Q1 2020 Earnings Call
Ladies and gentlemen, you were currently on hold for the arch coal first quarter 2020 earnings conference call. At this time, we arent someone today's audience and we plan to be underway. Shortly we appreciate your patience on please remain on billing.
[music].
Ladies and gentlemen, good day and welcome to the arch coal first quarter 2020 earnings Conference call Today's conference is being recorded.
I would now like turn the call overnight you get Sloan Senior Vice President of strategy. Please go ahead.
Good morning from Saint Louis and thanks for joining us today.
While we are conducting this morning's call from arches Board room I want to assure you that the team is widely spaced and falling CDC guidelines closely.
Born again, 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.
Segments by their nature address matters that are to different degrees uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we filed with the FCC may cause our actual future results to be materially different than those expressed in our forward looking statements. We do not undertakes to upgrade our forward looking statements whether as a result of new information future then.
[noise] 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've posted in the Investor section of our website and arch coal Dot com.
As you know Johnny's work will be retiring the CEO and transitioning the executive chair role next week.
He plans to say if you were sort of this morning's call before turning the proceedings ever to Paul Lang, our incoming CEO and the rest of the team.
Also participating in this morning's call will be John Drexler, our incoming CFO, Matt you all Gemma our incoming CFO.
After our formal remarks, we'll be happy to take your questions with that I'll now turn the call over to John.
Thanks, Dan Good morning, everyone. I Hope you on your families are staying healthy unsafe. During this unique in challenging times as you're aware holby transitioning to a new roles arches executive chair at the company's annual meeting next week.
Well take a few minutes here at the outset or this morning's call to say a few words about my time as CEO to talk about the leadership team and the workforce is a whole and express my great confidence in arches future.
Let me start, though by saying thanks to all you for your interest your support your friendship during my years as CEO I've enjoyed the frequent and close interaction with so many of you over the years and that benefited greatly from our exchanges I look forward to continuing the relationship into the future.
Second I want to ensure that the company cannot be in better hands. As you know we've been planning the succession process for several years now and they're simply no one better equipped and Paul to lead the arch same forward into the future. He's played a critical role here at arch for many years and brings tremendous experience and expertise and every aspect of our.
Business in addition.
He is supported by an outstanding Senior officer team. One that's contributed significantly to the company's growth and success over the years and one is well equipped to carry to even greater success in the future.
In fact, the entire arch workforce is world class in my opinion and represents a company single most compelling competitive advantage.
Finally, I want to say how excited I am about the company's outlook is that transition into this new role with our premier metallurgical franchise high potential growth prospects industry, leading safety and environmental stewardship credentials and tremendous human assets I firmly believe that arches position for great things.
Well on passing the baton to CEO I'm excited about the prospects of continuing to work with the board with Paul and the entire management team and leading the company followed in fact I wouldn't Miss it for the World again, many thanks for all your great support in the past and thanks in advance for all your all ongoing interest going forward with that I'll now turn the call over time.
Just incoming CEO Paul Lang Paul.
Thank you John and good morning, everyone.
Certainly appreciate you taking time this morning.
Given the broader issues were all facing personally.
I do hope.
Thank you and your families are navigating through the crisis is positive effect and as can be expected.
I'd like to start but think of the entire arch workforce, because a tremendous job they're doing there that's challenging time.
As you know the federal government in each of the states in which we operate have designated resource companies as a central service providers.
The arch team is proud of the roll it is playing and keeping the country safe and functionally during this fiscal period.
At the same time, our people our balance sheet increasingly complex personal lives even as they deliver on the work fronts in their everyday exemplary fashion.
We applaud them to the resilience that professionalism and their dedication.
Turning now to our first quarter results I'm pleased to report that today, we're continuing to manage through the current crisis in a successful in effect the fashion if acutely focused on the things we can control.
Our core coking coal portfolio continues to demonstrate operational excellence, we're making significant progress in the build out of yourself and we've taken steps to further fortify our liquid.
Well first our thermal segment struggled in the first quarter due to low natural gas prices and historically weve power markets, we're moving quickly to adjust our cost structure to match the softening thermal demand.
In short, we're executing effectively and driving forward on numerous flows as we adapt to the current market reality.
In Q1, our core metallurgical segment delivered another strong cost performance well, John Drexler will provide some additional commentary shortly.
Well, what I would like to highlight the fact that our average cash costs last quarter was on the low end of the guidance range and solidifies arches first quartile cost position.
Leading the way once again, a little earlier.
Underscores the reasons why we're so eager to get its sister line Theirself often running as soon as possible.
Turning to our legacy thermal operations market conditions of condos come under intense pressure recently in the face of exceptionally low natural gas prices and the rolling shutdowns in the U.S. economy that commenced in mid March.
As a result, we reported a negative margin in both of our thermal segments in the first quarter.
Anticipating that those challenges are likely to persist at least through Q2.
We're moving quickly to adjust our production plans and cost structure to be prepared for the potential of lower sales for the balance of the year.
