Q2 2020 Arch Resources Inc Earnings Call

Good day, and welcome to though arch resources Inc. second quarter 2020, <unk> earnings Conference call Today's conference is being recorded.

I would now like to turn the call ever Chindex foam senior Vice President of strategy. Please go ahead Sir.

Good morning from Saint Louis and thanks for joining us as an April the team has it is conducting this call for marches boardroom, but we want to assure you that we are widely spaced here and following CDC guidelines.

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 matters that are two different degrees on certain.

These uncertainties, which are described in more detail in the annual and quarterly reports, 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 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 website at arch RSC Dot com.

With me on todays call, we have pulling our CEO and president.

John Drexler, our COO and Matt Guild Young our CFO, we will begin with some prepared remarks and following those remarks, we'll be happy to take your questions with that I'll turn the call ever to Paul.

Thanks deck and good morning, everyone I Hope you and your families are staying safe and I. Appreciate you taking time to join us on the call. This morning.

Let me begin by extending my gratitude to the entire urge team for their tremendous contributions during this unique time.

Time, when many of US are finding it's challenging to balance a dynamic personal and professional obligations.

On the special frogs, the arch workforce has adjusted quickly to the new reality in an impressive fashion.

Throughout the organization employers have embraced rigorous new protocols that day, and we believe can help safeguard the health of our communities our colleagues and ourselves more ratable still our people are adopting these new routines, while advancing key strategic objectives and executing their daily tasks.

In the same exemplary fashion is always on behalf of the entire senior management team I want to thank the arch employees for their efforts on this front as well as further resilience their professionalism and their dedication.

I'm pleased to report that these qualities wrong display over the last three months during the second quarter or coking coal franchise continued its strong operational momentum delivering another first core trial cost performance, despite lower than anticipated volume levels stemming from customer deferrals, we racked up another.

Third quarter of excellent progress at Leer cells, where we're laying the foundation for future value creation and growth.

We significantly enhanced our financial position through a 53 billion dollar tax exempt bond offering that we completed on July 2nd thus enhancing our liquidity and helping with our continuing progress at Leer. So.

We move quickly and aggressively to address the highly challenging market environment for thermal coal by adjusting our cost structure to match lower expected volume levels included in this we conducted voluntary separation and furlough programs and each of our thermal operations that were in addition to the program we offered at the core.

Separate office in the first quarter.

We took steps to further preserve liquidity by train another $10 million from our capital budget, bringing the total reduction to $30 billion as compared to where we started figure was and finally, we completed the name change of the company to archery sources. This is yet. Another example on how we have deliberately and systematically built.

Out our metallurgical franchise over the last 10 years and have crystallized our path forward [noise].

Along with this we launched new website that provides a robust accounting of our significant achievements and ongoing efforts of the areas of safety environmental social and governance.

In short, we stayed focused and advanced many strategic objectives, despite the highly challenging macro environments.

With this we believe we position the company for improved performance in the second half of the year, we're expecting higher volumes and continued strong cost performance from our core coking coal franchise and our cost structure at the thermal mindset as better aligned with volume expectations.

Turning now to the coking coal markets, we've been encouraged to see some early steps towards recovery in recent weeks, although we're almost certainly several quarters remove from anything resembling normality.

At the macro level, we're pleased to note that manufacturing activity appears to be only upswing around the globe, what the U.S., China and Brazil, all reporting June manufacturing PMI, indicating some level of expansion.

As for the steel complex, while steel prices remains severely depressed steel producers are moving forward, what's the restart of some of their idled capacity.

In North America alone there have been three blast furnace restarts announced in recent weeks. Moreover, the average capacity factor North American Mills has inched up steadily since early June and now stands at 59% eight percentage points above the recent Bob.

The resumption of manufacturing activity by the automotive sector is a critical developments as well, particularly for blast furnaces, which provide a majority of the high quality steel required by the automotive sector.

China, which is the source of more than 50% global steel supply is arguably furthest along in the recovery process. In fact, the World Steel Association is projecting that China will experience a modest year over year increase in steel output in 2020, which is encouraging.

Well the coking coal markets remains very much in a trough there are some positive signs Chinese seaborne imports are up strongly year to date North American bars have just issued RFP is on their usual timeline and sales inquiries or on the rise on a less positive note coking coal prices remain at levels. We view is.

On sustainable even after a modest bounce in recent days premium high vol. AK coal our primary product is currently being assessed at $109 per metric ton, which is $65 per metric ton lower than the average in 2019.

On the supply side production is coming off line fairly quickly. Although we believe more cuts will be required to balance the market. Many of these cuts will likely come from the higher cost producers in North America, which represents the high end of the global cost curves.

We believe that more than half of the U.S. output is cash negative it's hard coking coal prices and at least one analysts to suggested that half of all global coking coal production they fit that same description.

In addition, we're seeing supply cuts in every other producing country, including largest supply source, Australia were weak prices high profile operational outages and limited capital spending in recent years is constraining output.

