paul laying for further thoughts on her operational performance now Paul.

Thanks, John and good morning, everyone as John noted our core metallurgical franchise again executed at a high level last quarter, even as we undertook a major transition had mount Laurel the cost structure for the metallurgical segment, excluding Mount Laurel with subs $60 per tone, which we believe is at least 20.

He dollars below the median <unk> peer group.

As you would expect the Lear mine led away with cash costs and bid 40 dollar per ton range.

Again underscore and why we are aggressively moving forward with the build out of its sister operation later South.

While our metallurgical segment has consistently demonstrated operational excellence more far from satisfied and still see significant opportunities for continued improvement.

First opportunity, it's a transition at Mount Laurel.

The remaining reserves at Mount Laurel are no longer suitable for a long while money, we are enthusiastic about their potential to support and efficient and profitable room and pillar operation.

But by the end of the fourth quarter of 2019, we had four or five continuous miners operating in a room and pillar configuration, and we expect add the fifth unit in March.

Today units that have transition to the new mind plan have operated well and achieve solid rates of advance.

Well these changes at Mount Laurel, we expect steady improvement at the operation as we progress through the year.

In total the reconfiguration of the operation should deliver about a 10 dollar per ton decrease in the minds cash operating cost during 2020 as well as a meaningful improvement in coal quality and most importantly, more consistent operating performance due to our greater ability to.

Yes, the variations of geology.

The reserve.

Second opportunity that should drive improvement in the metallurgical segment, here's the progression of our flagship Lear mine into thicker reserves.

As previously discussed we have systematically reduced costs set lear in recent quarters and the improved geology. We are currently experiencing should continue this progress.

With amid 40 dollar per ton cost structure and each of the past three quarters Leers already performing at a high level, but we remain focused on incremental improvements at the operation incoming corpse.

The third biggest opportunity for improvement in our metallurgical segment of course will come with the startup at a long while at Lear, South has indicated we're making excellent progress in the development of this world class asset and our well on track convince long, while mining and the third quarter of 2021.

Just as importantly, we're maintaining our sharp focus on Capitol discipline and remain comfortable with our original guidance of $360 million to $390 million for the development of the mine.

Within this estimate we're netting out the cost of the replacement shields lost at Mount Laurel against the expected insurance recovery.

In summary.

Respect to step down in our metallurgical segments cash costs in 2022, a range of $58 to $62 per tone and further improvement in our cast caught cash cost structure next year, which expected volume contribution from the Lear South long wall.

We expect still further progress in 2022 with the new long wall when the new long, we'll we'll be operational for the full year.

We believe were unique in that we're showing a long term decrease in our cash costs on an already U.S. industry leading base.

Moving from operations to marketing. We're also pleased with the solid progress we made.

To build out our 22020 contract book for the metallurgical segment during the fourth quarter.

To start we we added roughly 300000 tons of high <unk> and high Walby commitments in North America, bringing our total contract to position in the U.S. in Canada to 1.8 million tones at a fixed price of around $107 per ton.

We view this as a solid foundation at an attractive price given the market conditions that prevailed through the contracting season.

In addition, we increased our seaborne commitments to 2.4 million tonnes during the quarter.

Was more than 90% of that and market based pricing.

And the remaining 10% at a fixed price for a hive all be product.

We believe our contracting activity to date represents a good and healthy balance the North American business, which we again expect to account for about 25% of our sales provides us with readable term business a solid fixed price.

Seaborne business extends our market penetration into the international arena, while providing exposure potential strengthening in those markets.

All told we now have placed approximately 60% of our project in 2020 coking coal volumes in our in the midst a further negotiations with international customers.

[noise] turning to our legacy thermal assets, our minds continue to generate significant levels of free cash as helping fund our capital return program and growth in our metallurgical segment.

In 2019 are thermal assets generated over $100 million more and segment level, even <unk> than they expand it in capital.

Performance brings the total on that same basis to more than $600 million a free cash generation since emergence in late 2006 team.

As far thermal contracting position overall, where nearly 82% committed at current volume guidance levels.

Of these committed volumes, we have 60 million tons of pottery River basin coal committed of which 58 million towns are on a fixed price basis of 12 22 per ton and another 2 million times were sold on an index basis.

View that position.

Solid in today's market environment.

Moving to the joint venture with P. body, we continue to engage with the Federal Trade Commission as we make our way through the regulatory review process.