We're cautiously optimistic that these efforts will deliver improved results in the second half of 2020, recognizing of course that the unknown duration of the economic shutdown makes forecasting an exceptionally difficult.
As we maintain our sharp focus on executing at our existing mines were also working to ensure that our plans for long term value creation and growth remain on track.
Most significantly we're continuing to push forward with the development of the World Class Lear, South mine at a rapid pace at quarter end, we'd extended nearly 45% after the projected capital required for the project and we're now only five quarters away from an expected longwall stuff.
While it's difficult to predict the market turn and even harder in the current macro environment. We believe that leave ourselves could be ramping up production into a recovering market.
In addition, we've taken steps to align our corporate support structure with our change in operating profile and strategic direction.
In late February we initiated a voluntary separation program that resulted in a 30% reduction in our corporate staff.
Obviously, it's always hard to say goodbye to friends and colleagues, particularly those who contributed greatly to the organization success over the years. Given this though we are pleased to be able to go through this process in a way that work for both their personal interests in the company's Walter leads.
We see this adjustment as appropriate and healthy given our ongoing pivot towards metallurgical markets as well as our progressively smaller thermal footprint.
We also continue to pursue our joint venture with Peabody component, our thermal operations in the powder River basin in Colorado.
We remain confident that the business combination will prove beneficial to all stakeholders, including our customers employees and shareholders by creating a long term efficient stable cost competitive supply platform in an increasingly difficult energy marketplace.
The Federal Trade Commission is challenged the proposed joint venture at Federal Court and say lows.
We respectfully disagree with the FTC position and along with Peabody will be vigorously defending the transaction.
The core to set the baked commence the proceedings in mid June and we expect to have a decision by late this summer given the process is now in litigation, we will not be able to answer any questions related proceedings.
Finally, we're taking the necessary steps to ensure that we maintain ample liquidity to the full extent or the crisis. However, long that may prove to be.
We completed a well timed and attractive equipment financing effort in the first quarter, we trimmed $20 million for capital spending plans for the year, primarily at our thermal operations and we just about the board's decision to temporarily suspend our quarterly dividend.
Longer term the board continues to view of sustainable recurring dividend has an important component arches value proposition in short the current environment to serve to validate our longstanding commitment of 18 exceptionally strong balance sheet and recent moves will serve to bolster that position further.
Looking ahead, we expected challenging market environment through the balance of the year on both the metallurgical and thermal fronts.
After holding up reasonably well for much of the first quarter steel markets have weakened considerably in recent weeks.
Major steel producers in most regions have announced plans to curtail output and idle blast furnace capacity those developments are starting to take a toll on global metallurgical markets.
While fuel market should improve as the economy. It stabilizes then begin to recover we expect all of us to take some time.
Fortunately, we believe we're well positioned to whether such a period.
In summary, we're navigating through the current environment in a precise and careful way, we're working diligently to protect our people doing our part to limit the spread of the virus and we're executing in every aspect of the business over which we have control.
With our low cost assets fortified balance sheet solid book of business and skilled workforce. We believe we're well equipped three with protracted period of market weakness.
At the same time, we plan to be ready to respond to improving market conditions have the global economy, It stabilizes and ultimately recovers.
With that I'll turn the call over to John Drexler for further thoughts on our operational performance and outlook John.
Thanks, Paul and good morning, everyone. It's a pleasure to be reporting to you in my new role as incoming Chief operating officer, and it's exciting to me personally to be working even more closely with the operations and marketing teams.
They are doing an outstanding job in the current environment and it's an honor to be a small part of that equation.
I'd like to start my remarks by addressing our response to the current coded 19 crisis.
Across our operations, we could not be more proud of our men and women who have embraced the challenge of this pandemic head on.
We have instituted policies and procedures across our organization to protect our employees during the outbreak, including staggering ship times to limit the number of people in common areas that any onetime.
Limiting meetings and meeting sizes.
Continual cleaning and disinfecting of high touch in high traffic areas.
Limiting contractor access to our properties.
Eliminating business travel and instituting work from home for most of our employees in the corporate office.
We plan to keep these policies and procedures in place for as long as necessary and to continually evaluate enhancements.
We recognize that the coded 19 outbreak in reaction to it will also impact both our customers and suppliers.
To date, we have not had any significant issues with critical suppliers, but we continue to communicate with them and closely monitor their situations to ensure that we have access to the goods and services required to maintain our operations.
In short we are doing everything we can to protect our employees and I commend them for making a difference as we manage through these difficult times.
As Paul noted our core metallurgical franchise continues to perform at a very high level, even as our people take every precaution to ensure that we are maintaining the safest and healthiest work environment possible.
During the quarter, we shipped 1.5 million tons of metallurgical coal, which was generally inline with expectations considering the typical seasonal closure of the great lakes shipping channels.
The team also delivered an impressive cost performance, particularly in light of the many additional precautions related to the virus.
The segments average cash cost was $58.42 per tonne.