Moving to the legacy thermal business the market environment remains intensely challenging.

We expect U.S. thermal demand declined by 130 million tons in 2020, following the nearly 800 million ton decline in 2019.

Making the situation still more challenging stockpiles at U.S. power plants.

Or an all time high.

Based on days a supply.

Along with this anemic international pricing is preventing most U.S. thermal producers from participating in the seaborne market in a meaningful way.

As I noted arches, taking aggressive actions across the organization to drive down costs and compete in this new market reality.

Looking ahead, we believe we have the right mix of attributes to weather protracted period of market weakness, including low cost coking coal assets, a skilled workforce high quality products, a solid book of metallurgical business and a proven track record of operational execution.

Moreover, we believe these same attributes will put us in a strong position to capitalize as the global economy recovers and as the world returns to an expansion mode.

Last Friday testimony concluded the preliminary injunction Harry it's a federal trade Commission in Saint Louis related to the Fccs attempt to block our proposed joint venture with Peabody Energy I want to thank the customers employees and the team of people that have supported us through the process closing.

Arguments are scheduled to take place on August 10th and we hope to have a decision from the court by the end of the core.

I remain confident in the ability of the joint venture to deliver significant cost savings and to position the JV to better compete with natural gas and subsidized renewables. This would benefit all the stakeholders, including our customers and employees.

Given the ongoing litigation will be unable to answer any questions regarding the matter.

Moving forward, we plan to maintain our sharp focus on driving operational excellence across our portfolio protecting our solid financial footing and forging ahead with Alere self development, which we believe will greatly enhance our already strong cash generating capabilities down the road.

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. Let me begin by echoing Paul's comments about the arch teams exceptional performance during the current global health crisis arch employees have embraced the challenge of the pandemic head on and are doing an outstanding job of taking extensive health related precautions, while still executing their usual duties at the highest.

Uh huh.

We appreciate their ongoing efforts to ensure a healthy workplace for their colleagues and themselves and we applaud their continued sharp focus on every other critical area of performance, including mine safety environmental stewardship and operational execution.

Moving forward, we plan to continue to respond quickly and aggressively to new developments on the virus front.

And to implement enhancements to our already rigorous dense distancing and hygiene related protocols at every turn.

Well, we have worked hard to minimize the impact of our covert 19 protocols on our results.

We have incurred additional operating costs related to the virus.

We estimate that the new protocols have reduced productivity and increased spending on health and safety related products by a total of $5 million in our metallurgical segment and by $1 million at our thermal operations.

We expect these costs to moderate moving forward as we become more efficient at managing these changed protocols.

Turning now to the operations I am pleased to report that we are can maintaining our strong operational momentum at our core coking coal franchise.

Of particular note, we achieved per ton cost of $61, a 95 cents during the quarter, despite lower than expected sales volumes, resulting from more than 300000 tons of customer deferrals during the quarter.

If not for the impact of direct covert 19 costs impacting our quarter hour per ton costs would have been approx would have approximated $58.50 per ton.

Our flagship Leer mine again set the pace with costs in the low fortys per tonne further underscoring why we are so focused on getting its companion operation Leer, south up and running as soon as possible.

On the Lear, South front, we continue to make excellent progress and remain on time and on budget.

During the second quarter, we expended $46 million in capital at Leer, South, bringing the total investment on the project to date to $211 million.

Looked at another way, we have now expended 56% of the total projected capital needed to complete the project at the midpoint of the guidance.

That's an exciting milestone to reach one that keeps us well on course to commence longwall production in the third quarter of 2021.

Let me add here that we view our ability to drive forward with this transformational project even in the current market environment as a key differentiator for arch.

We also believe that pushing forward now when the market is in the trough could well, meaning that we are ramping up our initial longwall output into a strengthening market environment, thus positioning us to capitalize to an even greater degree on the market turn when it comes.

Before turning to thermal markets, let me comment briefly on our Beckley low vol and mountain Laurel High vol be operations.

Beckley remains cash positive in this market environment and is providing a small but peening full contribution to cash generation.

Mountain Laurel continues to move in the right direction, and we will progress into reserves, we own in fee during the fourth quarter, which should lead to further improvements in its cost structure.

We view both of these mines as important components of our portfolio components that are cost competitive and normalized markets and that round out our coking coal product slate.

At the same time, we have flexibility to adjust volumes at these operations as necessary and appropriate and ways that aligns with changing market conditions.

Let's turn now to our expectations for the <unk> metallurgical segment in the years back half.

While forecasting is quite obviously, a tricky business in this environment. We nevertheless, anticipate a solid shipping schedule for Q3 in Q4.

As indicated our customers requested deferrals on more than 500000 tons of expected 2020 shipments.

However, I'm pleased to say that we were successful in layering in approximately 500000 tons of incremental 2020 commitments during the quarter, which I consider to be a significant accomplishment.

As well as a testament to our sought after product qualities carefully cultivated customer relationships and excellent reputation for logistical support and customer service.