Main confident that this business combination will prove beneficial to all stakeholders, including our customers employees and shareholders.

Reading, a long term efficient stable and cost competitive supply platform in an increasingly challenging energy marketplace.

As you can appreciate we cannot specifically comment on the process other than say things are progressing as expected.

Looking ahead, we expect another strong year of operational execution in 2020 across our entire platform.

We believe were uniquely positioned the managed through and even thrive in the current market environment.

The same time, we're looking to improve on every key operating metric and plan to extend our competitive advantage further in the corridors ahead.

With that I'll not turn the call over to <unk> are CFO John.

Thanks, Paul and good morning, everyone.

John and Paula vindicated absinthe earlier than expected transition at our Mount Laurel operation, Our fourth quarter results represented continuation of our strong execution on our plan.

Since our emergence from restructuring we have purposely maintained the foundation of a strong balance sheet and abundant liquidity.

Strong foundation combined with our tier one low cost long lived operations has allowed us to generate healthy cashflows, even as the market cycle has weekend, but more importantly allows us to expect ongoing healthy cashflows as we worked through the market cycle.

The fourth quarter is a good example of our cash flow capability, even in challenging markets.

Despite the transition costs, we encountered it mountain Laurel, we generate at $86 million of operating cash flow in less than robust coking coal and there are multiple markets.

Armenians capital during the quarter was $36 million, leaving $52 million of free cash flow.

That cash flow is utilized to continue the build out of the Lear, South mine and to acquire the Lear north reserves to significantly extend the life of the Lear operation.

As we look ahead to 2020, we continue to expect are low cost portfolio to generate cash well in excess of our maintenance capital requirements and to utilize that free cash flow to continue to build out of our world class Lear, South operation, while continuing to maintain a strong balance sheet and healthy liquidity.

Let's now focus our attention on arches capital allocation in liquidity position.

As we signal during the last earnings call, we have significantly reduced our capital return program during the fourth quarter given the market downturn.

During the quarter, we paid our recurring quarterly dividend of $8 million and utilize $10 million to buy back 133000 shares.

Moving forward, we are committed to the quarterly dividend with arches board approving and 11% increase in the quarterly Ray from 45 cents per common share to 50 cents per common share, which is scheduled to be paid on march 13th to stockholders of record at the close of business on March 3rd.

However, as we look at our capital return program and 2020, we expect that lower met called pricing along with the higher capitals us spending associated with the Lear South Buildout will result in a reduction in excess cash flows available for share repurchases.

Quite frankly, that's how the board always envisioned the program working when excess cash flows are high and needs are modest return capital via buybacks.

Adversely when excess cash flows are reduced the amount of capital available for sheer repurchases is reduced as well.

John indicated in his remarks, we plan to direct our excess cash flows after the quarterly dividend payment to the build out of Lear South.

Once online the cash generating capability of that complex will rival that of Lear, which even in today's lower met market environment is capable of generating 50, plus dollars of cash margin per time.

Regarding our liquidity, we ended the quarter with $412 million of liquidity with $289 million in cash in $113 million in borrowing capacity on our credit facilities.

As indicated on previous calls, while we are comfortable with our ability to utilize existing cash flows to fund the build out of their south we will continue to explore in our confident that we have the ability to raise additional modest levels of capital at attractive rates to help facilitate the construction of the project.

As Paul mention the removal of the long while at Mount Laurel proved to be more difficult than anticipated conditions developed during removal that precluded us from removing 123 of the long wall systems 176 shields.

As you know we are refurbishing this long while to be utilized south.

As a result of the loss, we will replace the 123 shields, which will arrive on site well in advance of our anticipated start update in the third quarter of 2021.

We are finalizing an insurance claim for $30 million to $35 million that will cover the amount of capital required for the new shields.

Proceeds are expected prior to mid year.

Regarding our capital spending for 2020, while we are guiding to arrange of $310 million of cap exit the midpoint.

$220 million of that is for the development of Lear, South, leaving $90 million for maintenance cap X.

We view that is very manageable levels of cap x. for our portfolio.

Absolutely yourself, even in challenged call markets, we would be generating significant free cash flow.

Near South offers a great return in a rapid payback in any market scenario and is where we will direct are asked excess cash flows.

Mm.

As we wrap up 2019 and step into 2020, we are pleased with the position of the company.