Which as Paul noted positions us well to the left on the U.S. cost curve and arguably 20 to $25 per ton below the median for us coking coal mines.
No Leer mine continued to set the pace for the portfolio with another mid $40 per ton cash cost performance.
Perhaps most importantly, we again demonstrated strong and consistent progress at Leer South.
We achieved excellent rates of advancing the development of the first longwall panel and we remain well on track for the longwall startup in the third quarter of 2021.
It's worth noting that the first longwall panel is more than two miles long, which serves to underscore the highly advantageous nature of the Lear Reserve base.
Importantly, the earlier South team is also doing an outstanding job of maintaining tight capital discipline during the development process.
As you will recall, we had projected a total price tag of 360 million to $390 million. When the project was first announced and we remain very comfortable with that estimate.
We had invested a total of $165 million in the project at quarter end, which as indicated previously takes us to roughly 45% of the projected capital spend at the midpoint of the guidance.
It's exciting to be approaching the halfway point of the development Im more exciting still to be just five quarters ourselves from the longwalls anticipated startup.
To reiterate we view Lear, south as the industry's premier growth project, and we expect it to be transformational for our metallurgical segment and for the company as a whole.
Thats startup, we expect to increase our high volley output to 8 million tons annually.
To enhance our already advantageous position on the us cost curve.
Strengthen our coking coal profit margins across a wide range of market conditions and to cement our position as the leading high leading supplier of high vol. AK coal globally.
Let me say again, we're making excellent headway and we remain intensely focused on staying on schedule and on budget.
Before moving onto our other segments, let me comment briefly on our metallurgical sales position.
At present, we have a meaningful book of business in place for 2020 with a total of 5.9 million tons committed as of March 31st.
And we are working closely with customers to ensure those volumes move as planned.
As we sit here today, we anticipate shipping the same amount of coking coal in Q2 as we did in Q1.
While we are preparing for the possibility of only limited incremental sales for the remainder of the year, we continue to engage constructively with customers and potential customers, including some that have struggled to secure previously contracted tons from other suppliers.
Given the lack of visibility to near term forward demand as the world manages through the global pandemic, we're suspending sales volume guidance regarding the placement of any incremental tons.
Correspondingly, we will no longer provide cost guidance either.
Additionally, we are reducing our capex guidance for 2020 by $20 million predominantly to reflect reductions in the expected capital spend at our thermal operations.
Let's turn now to our legacy thermal segments, which experienced lower volume levels in the first quarter in the face of very low natural gas prices in historically weak power markets.
As a result of these difficult market conditions, both the powder River basin and other thermal segments reported negative cash margins a situation we are seeking to rectify.
As we have demonstrated repeatedly in recent years, we are fully capable overtime of adjusting our operating structure and our operating cost to align with lower demand levels.
Given the sudden nature of the market decline, we anticipate significant margin compression again in Q2. However, we are we currently expect our cost control efforts to deliver a stronger performance in the years second half recognizing again the difficulties are forecasting in the current environment.
As reported in the guidance table. This morning, we have commitments totaling just over 58 million tons in the auto River basin, and 3.8 million tons in the other thermal segment.
Again, the goal is to restore both our legacy thermal segments to profitability, even if incremental sales per fence and non existant for the balance of the year.
In closing, we would be remiss, if we didnt take a moment to celebrate several significant successes on the safety front.
During the first quarter a time when concerns about the current health crisis, where on the rise our beckley lifestyle and coal Creek mine all operated injury free.
That's an impressive accomplishment in one we strive to replicate every one of our minds every quarter.
With that I will now turn the call over to our incoming CFO, Matt Yale Jen Matt.
Thanks, John and good morning, everyone.
Before I begin, let me say that I too am enthusiastic about the opportunity to serve Archer and its shareholders in this new capacity.
Like the rest of the team I believe arches exceptionally well positioned for long term growth and success.
When I look forward to playing a part of helping the company realize it's great potential and deliver on is promising value proposition in the days ahead.
Moving out of the financials are we'll be focusing my remarks on cash flows and liquidity.
For the first quarter cash from operating activities was an outflow of $12 million, which was primarily the result of negative changes in working capital of nearly $35 million.
This is somewhat typical for the first quarter as inventories built in advance of the opening of a great lakes shipping channels and payables historically are at their lowest point of the year.
Capital spending for the quarter totaled $87 million with 62 million of that related so we are so.
Both of those amounts are expected to be the highest of the year [noise].
Another item to highlight during the quarter was the execution of our four year $54 million equipment financing, which carries an average interest rate of 6.3%.
We believe our ability to get this done at favorable terms differentiates us from many in our industry and as a reflection of and Testament to our strong balance sheet and highly competitive operating profile.
As we have discussed this financing bolsters our liquidity while remains through the current environment, while only modestly increasing leverage on our strong balance sheet.
As we look at the remainder of 2020, while it is clearly a challenging time to try to forecast, we expect to see improved cash flows for the back three quarters of the year.
As noted in our release, we will work, we will realize approximately $100 million of cash flow benefits over the remainder of the year.