We also continued to be encouraged by increasing inbound inquiries regarding volumes in the back half of the year as well is ongoing request to accelerate volumes from the fourth quarter to the third quarter.

As we currently see the book, we are expecting increased metallurgical shipments in the back half of the year.

From our committed position alone a position we continue to gain more confidence and we would ship 3.1 million tons of met coal in the back half of the year versus the 2.8 million tons that were shipped in the first half.

We would be hopeful to see improvement on that level from the inquiries we continue to field.

While we remain extremely cautious and at the ready to respond to all market developments. We believe we are seeing some signs of improvement in the metallurgical markets and our position to capitalize on such strengthening moving forward.

I would also note that the north American RFP processes is shifting into full gear at present.

As always we are engaging in that process in a careful and strategic manner as we seek to determine how best to direct our 2021 volumes in order to optimize value for our shareholders.

Turning now to our legacy thermal segments. The second quarter was tough clearly as volumes declined significantly in the face of historically weak natural gas prices and substantially reduce power demand.

The upshot was negative cash margins in both the powder River basin and other thermal segments.

As discussed however, we mobilized quickly to adjust to the new reality overhauling our cost structure to align with the lower volume levels.

As Paul indicated we conducted voluntary separation plans that all of our thermal operations that eliminated approximately 200 positions.

All told arch has now reduced its combined corporate and thermal workforce by approximately 560 positions or roughly 25% over the course of the past 12 months and we are prepared to continue to make whatever adjustments are needed going forward to compete.

The significantly reduced head count has allowed us to reorient, our thermal operations, including idling certain equipment fleets to better align our production with sales.

As a result of our recent moves we expect an improved performance in the years second half across a range of volume scenarios.

And while those volume levels are hard to predict I will say that we're currently.

I will say that we currently have second half commitments of 33 million tons in our PRB segment that even with the risk of modest pushback should translate into actual shipments significantly in excess of the 25 million tons. We shipped in the first half of the year.

Before closing, let me reiterate that our extensive efforts to manage health risks stemming from the virus if not dimmed, our focus on mine safety and environmental stewardship in anyway.

In particular I want to highlight the exceptional environmental performance across our entire portfolio during the years first half.

At the Midway point in the year, our subsidiary operations had not recorded a single MACRA violation.

And they had in aggregate precisely one water quality exceedance over more than approximately 100000 parameters tested.

We are immensely proud of our leadership in these critical areas of performance and are committed to driving further progress through a highly disciplined approach to continuous improvement.

With that I will now turn the call over to Matt Gil Jim for some additional comments on our financial performance Matt.

Thanks, John Good morning, everyone.

Begin my remarks with a brief discussion of the second quarter results, which as John discussed were significantly impacted by the reduced shipment volumes across the business.

The shortfall in volumes was the primary driver of lower margins in our metallurgical segment in cash losses in the thermal segment.

Additionally, although not impacting EBITDA in the quarter included charges of more than $7 million related to the voluntary separation plans, it's a thermal operations.

And $8 million of costs related to the proposed joint venture.

From a cash flow perspective, we were able to offset the operating losses, realizing over $66 million of benefits from tax refunds insurance recoveries deferred payroll taxes and receipts from the previously disclosed federal land settlement.

As a result, we were able to continue with Alere south development, while maintaining cash and liquidity largely inline with the levels at March 30 Onest.

Quarter end, we had cash of $217 million and liquidity of $303 million.

[noise] shortly after quarter end, we put in place another source of funding for yourself with the 53 million dollar tax exempt bond offering.

Working with the West Virginia Economic development Authority, we were able to qualify certain of the mine development expenditures to be financed in this manner.

Executing on a very successful offering.

We receive proceeds of approximately $30 million at closing.

And we'll receive the remaining funds overtime as the qualifying expenditures are made.

With approximately $15 million expected over the remainder of 2020.

We want to thank the D.A. and Governor Justice for facilitating the transaction and supporting the leader South project.

Combined with our first quarter equipment financing, we have now raised over $100 million of capital to date in 2020 at an average rate below 6%.

We believe that our ability to access capital at very competitive rates has been a significant advantage for arch and a testament to the quality of our operations and our solid balance sheet.

As we look at the remainder of 2020, we currently expect improvement from first half levels in both earnings and cash flows.

Our operating results should benefit from higher volumes in the metallurgical segment.

Improved financial performance in the thermal segments and lower SGN a costs.

With respect to cash flows in addition to the proceeds from the tax exempt bonds. We expect an additional benefit of $30 million to $35 million from payroll tax deferrals and receipts from the federal lands settlement.

As well as an improvement in working capital as we sell inventory that built up over the first half of the year.

These improvements are expected to be sufficient to allow us to continue the lear, south development, while maintaining adequate cash and liquid liquidity.

With that said given the ongoing uncertainties in the macro environment. We think it is prudent to continue to evaluate alternatives for additional financing.