Are low cost operations are designed to generate meaningful cash flows and all stages of the market cycle.

Combined with the foundation of a strong balance sheet unhealthy liquidity, we are well positioned to not only withstand the bottom of the market cycle, but to continue to improve the position of arts through the development of another world class Ultra low cost operation with litter south.

We remain enthusiastic about our key drivers of value.

The ongoing build out of lyrics out the transition of Lear to the heart of its reserve base the transition of Mount Laurel to a lower cost and operationally more consistent room and pillar mind and the ultimate completion of the joint venture with the body.

With that we are ready to take question.

Operator out turn the call back over to you.

If you like to ask a question we signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure your functions turned off to allow your signal to reach our equipment.

Star one to ask a question.

Oh, just for a moment to allow everyone opportunity to signal for question.

Yeah.

Okay. I first question comes from Lucas pipes.

<unk> if B.R.

Yes morning loading everyone.

Lucas.

I wanted to follow up a little bit just on that last point.

John that you were making in regards to.

The amount of leverage and liquidity that you could be comfortable with could you elaborate on that a little bit like you think about liquidity when you think about.

Leverage what could we go.

If this market states, a little bit weaker for longer.

Would appreciate maybe I just just some few numbers around thank you.

So Lucas obviously as we've indicated during the course of the call. We continue to remain very comfortable with the cash flow generating capability of the profile that we've position the company.

With an anchor asset like Lear, even in in very difficult markets generating meaningful amounts of cash flow as we've indicated.

More comfortable we can continue to fund the needs of of the company and the cap X. build out at Lear South.

From existing cash flows.

Also indicated in my remarks.

We think that there's other opportunities for modest levels of additional leverage we obviously have a very strong balance sheet. We expect to continue to maintain a very strong balance sheet and healthy liquidity as we managed through this but will continue to explore that if we think there's opportunistic ways to add on some additional smart leverage will will.

Consider that.

It's in if those avenues aren't available, but we think they are.

We remain comfortable that we can continue to build out of near south from existing cash flows.

Yeah. That's helpful. I appreciate that and then just a quick follow up on on Mount Laurel.

Good to see that transition occurring.

You tell us what level of production.

I should expect from this mind going forward under the current configuration and.

I'll see curious in terms of where that mine would be shaking out on the cash costs going forward.

Continuous miner and then just separately I noticed there were some movements on the other thermal portfolio in regards to 2020.

What changed during the like the committed sounds came down yeah. Thank you very much.

Right Leucosis, Paul I guess start with Mount Laurel.

You know as I mentioned earlier, we currently have for the fire Cmes running the fifth little startup in March.

And what we are targeting right now is a production level of about 1.2 to 1.3 million tones.

But as you think about it Lucas. This mine was set up to run 4 million tons a year.

And we have a lot of opportunity to expand that but right now we're going in at that kind of 1.2 to 1.3 million tone rate.

Well, but on the cost side, I think Mount Laurel, probably fall right in what I'd call average for the U.S. industry, you know in that mid eighties range.

If I remember your third if I remember your third question on the other thermal.

I think what you're saying is the impact of Colomac sale and the committed tons of people with cold back with the sale.

That's yeah. So that's that's really straightforward.

This is all very helpful.

The best of luck.

I can Lucas.

If you find that your question has been answered you may remove yourself from the queue by pressing star too.

Mm.

Next question comes from Daniel Scott Clarkson.

Hey, Thanks, guys.

Oh good quarter. So during the in the next segment with all that was going on I just want to follow up on looks as question about Mount Laurel is that it that Runrate you were describing I'm, assuming you keep it there and at 1.2 to 1.3, what kind of a reserve like are we looking at for that piece.

Oh geez.

15 years 20 years.

Okay. So that's that's a study part of the Oh the balance. So then when I think about you know that that mind drops $10 have its cost structure you add litter south that you know presumably is going to have a for handling it's cost structure. I know you said you were going to be trending down this year versus last year next year versus this year energy when you get to the point.

Production from from their south we talk into potential and without getting hard guidance that you know mid fifties.

On average cost is is not unreasonable.

I mean, that's the direction, we are trying to get too.

Well that would support a lot of free casual certainly and then the two last ones. One was it was reported that spring Springfield is closing a couple of the units that are served by Viper and then given the Coolmax sale is is in the joint venture covering kind of everything else Who's Viper you know a a core asset at this point.