This includes the refund of the remainder of our alternative minimum tax credits.
Benefits from the previously disclose federal land settlement.
Additional insurance proceeds and the deferral of social security tax from the cares Act.
From a timing perspective, we expect more than 80% of this benefit to be realized by the end of the third quarter.
Looked at one way, we expect the supplemental cash flows to be nearly equivalent to the capital spending requirements for earlier so over the next two quarters.
Additionally, management and the board have taken actions that will benefit cash flows and preserve liquidity.
As Paul mentioned arches board has temporarily suspended the recurring quarterly dividend savings of more than seven and a half million dollars per quarter.
Combined with the reduced capital spending levels. These actions result in more than $40 million of savings for the remainder of 2020.
Lastly, we expect savings of $6 million in our SGN a expense in the back half of the year offsetting the severance charges from the voluntary separation plan.
Beginning in 2021, we expect the annual savings from this program to be in the range of $12 million to $15 million.
As a reminder, $18 million of our annual SGN a expense is in the form of noncash stock compensation.
Before moving on I would stress that the actions taken to date, a responsive to the market conditions that we see today.
Clearly these are uncertain times, and we are ready and well equipped to take additional actions to preserve cash should they become necessary.
Turning now to our liquidity position, we ended the quarter with $323 million of total liquidity.
$234 million of that in cash.
All this is below the range, we have historically targeted for liquidity given the cash flow benefits, we will realize over the remainder of the year and the other actions. We've taken we believe this is ample liquidity to run the business and continue the development of leader so.
With that said, we continue to explore opportunities to raise additional modest levels of capital to bolster liquidity and help facilitate the construction of the project.
Before taking questions I'd like to underscore the company's positive long term outlook when it comes to cash generation.
While facing today's challenges it is easy to lose side of the fact that we're just over a year away from a significant transformation for arch.
And the Lear self long haul starts up arch will meaningfully reduce its metallurgical cost profile and capital spending needs, while boosting metallurgical volumes in the process, we expect to greatly enhance the cash generating capabilities of our core metallurgical segment.
In the meantime are already solid foundation of low cost operations and strong balance sheet.
Bind with numerous liquidity management alternatives will allow us to manage through this uncertain time.
With that we are ready to take questions operator, I will turn the call back over to you.
Thank you if you would like to ask the question to signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure you assumption is turnoff totally your signal to reach our equipment.
Again, it is star one if you would like to ask a question.
And we will take our first question from David Gagliano with BMO capital markets.
Great. Thanks for taking my questions first of all congratulations John on the transition.
It's been great work review various capacities over the last 20 plus years and.
I wish you the best of luck.
Next year.
On your side.
Just.
Switching over the questions I wanted to kind of drill down a bit more on that.
You know the decision process with regards to capital allocation and liquidity.
Clearly I think a lot of us that look beyond 2020 feet.
Shift in cash generation positive.
Obviously as we got the 2021, but at the same time, given everything that's going on right now.
All the uncertainty, obviously, we've seen a bit collapse and.
Oh production and some of the forecast we're seeing is that still consumption doesn't get back to pre kill that 19 levels until 2023, given all the uncertainty and given the liquidity sort of squeeze a bit.
Why not just pause we are south.
For a bit and preserve some of that liquidity push it out leave it in the ground and so you know the world needs that Michael a bit more.
Hey, David This is Paul I'll start. This if you don't look I think what you're asking as a fair question frankly, it's when we talked about regularly but what I keep coming back to this is this is a unique.
Opportunity for the company and arguably will give arch to the top three coking coal by the United States.
Probably it will be also be the top two large in my view United States, it's going to lower our cost position and we're going to be produced at a high quality high demand product.
If you look the price tag of $260 million to $390 million.
Look when you look at that on a comparable or what's being bought and sold in the U.S. or internationally.
Hi, I'd say it quickly, but it is a bargain.
More importantly, if you recall the analysis, we did even at today's current prices. It's about 48 month payback on this project.
Can you think about it five quarters from now which isn't very long, we could be starting the longwall into an improving market.
But as you say this is the big clear this is not kind of a band of torpedoes, we're going to do this no matter what right now we have the balance sheet and liquidity to make it happen.
We see the market unfolding.
But I'd say, if the current black Swan event turns into a nuclear winter or whatever analogy, we want to use we're going to have to be flexible and what we do we have a very large lever appeared a pool of liquidity gets tight.
So Dave this is John Drexler, I think the only other color there Paul referenced in the four year payback opportunity even at todays pricing levels.
When you look at the expected cost structure leader, south and even with with very low price for high volume product.
Our expectation on an annual run rate basis, as we would be generating $90 million a year of cash flow of EBITDA from that operation. So as Paul indicated we're clearly evaluating everything we have this as a very big lever, but as we sit here today, we think actually the timing is rather interesting.
