Q3 2020 Arch Resources Inc Earnings Call
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Yes.
Good day and welcome to the arch resources Inc. third quarter Twentytwenty earnings conference call today.
Today's conference is being recorded.
At this time I would like to turn the conference over to Jack slow.
Senior Vice President strategy. Please go ahead Sir.
Good morning from Saint Louis and thanks for joining us today, while we are conducting this morning's call can watch a board room I want to assure you that the team widely spaced.
Yes, 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 to different degrees uncertain.
These uncertainties, which are described in more detail in the annual and quarterly reports, we filed with yet you see may cause our actual 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 more information future events or otherwise, except as maybe required by law.
I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures to claim discussed this morning, but do you have a press release.
Which we have posted in the investors section of our website.
Arch class C Dot com.
Also participating on this mornings call will be Paul Lytle, our CEO.
John Drexler, I see Oh, I'm bad deals young our CFO after.
After some formal remarks, we'll be happy to take your questions with that ill turn the call vertical.
Thanks, Dick and good morning, everyone. I appreciate you taking your time today to join a protocol.
Let me begin by extending my thanks to the entire arch workforce for their continued exemplary efforts during a complex and challenging times.
Through the third quarter arches subsidiaries are wanting to covert nice true construction right well below the national average and it was.
Been fortunate that none of these cases have been complex and required extensive tree.
Well, if I were to marry a serious health threats to our workforce and society at large we are proud of our employees are going to efforts to protect themselves their co workers and their communities for their any I'm sorry exposure.
Welcome to the dog right that'd be a social service provider.
Even though the organization has prioritized addressing the challenges of the parents that much. We've also maintained our sharp focus on every other key metric in the environmental social and government jewelry.
As evidence of the team's commitment to these principles marches subsidiaries were honored this past week to study all the safety awards. The nations highest distinction combined safety as well as department of Interior is good neighbor Award nations highest honor for community outreach and engagement with them.
Within the mining industry leader.
They were captured the struggle the safety award in the large underground mine category.
Wonderful I love the sample will say a few award the appliance category and the Lear South line captured the married to award for its outreach efforts and positive contribution to its local community.
The department of interior recognition was even more noteworthy since it marks the second your role but March subsidiary is one of the good neighbor was following on the heels of Alere buys your C to be out of the 2018.
Well, we've got the highest internal standards for operations across the full range of yesteryear metrics and drive progress in these areas with rigorous approach to continuous improvement. It is nevertheless, gratified to receive external recognition for our achievements.
Let's see exceptional ongoing accomplishments of our two cornerstone operations leader and Theirself. We've established a strong foundation for continued excellence in that's crucial area performance for the years like that.
Beyond our U.S.G. related achievements arch delivered exceptional results on a broad range of other flights during the third quarter.
Well they turned out to really track record of strong operational execution [noise] monarch.
In our core coking coal portfolio, we lost the solid probably see another 1.7 million tones, well North American coking coal business for 2021 deliberately leave.
Make great progress on the build out of Leer South has completed the tax bodies of tax exempt bond issuance.
Really competitive right the support that development it's fine.
And finally, well moving forward aggressively with our plan to optimize the value of our thermal assets.
Well, John and that will still you got all the details of these various achievements momentarily I'm gonna take few minutes to discuss the final item the plants, where our thermal assets.
Let me start by saying that we're tremendously proud to be an important contribution that our thermal assets have made to the U.S. to try to be for decades.
As well as our strong contribution the arches growth and success.
Weve conveyed many times, our powder River basin and other thermal segments have generated a substantial level of free cash flow over the course of the last four years.
Despite the ongoing decline in the thermal market environment.
Cash that we've put a value creating links initially through our capital return program and more recently in the build out of there so.
However, we are shifting into a new phase in keeping with all our ongoing pivot toward steel Coke and coal markets. We are driving forward with a clear cheerful and well defined optimization plan for our thermal assets that's.
As previously announced we already launched an accelerated effort to evaluate strategic alternatives for these operations.
Put simply we're exploring the sale. So we're all these assets assuming we could find it appropriate buyer that satisfies our rigorous requirements.
Well, we clearly understand the complexities of such sales as evidenced by recent transactions in the powder River Basin. We know we have ultimate control over production rates and mine closure planning and we're committed to not marriage these processes and the most value enhancing that fashion possible.
Given that we're finalizing our plans to shrink the footprint put these operations that particular emphasis on our powder River basin mines, where we were prior prioritizing the reduction in our asset retirement bonding related closure obligations.
As a reminder, arches powder River basin by its produced nearly 75 million tons in 2000 like true and we expect them to produce lots and 55 million tons in 2012 works.
We're currently evaluating plans the <unk> reduced production levels in the basin by the additional 50% over the course of the next two to three years.