Yeah, I think the announcement on city Springfield was not a surprise obviously we knew.

What they were trying to get to put their integrated resource planned.

They're basically shutting down to the older units that ran.

What I'd say at best on a parttime basis, the two big units, especially the newer one will continue to run incrementally. It's about 100000 tonnes, we think of lower production out a viper.

You know and Vipers, one of those interesting mines Ah you know it is what it is it's a captive to the C.W.L.P. the city Springfield.

It it generates of you know nice little bit you, but and you know isn't poor or is it not you know if there was a way to create value from it by some other means I think we'd explorer.

Just just to follow on their van we you know we do have a a five year contract in place that's been secure for the next five years with most of the volume from Biber. So you know as Paul said, we're really not subject to the open market very much at all so we think we're well positioned certainly with that mine for the next five years or so.

Well, that's a good defense there and then I guess, we're actually are long wall mood schedule for Lear any this year.

But we just finished one layer last week. The other one will be in late two three early queue for.

Great very helpful. Thanks, guys good job.

<unk>.

Or next question comes from my Heart, leaving benchmark.

Great. Thanks, I'm very much guys do a couple of quick question one.

U.S. thermal how much P.R. be cool do you expect to sell this year.

Versus last.

You know, we didn't give exact guidance mark or <unk>, but you know I think you can imply from our thermal guidance. We look like we're going to be down anywhere from two to 5 million tonnes versus last year.

Okay, Great Perfect and then second question is for for John Drechsler, John What we're doing that kind of EBIT done to free cash flow bridge.

Obviously, you you noted cat banks and you noted cash interest expense is there anything else below the line, it's not captured in <unk> needs to be.

Needs to be accounted for to get to that pretty gash number.

Yeah, So mark a few other items just to reference [noise] is as you know from a a tax position, we're not expecting any cash taxes for the foreseeable future. So that's not a component and so then there are some other items that that provide a positive impact that we expect in 2021 that we've references.

P.R.L.A. settlement that gain of 39 million that was recognized in the fourth quarter. We expect the majority of of that gained to be realized over the course of of 2020.

We do expect an A.M.T. tax refund somewhere to the tune of of college $17 million to $20 million flowing through in 2020, as well and another item that we reference in our guidance, while we provide S.G.N.A. guidance, we do split that out between cash and noncash there's a stock based compensation component.

Of that that's flowing through and negatively impacting you <unk> won't be in a cash component and that's in a range of $18 million to $20 million. So you need to kind of add those positives back to reconcile we don't expect any you know while we are affected by working capital adjustments over the course of the year, we think a lot of those things moved.

Smooth themselves out.

Guy got got it did not believe you guys are there's a 52 million dollar purchase a preserves from from Black hockey is that expected to hit this year and how would that be.

No that that cash came through in the in the fourth quarter. So that's already reflected in our cash balance then it affecting liquidity.

Got it okay perfect. That's that's that's terrific and I think I had one more question and it's probably circling back to well.

We'll have a broader market.

More a broader market a comment about them that market. You know this morning <unk>. They are seeing signs of stabilization any proving demanded in Europe. He ended Brazilian steel market. There's a lot of the d. stocking is over I'm I'm. Just curious if you guys are feeling better about European or Brazilian.

Bet market said 2020.

[noise] Yeah. Mark. This is Paul you know I'll start with you know rewind about six weeks it was a pretty bleak picture.

You know I think we had a lot of concern of our customers, particularly in Europe.

And South America. It was was I don't want to say worse, but it was pretty depressing also.

What we have seen though is really the last couple of weeks, there's been a little more positive news coming out of it and a little more discussion over what we're going to be doing and 2020.

You know and I think that's reflected in the index is you're saying you know we've seen a movement of about $10 on highway prices since the end of the year.

You know market as I made my opening comments, we've seen 8 million tons of production come out we think that number is going to grow.

Probably by several million times, you know with with a lot of the cost structure in Central lab, Yeah. I think it current price levels is just going to be challenging. So you know as Paul said, we've seen a an uptick over the last couple of weeks, there's probably a little pause right now because of the virus concerns, but you know as we had into you know the back half of the year.

We certainly could see a a pick up in the market and you know with our cost structure now logistics homing will be prepared to capitalize on that so we feel pretty good about where we are and we're we're going.