We're going to continue to push forward down with the opportunity that Hey, Bhavan, a final point in stack I mean, the fact is we're halfway there right. So the fact is that half the capital has been extended we only had about $200 million still to expand so really that changes the equation as well to get those $30 plus margins that John just referenced doesn't recur.
Hi, all that much more capital granted these are unusual times as Paul said, we'll continue to evaluate as we go forward, but right now that's still feels like the smart way to go and the best value for our shareholders.
Okay I appreciate the additional color given.
Given the environment.
In a situation, where instead of where they are or get worse over the next six months for example.
His arches preference to.
That's a capital markets.
We continue to push ahead with more south or would it be.
Now to cause there's out for a bit to preserve liquidity.
Hey, Dave This is Matt, Georgia, and I'd say.
In terms of tapping any capital markets as we look at the more traditional.
Hi yield markets, and where are our loans trading today I don't think that as a.
An option that we think is very attractive today and we do think we have access to I'll call them more alternative areas of capital that we could tap and we're continuing to explore and if those things come at a cost us more reasonable I think that's that's our preferred path to continue to look at things like that.
To raise capital and continue the project.
David I guess kind of finish in this up look we've got a very sober view about what's going on and if the world gets worse will react.
We have other things, we can do and we will probably do before we slowly yourself.
There are south is out there if we have to.
Okay. Just last off what are what are those alternatives just roughly like what do you in say alternative.
Yes, theres completely reduction of our capex of thermal operations.
There's a host a variety of things that we can do to cut costs further.
Okay I appreciate that thanks, I fall was actually mentor.
Comment about alternative financing options as well what are the lower.
That's okay. So clearly.
With the equipment financing, we just completed we didnt use up the entirety of our equipment were sold.
Of the equipment and other locations that could be used in a similar manner and have capacity for that in the.
In the agreements that we have we have other avenues in terms of other markets that we're exploring today that havent traditionally been ones that the coal industry has been able to a two utilized but but hopefully we'll be able to do that as we look at some of the unique.
Spending aspects of Lear, south and how those might qualify for for other markets.
Okay honestly that that for now thanks very much.
David.
Well take our next question from Michael do you guys with vertical capital research.
I'll Echo Daves comments, and John and congrats Paul and John as well.
Thank you Michael.
Two things first with regard to coated and you see.
And what you've changed here given the CDC guidelines et cetera.
How has that changed operations productivity.
As it becomes a noticeable impact as has been some help because of what you're doing that if thats something.
As we move forward that kind of being factored into some of your operating costs.
Going forward.
Hey, Michael as John Drexler, I think I've referenced it and some of my prepared remarks, we've taken aggressive actions across our portfolio to be responsive to the CDC guidelines and make sure we're hearing to them in every way possible.
Just given all of those actions that we take.
I'm very proud of the way that the operations of continued to perform and continue to operate.
You know there.
When you are staggering start times, when you're reducing the number of people that are coming in and out of the mining at any point in time.
There's some impact to productivity, but from our perspective, what we've seen so far in as reflected in the cost performance turned in by the.
Matt segment.
We're performing as expected and so I'm very proud of them.
In the way that they're managing through this and through all of the challenges but.
We're seeing minimal impact to the operational performance as result of coated 19.
We have had an issue at our west Elk operation.
We did have a.
Small group of employees for on the same crew test positive that crew has been idled for an appropriate amount of time away from the operation and in quarantined.
Before gentlemen that have tested positive are doing well so.
We're hopeful I'm confident that that crew will be able to come back here in relatively short order, but that's really the only impact that we've had directly of any positive cases.
Taking appropriate actions, there and even there.
Impact operationally is being managed very well by the management team that and are.
West Elk operation.
Michael the only other color on derivatives.
I think we tried to be aggressive early in this.
Even in early March about doing cautions we're taking.
I think clearly has paid off.
The four people at West Elk, obviously was a great concern, but in the handle.
Able to limited to a very small group.
As John said, I give nothing but applause to our people and the way they've handled this frankly, keeping them back is harder than pulling them.
Good to be more cautious.
Well I understand that this great news.
Good to hear from.
Secondly.
Intrigued about your comment I think Paul Paul maybe John regarding inquiries from customers because of concerns about other suppliers and then you can elaborate a little bit more on that certainly at the markets can be as hard in the near term is most.
Maybe to that something that.
Appeared to deal with a is that something that customers are not refocusing and right now because they are there other issues, but did that emerged would be something that's actually start you know benefit arch in assertion well capitalized as like yourself.
Thank you from.
So Michael yet the as Paul indicated as we've said throughout the course of all of our comments, we're taking a very sober view and clearly.
Seeing a very large impact.
Industry wide to to the steel producers, so we're very cognizant with that.
But we have had inquiries.
They have come in and maybe can share some anecdotal kind of observations as well but.
As as this whole quoted 19 issue has played out as other operators.
Have shut down whether in response to fill that 19 or our demand concerns or inventory concerns that they've had we've had a lot of inbound calls from several of our customers.
In wanting to know what our status was in concerned where we're going to have any type of issues like that so we took that is a positive sign we've actually had a few inquiries.