We view this systematic winding down of our thermal operations in a way that allows us to continue to generate cash to fund long term closure costs.
Like Bill Gates solution I gave that were unable to find it appropriate buyer.
As such.
We believe that providing a well communicated glide path is the most responsible way forward for a range of a sexual stakeholders.
Here's our employees communities in which we operate our long standing customer base and maybe the customers who rely on coal based electricity.
It's generally we've established a clear compelling and arch control strategies for long term value creation well for sure.
With a sharp and singular focus on steel and metallurgical markets and we intend to pursue that strategy, but the urgency expected by our stakeholders.
Let me now spend a few minutes on the state of metallurgical markets before turning the call over to John.
As you all recall steel demand and pricing started to deteriorate around the middle of last year. If you expect knock on effects on the coking coal markets.
The onset of the virus always served to exacerbate the situation.
However, after bottoming in the spring steel markets. We recently began to show signs of a slow gradual recovery, which should in turn bolster the logical markets over time.
In North America for instance, steel producers of restart at six approved a 15 previously idle blast furnace capacity factors at U.S. Mills have marched up steadily to 51% Murley may June nearly 70% today.
In Europe. The story is similar with the restart of nearly half of the 25 million pounds of steelmaking capacity idle earlier this year.
Asia, that's falling it's true led by China, where steel output has now exceeded 2019 levels by a wide margin.
Moreover, in the air show signs of getting back on its feet as well well. Its recent manufacturing PMI indicates that well return to expansion levels for that up and coming autonomy.
That's improving demand outlook across the Globe has also act to lift steel prices, what's hot rolled coil price is up 30% or more in all major markets in recent months.
In addition to the improving fuel dynamics coking coal markets are also likely to benefit from widespread supply rationalization arch believes that more than 10 million pounds of high cost U.S. coking coal production is likely to be shuttered 2020. In addition, Australian up it looks to be down.
By an equal amount this year in face of supply cuts in high profile operating challenges other regions are facing similar reductions.
In short, we believe coking coal supply and demand is on its way to rebalance even in the relatively near term, which should lead to an improving price environment. It's.
In fact coking coal prices have already bounced off the virus grew a little old even with the pullback scenery subs.
Stemming from the uncertainty of Chinese import policies.
Let me close by saying how excited we are about the tremendous value creation potential of our business going forward. We're confident that we have exceptional foundation in place.
Claire carefully constructed strategy, a talented workforce low cost metallurgical assets high quality products like pretty good marketing and logistics expertise industry, leading the U.S.G. practices and a best in class growth project at Smith <unk>.
While we can't control the trajectory of the market's recovery, we can make certain that we're ready for that recovery when it does come out and we're working aggressively to do just that moving.
Moving forward, we plan to focus on our operational execution balance sheet strength and the U.S.G. leadership, even as we forge ahead, we'll pull yourself, which we believe will set the stage for greater cash generation and value creation in the future.
With that I'll turn the call over to John for further details on our operational and marketing performance during the quarter John.
Thanks, Paul and good morning, everyone.
I'd like to begin by expressing my own sincere appreciation to the yardstick, which continues to perform at the highest level, while complying with extensive virus related protocol, let's move.
What's most impressive in my view.
The fact that he moved into the file.
Our employees remain focused and disciplined in their efforts to protect one another their families and their communities well.
While these efforts are essential they do all the financial call, we estimate that the productivity impacts along with the cost of health and safety related costs totaled three and a half million dollars that our metallurgical sales during the quarter and help the million dollars that are other rental operation.
That was called noted even the yards team has adapted to the realities of the bottles. We have continued to execute at the highest level on every other costs as well.
In the quarter, just as it our metallurgical segment achieved average per ton cost of $60 to 78 cents to talk again, assuming parts in the first quarter, our U.S. coking coal producers.
If not for the impact of focus and I think our unit costs would have been below $60 per ton.
At the same time, we capitalized on gradually improving market dynamics during the quarter by shipping 1.7 million tons of coking coal.
That increase versus Q2.
Back to the virus on the global economy work there most of the year.
I'm also pleased to report that our marketing team was highly successful during the quarter in securing north American business for next year, that's fixed price is well above the current market.
In total we submitted 1.7 million tons for deliveries North American customers and 2021.
Netback to the mine has more than $90 per ton.
For a high volume products, specifically that number was in excess of $93 per ton.
Well that constitutes a step down relative to 2020, North American pricing levels. It was a $20 per ton of premium to prevailing market prices at the time.
As we have stated many times in the past we value our relationships with our North American customers, and we see advantage and keeping our coking coal products and nevertheless.
But we also know the value of our products like how the option of directing all of our volumes into the seaborne market. If we cannot secure appropriate pricing in the North American markets.