<unk> that's great color appreciate let last question since actually for <unk> any thoughts on what you think P.R.B. consumption or demand is gonna be 2020 versus 2019, given kind of were gases today in the inventory situation.

Yeah, Yeah, Mark things that you know I guess I would say and I mean, clearly that's a hard call with gas prices you know in the Middle 180, that's that's tough and obviously, we've had a a pretty mild winter. So far I guess for US. We're we're going to focus more on kind of the strategy, which is we're going to take whatever is there in terms of the market we're going to.

<unk> <unk>, you know high levels of cash and extent, we can and as we've been doing with our thermal assets and really that continues to be our focus as we've indicated you know since emergence we've generated about $600 million a segment level, even die in excess of capital expenditures and so rather than sort of sweating, where the market's gonna be we know it's going to continue.

To be under some level of pressure, we're just going to continue to focus on that that harvest strategy and taking cash the fullest extent possible managing our our capital and a disciplined way so hard for us to call exactly Ah you know as as we saw and you know the 19. It was a pretty significant step down in terms of overall thermal consumption 2020 could be another.

One still we're not starting out great. Obviously, we think we got the right strategy for that.

Oh right appreciate the timing congratulations guys.

<unk>. Thank you Mark.

The next question comes from Lucas pipe be rally F.B.R.

It's very much for taking the Hey, Hey, Hey.

Good morning, again and things of taking my follow up question.

I want it to.

Follow up extra and some of the.

Bigger picture metal market questions that that just came across and if you think about kind of to balance in the north American market is their need for more production cuts.

And if so <unk> roughly how much. Thank you very much for your perspective on that.

You know looks outlet deck jump in here, but I think you know certainly with a cost structure or call. It eightyish for average I think it's gonna be challenging at current pricing for a lot of these guys to make it you know some I'm also have pretty stressed a balance sheets, which also is going to put a challenge, but I guess you know we look it kind of the world and and what's.

The one on globally and you know as as we put out a number of times when we look at a very conservative demand growth over the next five years, a very conservative depletion right. You know, we think the the world's gonna be under supplied over the next five to six years I think the challenge of some of the guys in North America is kind of making it to that point you know with their cost structure.

I just think it's gonna be very challenging I don't deck, you got any comments yeah, Yeah, certainly Lucas would would would agree with all those comments and and you know the the fact is and as we've indicated you know we think this downturn is actually pretty constructive for us. We we think that separating the wheat from the chap.

Useful here, there's high costs production in the market that really should come out high cost reduction that was kind of clinging to the rock even even in the high price environment and so you know because of the barriers accent for a range of reasons. So you know this this turned down is really you know we thing healthy from us supply demand balance in in the long run.

You know quite obviously, we're we're built to whether this.

But we think several more horrors would would be desirable you know and just seven months really the the downturn <unk> really began in earnest sort of July one of 2019, and and then just seven months. The fact that 8 million times is already come out of the market kind of tells you everything you need to know there was production that really just didn't didn't need to continue to produce.

And as we've seen I mean, some of that quite frankly, some of those reductions happen even before the market turn down which is significant and then you know some happened 10 minutes. After it dead. We've seen this study drumbeat of additional reductions and so yeah, we'd like to see this play out for a couple more quarters quite frankly, we're just not sure that in particular in North America.

Yeah that the supply side can hold up and so you know what what's the right level. You know we couldn't we couldn't tell you that that quite but quite frankly, we could say that in the U.S. There there's production that that needs to to dissipate would also add that you know we went through a three year upcycle with very limited in <unk>.

Asman, an expansion capital, which was which was significant development. When you go through you know sort of 200 dollar pricing for three years and there's very limited investment in new mining capacity I think that speaks well to this sort of constructive nature of cold market's going forward. This downturn, probably ensures that that continues and as John sad.

With depletion you know as a natural resource business. So we're going to have depletion and we really think this sets out well for the next five to 10 years in terms of of a healthy supply demand balance and coking coal markets globally and logo just to follow on them. If you think about our focus on high ball a I mean, you know we think that that demand is gonna be strong for for decades.

You know with our costs structure in our logistics I mean, you know, we think we're well position from a a quality standpoint as well, there's just not a lot of people around the globe producing high quality low cost high volume <unk>.

And looks out there on just one more comment it's interesting to we are starting to see a little impact in international arenas, while we saw shut down due South Wales and he's off coal just last week. There's structuring that's that's going on in Mozambique, and so it's not confined to be you ask for the U.S. seems to be you know where where we're going to see the big.