Before taking questions I'd like to briefly recap the first half of 2020.

It is no secret that industry conditions were challenging and arches cash and short term investments before the impact of any financing.

Declined by more than $120 million over the course of the period.

However to put that amount in perspective that is less than the total of the investments made in Lear, south the cost related to the proposed joint venture [noise].

In the various severance programs that we undertook.

In other words absent these strategic investments and nonrecurring items, we would've increased cash through the period.

Due in large part to the positive cash margins earned in our metallurgical segment.

Margins that will only be further enhanced when yourself starts up.

With that we're ready to take questions operator, I will turn the call back over to you.

Thank you.

This time, if he would like to ask a question. Please signal by pressing star one on your telephone keypad [noise].

If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Jim Press Star one to ask a question well pause for just a moment to allow everyone an opportunity to signal for questions.

[noise] Oh, My first question will come from Scott, China with Clarksons.

Good morning, everyone.

Born Scott.

Good morning, everyone.

Hi, it's like if I could start on the lower Capex guidance could you walk us through where there's savings are mainly coming from is it more timing on the or south expenditures or some cuts on sustaining capex.

Hey, Scott. This is John Drexler, you know as we discussed in the guidance, we reduced our capex by $10 million from the previous quarter with that was in addition to the $20 million a that we achieved in the first quarter. So.

We've taken our capex guidance on the maintenance side really from 90 million down to 60 million and you know we look at these lower volume expectations, we look at.

How we're utilizing our equipment fleet across the board.

And while there may be some element of deferral of some of that Capex, we think a lot of what we've been able to remove.

You know is essentially pushed out for a very long period of time once again, just given our our revised volume expectations. You know I'll I'll provide some further color on that maintenance Capex, where we sit here right now with the $60 million of maintenance Capex, 80% of that really is directed at the met.

Portfolio, 20% directed at the thermal portfolio. So you know as Weve as we've moved forward. The focus has continued to be on the met operations. You know as we've indicated in our prepared remarks and in the release, we've taken significant steps across the thermal portfolio and that's where I think we've seen a lot of the.

Benefit and the reduction in the Capex familiar South perspective, clearly we're we're moving ahead, we think it's an excellent.

Opportunity and so we continue to move forward with the Capex at that operation, which since the beginning of the year, we've identified about $220 million to be spent over the course of 2020 athleisure south.

Okay. That's very helpful. I appreciate that color switching gears, a little bit tied to the 300000 tons of deferral us.

That you mentioned that you experienced in the second quarter could you provide a little bit more color around this specifically I guess, where the deferrals came from more so domestic or seaborne markets and are you beginning to see some of the demand come back and what are your expectations around any potential deferrals side that third quarter is that kind of all behind us.

Yes, So Scott I think you know clearly we're coming through a period of tremendous volatility in the markets you know responding to what's happening around the world with the global pandemic in and as we indicated on the first quarter call and then playing itself out over the course of the quarter. We knew we would we would see some pressure and we have.

You know, we engaged or where we needed to with our customers in any request for deferrals I'm. You know I think we've indicated in total over the course of 2020, we've seen deferrals to the tune of about 500000 tons, while I won't get into the details. It does include both domestic and international.

Deferrals.

One thing I think we indicated on the first quarter call I want to reiterate here as well. These are for contracted volumes and so you know we fully expect that we're going to realize overtime. The full value of these request for deferrals, we're going to work with our customers in a way hopefully that creates a win win situation for both also.

And the customer and we think we've been able to accomplish that.

With these deferrals.

In relation to the markets themselves one of the things I'm. Most proud of is over the course of the quarter. Despite the deferrals that came and I'll say that most of those came earlier in the quarter. What we saw play out, especially later in the quarter has a lot of inquiries.

You know as we indicated we saw request for acceleration of shipments from the fourth quarter ended the third quarter, but probably more importantly, we actually saw inquiries for for new volumes and so we were able to place 500000 tons of new commitments that essentially offset.

The deferrals that we saw during the quarter you know in and we continue to be encouraged by what we see in the marketplace. We don't like the pricing that's out there, but we are getting a lot of inquiries and we think that's going to give us confidence as we move forward.

We also think it's a testament to customers view of of arch is our ability to produce.

In very challenged markets and our ability to deliver a quality product.

You know on time and when requested so we're encouraged with what we see.

You know, it's kinda like job did a great job summarize and I'm just kind of.

Stand back and look at a little broader.

Okay, I think the deferrals in Q2 were not entirely surprising.

Maybe a little bit board, what we thought but at same time.

I think we're taking a lot of comfort in the inquiries that we're hearing now as well as the these new commitments.

I think our customers are really trying to rebalance, what they're taking and try and get a grip of their own market.

And.

Look I think it's way too soon to call. This the bottom, but it clearly has been some goods.

Okay. Thank you that's all great commentary I think I don't do it for me. Thanks for taking my questions and best of luck going forward.

Thank you Scott.