Fortunately many of our North American customers appreciate the value in use of our premium products and we're willing to pay us a fair price even in this difficult market environment.
With the vast majority of the North American business concluded. We are pleased that we achieved volume levels for 2021, but were consistent with 20 twond.
Well that business provides a solid foundation at a price to generate healthy cash margins in our portfolio.
Open the majority of our projected 2021 volumes, so market based pricing, where we see significant upside.
While we are pleased with the strong execution of our existing portfolio in the premium we captured for our high quality products we have.
We expect to expand those advantages still further with the addition of lifestyle.
During the third quarter, we continued to make excellent progress on this transformational project and the finish line is now well inside.
During Q3, we invested a total of $46 million in developing the new mine, bringing the total investment today is $256 million.
That's roughly 70% at the midpoint of guidance.
The total capital required for the project, which remains on time and on budget.
With the commencement of longwall production that were soft in the third quarter of 2021.
We expect our average unit cost to decline meaningfully.
The percentage of premium I'm only coal in our product mix to increase market.
And our overall cash generating capabilities to experience a positive step change.
Moreover, with the gradual improvement in market dynamics for both you only coking coal we believe that the timeline to start <unk>.
With the longwall ramping into a potentially strengthening pricing environment.
Let's now turn to our legacy thermal assets, starting with our powder River basin operations.
As Paul highlighted we are shifting into a new phase with these assets as we explore strategic alternatives and evaluate a systematic reduction in their operational occurs.
Even as we do so however, we remain focused on strong execution and cash generation and our PRB team delivered on both those products during the third quarter.
As you know we've got a negative cash margin in the first half of 2020 as we adapt to the operations to the rapid fall off in thermal demand.
In late Q2, and continuing throughout Q3 yards, we have commenced in the spring to adjust our cost structure to match lower demand, but you have to pay out.
As a result, we got our Cas cost by nearly $3 per time relative to second quarter level and achieved a similar increase in our current time cash margins.
Combined with our continued diligence them keeping maintenance capex at minimal levels. We are again generated significant levels of free cash with these assets and expect that to continue into Q4 and beyond.
That's why our other thermal segment, we again experienced negative cash margins in Q3 with weak demand weighing heavily on both volume levels of profitability.
We are highly focused on bringing these assets back into cash positive territory, even as we assess strategic alternatives for them longer term.
I want to take a moment to recognize the employees at our thermal operations. It is their dedication and commitment to what they do that has allowed them to continue to succeed and generate value in the face of tremendous challenges and uncertainties.
They have worked for more than a decade to continuously position the operations to be competitive in a shrinking demand environment and more recently managed effectively the uncertainties of the joint venture and the ongoing been done.
I applaud their efforts and know they will be successful as we continue to navigate the thermal operations to a smaller footprint.
Looking ahead, we expect another solid shipping and cost performance for our coking coal portfolio in the fourth quarter and we expect to again benefit from the actions we took in the PRB in the spring.
In short we expect to end the 2021 with good momentum and to maintain that momentum through the third quarter start up of Leer style, which should take the cash generating capabilities of our coking coal portfolio to the next level.
Let me close by adding my congratulations to the leader Leer style and Black Thunder teams for their safety and community outreach efforts.
While we are proud of the efforts on safety and environmental performance as all of our operations one remarkable item I'd like to note that the Leer complex worked all of 2019 and a total of over 2 million employee hours without a recordable incident, a truly were tremendous accomplishment.
As always we continue to hold ourselves to high standards in all areas of the Apache what's the firm conviction that operating carefully and responsibly as a prerequisite to operating productively and profitably.
With that I will turn the call over to Matt for thoughts on our financial performance.
Thanks, John and good morning, everyone.
I'll begin with a discussion of the third quarter cash flows, which despite the weak market conditions were positive with cash increasing modestly from June 30 levels on an as reported basis.
On a pro forma basis, excluding the Lear, South development capital unrelated party as the energy related expenses cash from operations exceeded our maintenance capital needs by nearly $25 million a good results in a challenging environment.
Operating cash flows for the quarter totaled $30 million.
Cody 14 million from our land settlement and the deferral of FICA taxes.
As you will recall at the end of the first quarter, we identified approximately 100 million of these and other special cash flow items, and we have now collect the $80 million of vessel.
We expect an additional $10 million to $15 million from these items in the fourth quarter the benefits bundle and settlement will continue through the first half of 2021.
Capital spending for the quarter totaled $57 million with 46 million of whatever south development expenditures maintenance.
Maintenance capital was just 8 million with substantially all of that related to our metallurgical sales.
The remainder nearly $4 million was capitalized interest.
We don't consider capitalized interest to be a project costs. It has become a larger part or reported capital spending.
The additional financing activity we've undertaken this year.