Consequently.

[noise] very very helpful perspective may maybe one quick follow up on just on the back of this in in North America you have some.

Coking coal assets Nightline in restructurings say anything that could be of interest there or or you you're pretty happy with your portfolio into built out yourself.

You know Lucas as you can imagine I mean, we look at everything that that becomes available and you know with a critical why but we also bench mark it against what we can do you know with Lear, South and and that reserve a 200 million times in really quite frankly, nothing stacked up yet from a cost standpoint from a quality standpoint, and our ability to.

To get her to the poor so we'll continue to look around but we like our organic growth strategy very good so.

Perfect great.

Thank you very much for the additional color that's like.

Thanks for the pension Lucas.

Or next question comes from Dave Gagliano B.M.O. capital markets.

Hi, Thanks for taking my questions and I apologize. If this has been covered already I just wanted to come back to the longer term capital allocation plans and thoughts there.

After 2020, obviously or an obvious but after 2020 and it looks like you know free cash will generation goes up quite a bit assuming market conditions hold relatively.

Stable.

So I was just curious about the philosophy prioritizing capital allocation plans after layer shop, that's developed.

And you know is that our preference for you know more buybacks special dividends that kind of thing or or other.

Useless. Thanks.

Yeah, Hey, Dave [noise]. Good question, obviously, what's most important is the foundation that the entire companies built around which is significant cash flow generation right. The low cost assets in any market environment, they're going to allow us to generate free cash flow, it's only going to be enhanced as we move forward with Lear south for the last several.

Years, you know we've been very focused on on a capital return program back when markets, where healthier and we didn't have the the more significant capital needs of Lear, South that really focused on share repurchases because we felt that that investment was inappropriate. One we've made big strides there we've reduced the shares outstanding by 40% during the course of that.

Program. Obviously it was we vindicated you know we'll have a shift right now with a lower market environment call market environment in higher needs right now for bringing on and a significant cash generating asset, but as you reference do you know as we move forward into the 2021 post 2021 time period.

There's cash flow generation is going to be substantial that's like a great opportunity for US you know, we'll continue to evaluate longerterm as a management team on with the board on on what ultimately that we'll do here, but we continue to believe that and then that's arches isn't investment the that that is appropriate and and so there'll be a lot.

More to come over that time period, and and obviously, we'll keep the market's informed of of our direction. John you know dangerous to follow on certainly we think the investment Lear South is a prudent business decision you know as I said early on you know an annual basis and incremental $150 million of additional even even in this pricing environment is pretty cool.

Spelling for investors. We thing. So you know we're going to spend that capital is you're quite frankly as fast as we can spend and as quick as we can get this production up and running and I can assure you My board and I talk about capital returns. It every board meeting so as we get into 2021 and regenerating all this cash clearly that'll be a topic that we cover.

A very early on.

Okay really what I was and I appreciate those answers, thank you and and and so just to clarify really what I was.

You know trying to get it was.

Beyond 2020.

The preference for capital returns in whatever form or is there you know more preference for or shift in preference for.

Inorganic or organic opportunities.

Dave I think that'll depend on a business environment the market environment and as I said I mean, those conversations are ongoing with our board in and certainly will make the the right decision, but the management in the boards focus today is to get layer, south up and running as quickly as we can't.

Okay I appreciate it thank you.

Thank you Dave.

Yeah.

Oh nice question custom Chris feminine.

Jeffrey.

Hey, good morning, Thanks, guys nice taking my question.

First on lyrics out I think you said that you expect to be able to find that project out of existing cashless does that mean that you would expect free cash flow for large coal in 2020 to be positive and secondly.

With the.

Development profile for Lear, South and assuming co prices.

Stay relatively stable go higher from here again, I think they've made the point earlier that you're free casual should improve sniffily beyond 2020.

But then you also commented about looking for potentially adding on some smart leverage but if if the Lear South project is covered by cash flows and 2020, and then you're free casual trial profile <unk> improves beyond 2020, I'm I'm just trying to reconcile <unk> you might do to add leverage to the business. When it seems like if anything your net debt should be going down.

Yeah. So Chris this is John Drechsler, I I think you know as we've discussed over the course of this call work confident that the ability of the company to generate significant excess cash all stages of the market cycle is meaningful and we've indicated over the course of the call that that you know given.