Thank you. Our next question will come from David Gagliano with BMO capital markets.

Hi, I wanted to David.

Hi, Thanks for taking my questions I just have a couple of a couple of quick ones first of all the on the unit cost in them outside.

Closer to 62 Bucks a ton this quarter.

Obviously, a the volumes impacting I I'm guessing the cost rather than any reason to expect and its cost not to be below 60, as we go into the second half.

So David that that's a good question I think we've been encouraged despite the challenges on the volume side of how our operations have been able to respond to manage and control costs. We're proud of the results that we delivered during the quarter.

We also noted in the prepared remarks that we did have about $5 million of coded related cost impacts from productivity and just pure dollar outlays for four.

Things such as cleaning supplies are having to.

Maintain guard shacks with temperature control. So you know and all the other things that we're doing across our operations.

As we indicated you know eat from a a committed volume perspective in the back half of your we do expect improved shipment levels.

In the back half and you know I think that with moderating kobin cost as we move forward and kind of getting more into a rhythm of managing with the kind of cobot environment around us.

We would think we would be able to maintain costs going forward can I predict that will be below $60 that Tom there's a lot at play there, but I think you know we indicated on the last call the kind of wherever the volumes going to come in at we should be able to keep within kind of the range that we put out there at the beginning of year and that was anticipating higher.

Our volume.

So they'll they'll be a lot that continues to play out in the back half of the year, but rest assured we think we're going to continue to have a very good cost structure that we're going to report quarter to quarter.

Okay. That's helpful. Thanks, and then just.

Longer term.

Obviously, there south is the key project and and I think it's 211 of the total 363 97 spend can you just walk us through.

Some of the next big expenditures, the timing and also from an execution perspective.

What are the.

I mean, I guess risks associated with the leave yourself at this stage in terms of getting to where you want to be by three to 21.

Thanks, Yeah, So Dave I think we remain incredibly encouraged with what we see what's the Lear South development. It's on time, it's on budget.

I was there a few weeks ago and continued to be impressed with with the ongoing development. There you know many of the major milestones related to the project.

Already been achieved were on call, we're actually developing the longwall first longwall panel with continuous miners on both the head gate and the tailgate.

You know I think is as we look forward you know we're in the process now of obtaining a lot of the equipment you know between now and through the first quarter and the most significant piece of that is obviously the longwall all the shield the Pan line.

Those seem to be on time, the shipment process is beginning there as well.

So those are major things that will continue to move forward with you know there's some some healthy upgrades that and have to occur to some of the other infrastructure such as the belting.

In conclusion of some things at the plant.

But all those are ongoing and and we remain very encouraged with what we see in the milestones that we're hitting.

We'll continue to push forward hard and any major project, you're always concerned about falling behind anywhere, but but the team is very focused one thing we've said before in the past and I'm very proud of our team is definitely yourself you know the Lear operations, a very successful complex 11 miles away that we're working to replicate.

And a lot of the experience the we've gained and building out that complex and operating here for some period of time is that same experience that's that we're leveraging and developing the liver South project now and and why we continue to confidence that we're going to deliver on budget and on schedule and that we're going to deliver the.

The type of performance, the we're indicating that we're going to deliver from it. So we feel good about it.

Yeah David.

It's just kind of the simple view is.

The two big things that are out there the tie into the plant and they slow and the delivery longwall equipment. Those are all on schedule and we expect to have been Q1.

And it's just the development of the head gate tailgate for the first panel and.

The good news is the bad news those are long panels. This is over a mile and.

But we're on it and moving well.

Okay. That's helpful. And then just just my my last question, obviously big shifts coming in and cash.

And spending winds down and the volumes ramp up and and then you just mentioned, obviously sustaining capex, although down to 60 million as as we you know peer into 2022.

You know is is there any any meaningful expenditures that we should be thinking about over and above that 60 million sustaining capex number.

No David as we wind down the spending on Lear self.

The back half of next year, we're down to basic maintenance Capex, which has been running you know that roughly 90 ish billion a year.

From their forward, Yeah, there's really nothing big on the horizon.

Okay. That's helpful. Thanks very much.

Thank you David.

Thank you. Our next question will come from Mark living with the benchmark company.

Yeah great.

Watermark, great. Thank you yeah. Good morning, great. Thanks, Thanks, very much for taking my call a couple of questions one on met pricing.

When you kind of look out to Q3 versus Q2, just assuming all else equal if we just kind of set a flat met price Q2 to Q3.

Any reason why the realizations would be either materially higher or lower than what they were in Q2.

What you can tell.

So mark Yeah, I mean, I think [noise].

What we achieved in Q2, if if you know and that's going to work off an average.

Hard coking coal price that was what 118 and a high vol. A price average Q2, which was 116 I believe.

If you hold those flat you know once again it'll come back to mix of what we're shipping versus domestic and international.

But I don't think you should expect a significant a.

Meaningful difference, if you're holding pricing flat, although the pricing won't be flat, we expect volatility here and we'll continue to manage as we need to manage moving forward.