For volumes as well and I think it does speak to what you.
Added to that.
Consumers are looking at US is someone that's well capitalize has a good portfolio of great quality operations was great quality products. So with all that said I think once again very cognizant, we have had other customers, calling and want to discuss pushing out.
Some volumes.
Right now all of those discussions are very modest.
Kind of within weeks away.
One month to another and they're small volumes to date.
So as we sit here today, our shipment book for Q2 remains robust were believe we're going to be able to manage it very well.
We got low inventory levels at our operations and at the Port So.
We're continuing to need to run the mines and healthy levels. So from that perspective, we do feel good about things, especially in the near term here.
Yeah, So Michael Glick staffing services or add to that we're really quite clear eyed about the demand side and we understand the pressures there, but you know as of last week, we still think that more than 50% of you asked for the whole production was was shut down as John said for a range of reasons high stockpiles.
As a low commitment levels, perhaps in some instances.
But liquidity concerns and our view is that while some of that is starting to come back. There's some simply can't operate in this price environment. So with a high volume price today at $123, let's say a blended price across products and say $120 that to get the netback of maybe 80 to $85 at the mine that's why.
We think the midpoint of sort of costs would be for the average coking coal mine in the U.S. So you got half the mind you SNA arguably off operating on a cash negative position.
Commitments are noted amendments, there's simply not going to be able to do that for long given liquidity crime. So as a result, we've been calls to step into the bridge even in this environment and fulfill obligations than others haven't been able to deliver on so we certainly are.
That's a positive offsets to again, what we recognize is a very substantial step down in demand, but we're operating in.
In a manner that that is that allows us to to be cash positive I think they are customer certainly understand we're going to be there those who need to fill in gaps know that weekend, we can step out so thats certainly been advantageous.
Yes, low cost liquidity for the group you guys everybody stay healthy thank you thought.
Thank you Mike Thanks Bye.
Well take our next question from Lucas pipes with B. Riley FBR.
Hey.
To give me one.
<unk>.
Thanks for the Ferguson.
Speak up or maybe speaking more directly.
Hard to Gary.
Sorry about that so good morning, and congratulations to you when you respect this new chapter syndrome.
Very well deserved.
I wanted to follow up and so much earlier questions regarding kind of capital structure.
What's what's what is your optimal capital structure is maybe here a way to get to a higher.
Level, where <unk> is the right level for arch and then what amount of liquidity are you comfortable with you.
Navigate this environment.
[noise] Lucas this is Matt Gil Jim.
In terms of a capital structure.
As we look forward and see the layer South project coming on and the cash flows that we see coming from that clearly feel like we can support a little bit more debt than what we have had on the balance sheet historically.
The same time, we recognize what the.
Strength of our balance sheet has allowed us to do both recently and as we continue to explore other avenues for for additional financing. So clearly do not want to take on excessive debt, but as we look and as we've talked over the last several quarters.
Something in the neighborhood of an additional 100 million to 150 million of debt some of which we've taken with the the equipment financing.
Makes sense, given what we see for cash flows.
Mostly yourself in terms of liquidity, obviously, we're kind of a little bit below here the target liquidity levels that we've said before we think it's manageable within.
The parameters, we see today.
Some of the things that have kind of pinch liquidity here. We don't think are necessarily permanent some of the working capital items I mentioned.
In my prepared remarks are things that.
Really we don't expect to see continued throughout the remainder of the year. So.
As we look at it liquidity today is something that we can feel we can manage very very well, we don't think oh, we need to try and build a backup immediately but as we whether through this.
We'll see maybe some fluctuations, but something in the level we're at today.
It is clearly comfortable with how we run the business and Lucas. This is John Drexler, Matt Yeah, absolutely covered that very well, but from the old CFO here talking also.
With the leverage that we're taking on by design and I think we've indicated this in the past once we get the times of healthier cash flows. This this debt whether it's the equipment financing, which has a four year amortizing site period or lot of our debt is prepayable. Once the cash flows are healthier we can be in a position once again.
Again, if we choose to strengthen that balance sheet, we think theres great power in having a strong balance sheet in this industry that can see a lot of volatility into it. It's benefited us that we'll continue to benefit us and we expect it will continue to benefit from it moving forward also.
I I appreciate that that's very helpful and then.
Jobs on the cost side in the medical segment in Q1 and.
That's guidance.
What's a good range.
This year and 80 trips to cadence.
Coming quarters.
Do you think.
Cost take out the Q.
Okay.
Yeah. So so Lucas we were clearly guiding from 50 $862 a ton on the last call.
We've suspended volume guidance, obviously, the volume component can have a big impact on what the unit costs are.
However, as we look at the portfolio of the metallurgical assets, we think no matter where are we go from a volume level, we're going to be able to continue to manage those costs very aggressively on the lowest end of the cost curve in the industry to allow us to continue to generate cash through the entirety of them.
Market cycle has since we've suspended guidance it doesn't mean that there won't be more tons that won't move we do continue to expect we're going to be able to move more tons and once again.