In today's environment, we believe in our expectation moving forward. We can continue to fun Lear south from existing cash flows I think I noted.

In my discussion with Mark that there's some other positive cash impacting items as well so as we look at the totality of that clearly we continue to believe the opportunities there to fondly yourself from existing cash ones with all that said, we know markets can be volatile we know markets can be dynamic.

And so you know we'll continue to explore opportunities.

To put on very modest levels of leverage probably designed in a way that you know could be paid back or paid back in accordance with getting Lear South back online any type of leverage that would be brought on would be very modest would not stress the balance sheet. Once again as we continue to watch markets evolve.

<unk> you know, we'll just we'll be prudent in evaluating all of those types of opportunities.

That's very helpful. Thank you.

Oh Nice question comes from Michael Dude off Brooklyn Research.

Thanks to squeeze mean, guys <unk> could you remind us how much.

<unk> has been spent on leave yourself and what's the cadence and Where's the.

Kind of level spending.

Do you anticipate where there's this year early into 2021.

And.

It might Michael <unk>, yeah, Okay.

Our next quite well that's what I think we got the majority of the <unk>, We we lost as long as we're still online.

Think we got the majority of the of the question related to Lear, South So from a capital expenditure standpoint, we're we're guiding 360 to 390, we've indicated in 2019, we incurred $103 million of capital.

In our capital guidance for 2020, which is the most significant year of of capital required for the build out it's $220 million. So then backing into what's remaining in rounded numbers, it's around $40 million to $70 million that would be remaining in 2021 in advance of the long while starting up in the third quarter of <unk>.

21, that's essentially the k. So so 2020 is is the the significant Uri in cap X. and once again, all designed around making sure. We're in a position to start the long while up in in the third quarter of 2021.

Yeah.

Our next question I lived from Wayne Kuperman Cobalt Capitol sorry, yeah.

Yeah. So just follow up on that last question.

What's the actual cat bats number for 2021 in total and is there a number you guys are comfortable using a sort of an ongoing capital spending number beyond that and have one more question. After this one.

So Wayne from a capital perspective for 2021, [noise], we don't provide guidance to that other than the fact that you can back into the guidance for Lear, South right maintenance cataracts. This year maintenance cap X. This year is $90 million I think we've made indications previously that for the structure of the company as it is today that kind of 80 to 100.

A million dollar range going forward is is a comfortable range for the company from a maintenance perspective and that will lose.

Mouth after it's up and running at once again, we have been provided that specific guidance for 2021, and maybe there's a modest step up in that capital for maintenance for later, south going forward, but it wouldn't be significantly different from that range that I just described.

I just the corridor 'cause since you had a net income loss the shares outstanding with like 15 million, what what is the <unk>, assuming you had an ink like what would the deluded shares outstanding be on a you know assuming you had positive that income is 15, the right number it seems a little bit low.

Yeah. So 15 is the actual shares outstanding if you go back to the previous quarters, where we had net income I would say the diluted effect of those shares his anywhere from 800000 to a million and a rough range I I guess you can go back to the actual filings themselves and see that so once again, because it was a net loss.

The bottom line accounting rules require that we'd not taken into dilute of effect of the of the the delusion of the shares. So once again I think you can go back to the quarterly filings, but it's anywhere from college half a million to a million shares but you should have access to those specific.

If I was being conservative and you guys. Obviously, we'll get back to net income the 16 million give or take would be about the right number.

AD out of the range of reason alright, thanks very much.

Thanks.

Yeah, we have no further questions in the queue at this time.

Yeah.

And I was like Yeah, I want to go back over to John <unk>.

Thank you. Thank everybody again for your interest in arching for joining the call today as discussed 2020 could well be a year transition from industry. Following a three year upcycle that leveled off in mid 2019.

But arches exceptionally well equipped to ride the commodity cycle, Oh 2020 could start choppy corrective forces are already underway in the marketplace and long term global outlook for met calls pause it and closing let me remind you that key value drivers that we believe make arch an attractive investment.

We have some of the industry's lowest cost mine's producing some of the industry's highest quality products.

The balance sheet that will serve as well regardless of the market and.

And we have a compelling organic gross story that we believe this unmatched in industry and short are just position to manage effectively through any downturn and thrive over the long term. Thank you and look forward updating you in April.

[noise] speculation gyms includes day teleconference. I mean now disconnect.

[laughter].