Okay, Great and then the second question John I think this one's for you. So in the PRB. Obviously, you guys had been generating negative margins in the first half clearly theres a lot of headwinds out there.

You mentioned the shipment schedule in the second half being materially better or at least hopefully we'll be materially better than the first half.

What's your confidence level that you guys are going to generate positive cash out of the PRB in the second half of the year.

So mark I, you know as a Poland I indicated in the NR to you know discussion.

We're very proud of what our thermal operations have done to respond to the market environment and there were a lot of tough things that that we had to do.

We had to realign head count in a very significant way, which we did.

We've had to go and look at it the equipment fleet and how we best optimize it you know when a lower run rate environment. As we stepped into ended 2020. If you remember our original guidance would have had US you know, it's 70 plus million tons coming out of the PRB.

And as a result of challenges in the marketplace and then combine that with the global pandemic and what we've seen.

You know we've had to significantly realign that to a much.

Different footprint you know currently showing commitments at 58 million tons. So if you just do the the map, we shipped 25 million tons in the and the first half of the year off those 58 million tons of commitment that leaves us with 33 million tons to ship in the back half of the year now that we've realigned the operation from a production.

Standpoint to be ready for that I think it does give us comfort that we should see significant improvement in our results.

And then the question becomes what are we seeing from an our confidence level and our ability to ship to 58 million tons. I think it's no secret you know whether it's on the Mets side or the thermal side there have been.

Discussions around you know pushed back and deferrals.

And even on the thermal side, you know I would say, we probably have two to 3 million tons of current discussions on on push back that we see and as I indicated in the met discussion those are contracted volumes, we do expect our customers to honor those commitments I'll be.

If there are opportunities.

So realize benefit for both us and the customer and a win win situation will pursue that so even if we did see some deferral or pushed back.

I have some volumes from 20% 21.

It should still indicate that were it shipping levels that are meaningfully higher than the 25 million tons. We saw in the first half of the year Mark.

I'd add is that.

The bottom line is we're going to react and we're going to have we're gonna do we have to do.

What's happened in the first half here, we can't sustain so.

We're going to make the hard calls try and bring us back something more positive.

Got it got a got it and I guess the same question sort of applicable for other thermal like is that a business in the second half of the year that can you know at least breakeven from a cash perspective.

Yeah.

Same principles apply there as they do it at what we discussed it in the PRB.

We're working hard at those operations or to make sure that the production is aligning with expected demand.

And so we've we've we've made big steps in that direction over the course of the quarter. We were further challenged at our Viper operation as we indicated.

In the last quarter call with its primary customer having some issues with the it's generating fleet those have been resolved and in the Midwest. We've had you know hot summer it at least in the Midwest. So we've seen some demand pickup there, but we will work very hard to make sure we're getting.

All of our thermal operations or to a point where.

We're seeing them generate some cash over the over the course of the year.

Okay that makes sense and my final question just on the domestic met market. I know you guys negotiations I don't want to you know it puts you in a difficult spot you did a great job contracting in 2020, I think you guys were at or near the top of the market obviously.

Going into this round of negotiations that met market is in a bit of a different different state and obviously steel companies aren't doing quite as well. So I guess the question is is you get if you did let's say I think it ended up being about 75% export 25% domestic this year you know how wed.

Are you to that percentage if you don't get the pricing that you want I mean, how much you know at this point would you expect that that makes to change and maybe what's your what's your early thought process on how the domestic met market will shake out.

You know Mark I'll, I'll start and see if drx wants to add anything but.

I think is as we head into 2021.

You know my assumption is that.

At most we're gonna do about similar percentage domestic as we did this year last year, which is about 20 or 25%.

Yeah, and I think the reason, it's pretty simple or if we're bouncing along the bottom of the market and that's where the ended up fixed price North American business is.

We'll probably limit our exposure to it because I think there's more upside on the index on seaborne markets. So look I think ideally were somewhere around 20, or 25%, but I could see it going down a bit.

Yeah, No I think Paul that's a great commentary and agree with that you know Mark. The other thing is you have to look at where producers are in this market.

And that's one of the benefits for arch right now is where we can compete and the cost structure and give comfort to any of the customers whether its domestic or international that we're gonna be able to deliver.

On volumes that were committing to and I think you know with the expectation that potentially half of domestic U.S. productions underwater. It at these prices, it's a whole another dynamic to insert into the discussions and considerations.

For consumers of metallurgical coal. So you know, it's an interesting set up right now as Paul indicated we're going to make sure that we're doing everything we can to maximize the value that we see out there.

Given our low cost structure. It does give us the ability to evaluate a lot of different things here is as we move forward.

Great. Thanks, very much appreciate the time.

Thank you Mark.

Thank you.

Next question will come from Michael Dudas.

Barnicle research.

Good morning, everyone I want to.

Good morning, everybody.

Hey, Michael.