We wouldn't be we believe we can still be within the range of of the expectation that we said previously so none of it that.
Level of.
Hi, 50 dollar a ton low $60 per ton cash costs.
Kind of wherever this market cycle continues to play out.
That's that's very helpful color again, congratulations to each one of the line.
Good luck.
Thank you Lucas Thanks Lucas.
We will take our next question from Mark Levin with the benchmark company.
Okay, great congratulations to everyone is well John very much enjoyed working with you over the years.
Congratulations to all and Matt and wish everyone. The best.
Just a few questions real quickly so all of that market itself, maybe against can comment on on on price.
Jack referenced prices a second ago.
I have all eight market just sort of across the U.S. are you seeing.
Discounts to news prices are these prices good good prices to use how is how was the pricing environment relative to what we're seeing in the indices right now.
Okay. All started in let pillars kick in their thoughts.
Mark.
Yes, I think what you're seeing the market right now is a lot of noise.
Well I think we believe the index prices are relatively close.
We are seeing could have some odd sales here in there there has pushed the index is down a little bit.
As you look at our Q2, our Q1 numbers.
If you netback whale basically in line about where we should have been so look I don't know that that pressure will continue to.
Until some of the settles out.
But right now I think the indexes are close to what we're seeing the actual physical market.
That's very very much on I'll admit I'm sorry go ahead.
Mark I was going to jump in as I completely agree with having the markets right. Now are so roiled, it's hard to say precisely obviously as we know you at East Coast. That's just an assessment not not an index.
Certainly if you see much pressure from here below the the assess prices you're going to see a lot of carnage.
Already of these these quoted prices.
You're looking at lots of U.S.
The U.S. space that simply can't compete and can't can't produce cash positive basis. So you know last fall said, while there are interesting trades out there it's hard to envision much discounting below the current level simply because that just doesn't work for so many of our competitors.
That makes makes sense and just given where prices are has there been any discussions are conversation about let's say about moral or anything where might be somewhat lower quality coal and.
I guess no longer alone will operation has to be any discussions about maybe idling. Some some tons are just not not necessary.
The market as we sit here today and as we just reported with the first quarter call. The the portfolio is operating well right in every one of the complexes.
Continuing to perform at Mt. Laurel as we've indicated its transitioning from the longwall operation It was to continuous miner operation that transition continues.
Over the course of the first quarter got the fifth unit operating there were working to get them kind of in sequence, creating opportunities for them to be the in their most productive environment. So.
Every one of our operations, we look at closely and how they're performing where the market is as we've always demonstrated then asked arch coal is not.
Afraid of idling operations in aren't performing that arent contributing to the portfolio, but as we sit here today that the portfolios operating will continue to monitor all of the operations and when the market goes and we'll keep everyone updated as we continue to manage through.
This market environment.
That's helpful. Giant final question and I know you guys aren't giving any guidance throughout I'll try to be respectful of that but.
Just kind of thinking about Q2, you alluded to to coal sales being similar Beck wholesale dumps already being similar in Q2 to Q1 and I think you mentioned.
We should probably expect negative margin environment on.
PRB and other thermal at least through the through the second quarter. So I'm just trying to get my hands around like why what would be the factors that would cause in Q2, EBITDA or earnings to look materially different than Q1, and I am I missing anything or should have sort of similar 10 or maybe with just the exception of.
Net prices roll through.
Yeah, I think Mark I think as we look here today, I think thats essentially a direction were somewhat setting here as well will work to see improvement in the thermal operations. Some of that does take a little bit of time, we will benefit from from other things that we're seeing royal through the market right now as well such as diesel pricing.
So some of those will have impacts were going to work to improve that essentially kind of the tenor of what we're indicating here is the first quarter kind of roll into the second quarter is somewhat similar levels at least from a base market I think I.
I think there we typically see oddly, particularly on the coking coal side.
Pickup in Q2.
As I said earlier, we're just trying to be sober about what we see coming so I think we'll try to be very careful and what we're saying on the coking coal side.
Okay, all tetra derivative contracts due to two as historically the weakest on the thermal side. So that's kind of the overall background of the that discussion.
And could volumes actually be like on the thermal side, just kind of thinking obviously, we know where gas prices are.
We appreciate how much inventory there is on the ground it how difficult it probably just incremental tons, but.
Is there any reason.
Why the Q2, I mean, because I look at the PRB keep Q1 number obviously, that's a very low number would that we that get worse for the seasonal reasons or and then just you expect a much bigger pick up in the second half a year or or or kind of follow the same sort of seasonal pattern and get weaker Q2.
Yeah, Mark Mark I think.
Our expectation is we'll see some form of the seasonal pattern here, it's hard to predict kind of where that goes it's one of the reasons why we suspended volume guidance, but we do feel good about the commitment level that we do have it to 58 million tons were.
Creating operating plans and scenarios that will be very responsive if that ends up being kind of that level, but that will kind of put you know kind of project forward into very low shipment levels and once again, there will likely we think continue to do some see seasonality. So improvement after the Q2 as we roll into the summer months.