Yes, maybe to follow up on your last comments, John or Paul.

Well the fact that.

Domestic producers your competitors are underwater half of them.

And you know in that some of the new business that you picked up some of the most deferrals.

How much in the next.

612, maybe as you're going to starting to place the yourself coal will the ability for arches capitalization and their ability to deliver relative to the competitors because I got to think that you know in this pricing environment and the lack of capital where you've been able attract capital to the Bill your plans based competitors in such difficult shape is that something that you want a whole.

Hold towards as you're trying to negotiate your positioning for 21 looking ahead towards when this market. So hopefully picks up in 2022, so you'll have that much more of a more structured long terms significant supplier internationally and domestically.

Yes, so Michael I, you know clearly, we're very cognizant of what the opportunity is with Lear, South and what it's going to due to our overall met cost structure and the quality and suite of products in the high vol. Ate market, especially you know that that's Oh back of 21, you know type of analysis for.

US, but you know as we indicated.

We feel that as we move forward through the remainder of 20 and into 21, we're gonna see steel markets improve the global economy improve.

It's going to set up a pretty dynamic environment for us and and you know right now from a leader South perspective will be very careful in the types of commitments were making with what we see you know kind of for the markets in the back half of 21, especially.

Michael We certainly see a significant a stack, we certainly see a significant shake out playing out right now I'm sure you do clearly as you say liquidity is becoming more and more an issue you know John mentioned that maybe 50% of of all U.S. supply is underwater. These prices, but the fact is that there are those who.

We're saying 50% of all global production is underwater and cash negative at the current prices. So it does feel and sustainable to US. We do think theres going to be continued pressure, we do think that shake out in the long run is going to create meaningful space for Lee or south novelty or south can't come into the market and compete and take share if it needs to be quite.

Frankly at the pace at which we're seeing rationalization, we could easily see 30 million tons of supply come out in the market.

The next 12 months out more or less so we absolutely believe that that's going to create opportunities for us than you know as John pointed out given our cost structure and.

And maybe that's sort of 16, our cost structure more prudent or something less as as Lear South comes online we get a half a year earlier South next year and then a full year of Lear, South in 2022, certainly positions us to place our volumes effectively unprofitably going forward.

Michael you know clearly the U.S. position on the cost curve is well understood, but I think what's more interesting is you know you look at Mozambique, which was supposed to be one of the saviors of the future market has you know that's really turned out to be a disappointment all around both in terms of quality and cost in volume.

That's failed and what I think we're all trying to understand is what's going on in Australia, there's been a number of.

Mine issues that are rather high profile and whether you know you try not to read too much into a bit clearly you know are those mines getting a little longer in the two than even we thought they were look I think if he had a day there they've been great assets and they've been run very effectively but.

There's been some interesting developments out of Queensland.

[noise] answering the currencies not that hoping at all these measures should be helping arches domestic abuse given what the dollar has been doing and just finally my follow up would be relative to your prepared comments regarding.

Alternatives looking for second half liquidity et cetera, you know given the numbers you put forth and your liquidity and where you are with rear and then there will be yourself a development. It appears you have some very good coverage is one of your little more you know our understanding of that process and and I can I assume that alters would be.

The market really fill out a better things got really worse from here that certain there's other things on the table to.

Complete the the build out so just want to get a better sense of that so from your visit you point relative to your thought process on were cash flows and where the generation.

Thank you.

Michael This is Matt and in a would agree as we kind of look at the rest of this year in into next year.

As we've talked about with the expectations of improvements in profitability and cash flows feel like we're in a very good place liquidity wise, but as we sit here thinking about getting to the finish line uglier, south and having a year to go here still obviously planning for all sorts of scenarios and alternatives.

And frankly as we sit here today I'm you know if we happen to see a.

First half of next year that looks anything like the first half of this year.

We really would probably wish we had taken some more opportunity to get capital on the on the books today.

So that's kind of the planning that we're looking at is really trying to make sure we understand what the various scenarios are and that we're prepared for.

Even the worst of those scenario, so that we're able to get to the finish line with leader South as we've talked about when we get there the profile of the company changes dramatically in terms of both the earnings potential in the cash needs for spending so trying to do everything we can to make sure we get there regardless of what the scenarios are that we might face.

Sounds prudent thanks gentlemen.

Thank you Mike.

Thank you.

One last question will come from Lucas pipes with B. Riley FBR.

Good morning, everyone.

One of the Lucas.

Hey, good morning, everyone.

So I appreciate it be earlier comments in regards to kind of PRB and other thermal looking better for the second half of this year, but if the committed time.

Kind of looking looking further out into next year and beyond and obviously, we'll see what will come.

The the joint venture, but but what's what's the tolerance for shouldering losses in that segment.

I think we all agree that.

Thermal should substitute kind of continued build out and not vice versa. So so kind of how do you think about.

Thermal in the event that.

Jim you may not go through and continued losses in that say thank you.