John talked a little bit about pushback or very little pushback, we feel the coking coal side, but.
Let's say comments hold true on the thermal side you know.
And that's really for our comments why we think we sit here at about 58 million tons sold.
It may not be perfect, but that's kind of the ZIP code of what we could be seen this year.
Okay. That's helpful. So it sounds like no no delays or disposed meaningful deferrals yet.
For us.
Mark we're really not seeing any meaningful deferrals, particularly in the powder River basin.
Okay, great well congratulations to all of these new roles and.
Best Best of luck and stay safe.
Mark Thank you.
Well take our next question from stock Shire with collections.
Good morning, everyone.
Oh Gosh this question on costs.
Morning, following up on Lukas. This question on costs can you maybe bridge. The main factors the I'm a big decrease we saw for their own queries that really attribute attributable to here and then that acre scenes and secondly, what impact if any do you expect go to 19.
The associated proprietary measures taken back on cost inflation, the second quarter.
Yeah, Scott so the big step down and cost from the fourth quarter as we reported in the fourth quarter were just some of the difficulties and challenges that we were having that not laurel as we were continuing to transition from the longwall mine to a continuous miner operation. So we did have some expectation for a meaningful step down.
Yes, you are correct.
We are did get into the new panel that is beginning to get into that particular coal, we expect that actually to continue to improve.
Over the remainder of this panel.
Not discussed on this call in the first quarterly or actually had a longwall move they completed that in great timing.
Very efficiently and effectively.
And still we're able to achieve the cost that we were able to achieve.
And with the Longwall move so you know as we move forward.
We continue to feel very good about the opportunity to execute from a cost perspective, really well and while we have confidence in the not portfolio in what it's doing from a coated 19 perspective, I don't think Theres anything right now that we can specifically identify as increased expense directly related to the coated 19.
Kinda pandemic and once again as I discussed earlier any any impacts on productivity operating performance to date. We believe it has been somewhat minimal and managed very well with the operational level.
I appreciate that Thats very helpful.
Switching gears, a little bit can you talk about the dividend suspension and any conditions, you think would be necessary that you'd be looking for the warning never assumption. Obviously, it's very early and there's a lot of uncertainty, but any color you could provide around that would be great.
Yes, Scott. This is Matt yields are must start I think the key word you have there was the uncertainty obviously given the the outlook and really the difficulty in.
In understanding when things might get back to normal is what drove that decision obviously the dividend when we first set it we talked quite a bit about how it was something we would envision being able to support through the entirety of the market cycle and as we look today. We're just in conditions that it's hard to predict and so really this is an action that was taken the.
Really to make sure we were being very cautious with what could transpire.
As I look at it what would be the things we'd want to see before reinstituting that I'm really some some certainty around demand in volumes and then depending on where liquidity levels.
If there is the need to to kind of balanced the the liquidity versus the the capital returns at that point in time potentially build back some liquidity before doing it but really the primary factors going to be I'm seeing some certainty around demand in our and our end markets.
Scott I'm, just kind of follow on with have philosophically stand back and look at our capital return program I think from my perspective, it's been a great success.
Given almost $2 billion back to the shareholders.
We've continued to invest in the company.
And we kept the balance sheet pristine. So look I think we've got a good balance here clearly as Matt pointed out. This is a unusual time are very unique time for all of us.
Yes, clearly philosophically, we haven't changed anything in what we believe long term Scott is that Jack I was just add that you know the fact is the right now we are focused on building out earlier, south as we've discussed really building a bigger cash generating engineer by adding the second the second big horse to the stable and so.
Our expectation is longer term and we believe the board has this strong view.
That that capital returns are going to be important part of the equation for us, but as we take this pause right now and as we focus on on building. This bigger engine with clear South we think it's it's prudent and again given given all the reasons. We know in terms the current environment, but also this idea of just sort of pulling back on the capital return program at a time on where we're making this.
The significant investment wears out.
That makes sense very helpful. Thank you for your time and good luck on record.
Thank you thank Scott.
Ladies and gentlemen at this time, let's turn the conference back to Paul Lang for any additional my closing remarks.
I'd like to thank everyone again for your interest in arch and protected the times they participate in our quarterly call.
It's truly humbling for me to step for the John are you shoes as arches. Their CEO John has been an amazing positive for us not only within the company, but in the industry as a whole.
More importantly, it's been a good friend and mentor to me as well as many others in the company I'm looking forward to working with John in his new role as executive Chairman.
I'm also excited about the long term prospects at arch offers our investors we have a talented workforce unparalleled set of assets and a strong balance sheet offerings are likely to remain challenging in the short term.
Well that we're well positioned and agile enough to weather the storm and thrive when the current crisis seasons.
With that operator, we'll conclude the call when I look forward to report into the group like July.
Ladies and gentlemen, this concludes today's Tony. Thank you for your participation you may now disconnect.
Okay.
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