Got it looks as Paul you know I think you know clearly we've been executing on a strategy, we're pivoting towards metallurgical markets, that's been going on for 10 years.

Frankly, I think it's been the right courson, one we adopted early.

You know as you look at it we've assembled some great assets on the metallurgical side, where we built them, we have high quality low cost assets.

And I think regardless of what happens with the JV weren't going to continue down this course.

The way I would frame. It is the JV is the best path forward and I think simply as we've said it will lower the cost of the combined operations and compete better with natural gas and subsidized renewables.

But absent that you know I can't see us going back to where we've been in were surely not going to continue to lose cash if we can't come up with a more value way of creating creating value out of these assets.

We're gonna have to consider or whatever steps are necessary.

And you know frankly, I think one step is to continue to shrink down the operations and drop production at some of the mines and look around phase closures or the operations I think that's just the reality of what we're facing.

If you think about it it's no different than what we did in 2018, if you recall at Black Thunder, we had done or revised mine plan and revised sequence, we cut about $100 million out would be a aro cost of the operation. Those are the type of things were looking at but my guess is it's going to be a much smaller footprint going forward.

Yeah.

That's very helpful. I I appreciate that Paul and then a just a number of questions here on the medical market I want to follow up with one and in terms of.

Reduction to U.S. output you have a sense a kind of what amount of tons exactly has been taken offline from from the U.S. and then b what percentage up those cuts have been permanent versus temporary thank you.

Yeah look as its DAC and I'll start with that so you know the high watermark here recently, she doesn't 18, the U.S. produced around 80 million tons of coking coal as we count it.

Last year 2019 that it's fallen into the mid seventies 70, 475 million tons, we certainly could see a scenario, where we fall the way to 60 million tons. This year. So you know production is coming off line.

We see that continuing quite frankly, you know before the virus you know even sort of struck a we'd already seeing 68 million tons of supply in the U.S. you know come offline simply because the market turned down about July one of 2019, So do I want to 19 highlight prices were still.

All around $190. So really the decline started in earnest thereafter and in a period of just eight months as much as 8 million tons of supply came out of the market. That's continuing obviously and we think you know could accelerate we are looking at you know real liquidity concerns for a lot of producers it's possible that we'll see an additional.

Take out post the North American settlements I'm, there might be producers, who are sort of holding on to see if they can if they can lock in some business that will keep them profitable, but I. You know certainly we think at the moment is coming here, where there are going to producers are the producers that simply have to shut down so right now the if you look at.

First quarter of 2020 production was down about 15% route into the second quarter 2019, so relative to the last sort of strong quarter on pricing.

Certainly could see that 15% declined 50% reduction hold for the full year.

And quite frankly expect that to be higher so cuts will continue there simply has no ones that liquidity to simply say, we're just going to lose cashier indefinitely and hope for the market to turn so that's our expectation.

Any any sense on whats permanent versus temporary.

Yes, so really we would expect a lot of it to be permanent once these operations shutdown equipment gets pull power get shut off it's it's hard to bring those mine back and again, there aren't going to be producers, who were thinking you know what we'll just spend some cash to keep an asset I'm hot idle that really wasn't very competitive in the first place. So once they shut down.

On the you know you might hold on for as long as you can add a certain price, but once you shut down you need a much higher price to bring that production back online and so you'll recall that because I mean, if you go back to sort of the last cycle you know that the high watermark for the U.S. was about 92 million times it took.

Three years of strong pricing to get us back 80 million and even there that 80 million times, we were clearly defying gravity because production came off almost instantaneously as soon as the market turned down. So you know we would characterize the vast majority. This production is that shutting in as being permanent.

It's not to say that at some of those reserves couldn't go back into into production, but it's going to take capital. It's gonna take time, it's going to you know it's going to take you know a meaningful change in the market in one persistent anecdotally Lucas I did indicate you know that we do see equipment in the eastern Coalfields you know that that's a that's being sold.

I think Thats a testament to some of these closed in idled operations, you know having to look to move things. So I think it just further points to the points the deck is a.

Highlighting is as the challenges that we're seeing in production across the portfolio.

I appreciate the color. Thank you and best of luck.

Thanks Lucas.

[noise]. Thank you.

And at this time, that's all my questions. We have time for today. So now I would like to turn the call back over to Paul Lang for closing remarks.

I'd like to thank everyone again for their interested arch and taking the time today to participate in our quarterly call well I think it's too early to make any prediction on the slope of the industry's recovery My general feeling is things or at least incrementally better than were then when we talk three months ago.

Clearly, though we have a long way to go before we're back to something that reserve that resembles the old normal.

I expect things will remain challenging in the short term, but I think arch is well positioned we have world class metallurgical assets and it's at this very point the cycle that cost matter. Most on the thermal side, we've taken strong steps to adjust the operations and we'll continue to make the hard calls are required without.

Operator, we will conclude the call I look forward to reporting to the group in October stay safe everyone.

Thank you just conclude the call for today. Thank you for your participation you may now disconnect.

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