Regarding the tax exempt bonds as a reminder, we received the proceeds from that offering as qualifying expenditures are made up there. So.
We received 38 million over the course of the third quarter with 30 million of closing on July 2nd and the remainder is expenditures were made during that period.
We have nearly $14 million of the funds still to come but you will see classified as restricted cash our balance sheet.
But that's all we expect to receive slightly more than half in the fourth quarter with the remainder to be received in 2021.
Turning to liquidity, we ended the quarter with $265 million in total liquidity, including $220 million in cash as are the remainder under our borrowing facilities.
Well cash increased modestly during the quarter liquidity with roughly $40 million lower than June 30 levels.
Fairly due to increased collateral requirements for workers compensation obligations reclamation surety.
Additionally, we are required to post $60 million of collateral after the end of the quarter associated with legacy self insured workers' comp obligations.
While certain of our Counterparties and surety partner so taken actions in response to the difficult thermal coal markets conditions.
We continue to work closely with those counterparties to reinforce the positive long term outlook for ours is low cost and high quality operations, which will be further enhanced after the leaves out longwall start up.
Also on the liquidity for one of the key accomplishments for the quarter was the amendment of our accounts receivable securitization and our inventories credit facility.
Both facilities were set to mature in August of 2021, but the amendments to extend the maturity dates to 2023.
We were also able to reduce the minimum liquidity required under the inventory facility.
A $175 million to 100 million.
While the overall size of the receivables facility was reduced by 50 million.
Liquidity will not be affected as the reduced size is still sufficient for current and expected future borrowing base.
While our liquidity position and balance sheet remain among the strongest in our industry. We believe that building additional liquidity would be prudent in light of the uncertainty in our markets and the broader economy, and we'll continue to explore opportunities for additional financing.
Support the completion of the winter South development.
Yes.
Before taking questions I would like to address the impairment charges that were recorded during the quarter.
As Paul discussed in the event that we were unable to find a buyer for our thermal assets, we will begin systematically winding down the operations.
Winding down process will take several years, but it will result in lower production and sales volumes compressed margins in the shorter mine life than previously anticipated for the mines in our other thermal segment ended our coal Creek mine in the Powder River Basin.
Similarly, we reevaluated the value of our investment is nighthawk in light of our current market conditions, including longer term coal demand and pricing and capital cost and availability.
As a result, we recorded impairment charges for these assets totaling $161 million.
The Black Thunder mine was not included in the impairment due in large part to the mines demonstrated ability to maintain competitive cost across varied volume levels.
At September 30, Black Thunder property plant and equipment had a book value of just $160 million relatively small in relation to the cash generating capability of the mine as demonstrated by this quarter's margins.
With that we're ready to take questions operator, I will turn the call back over to you.
Thank you Sir if you would like to ask a question on todays call. Please press star one on your telephone keypad Thats Star one to ask a question.
We can now take our first question.
Probably Lucas pipes from B. Riley. Please go ahead.
Hey, good morning, everyone. Thanks to pick.
Thanks for taking my question wondering though because.
Yeah.
Good morning, Paul.
I just got a question is on the mobile side and specifically.
On the strategic alternatives you mentioned above.
The formal generated negative EBITDA margin per ton and I know this is all these really difficult but but.
It can you can you give us an update on how quickly you could possibly exit that business and again like I know, there's still the PRB question too, but a bit of a formal for them.
Yeah, Lukas all I'll talk about that so other thermal or two miles this west Elk and our Viper operation.
When you look at them they both have a little bit different story at fly for what the power prices and what's going on with the economy last couple of months you know, it's it's basically mine mouth when the plants. It serves as the Dallas. So liked his colleagues have been disproportionately hurt to lead the way for that reason the last six months.
Yeah, I think as things start to normalize back out I think back to should get back to more normal course that it's typically.
Yeah, West Elk is kind of the more interesting in a challenging one let's go.
Let's go because you know it has a great history of generating lot of cash, but it also has a history of some years, especially when the export market is down west Elk struggles I see it.
We'll continue to do that it's a great option you know I think into the Pacific several market and it's also a great product that a customer.
Customers in Japan, particularly like because it has a better quality of the big castle, well to a lower absolute lower sulphur coal with about sales TV value. So I think you know the process. While those two my guess is probably a little different the PRB.
You know west Elk is probably the one that has a smaller base of people that may be interested but at the same time it has a great option.
You know look at from a market perspective.
The expected improvement in several markets as we stepped in on 2021 as well you know, we we would expect that demand for that call even domestically as natural gas prices are expected to be higher than they did in over the course of the pandemic stricken 2020, but they'll be opportunity.
To give us options to it.
Options to increase volume, there as well, which is where we need to get some moving forward. So we feel.
We feel good about where were at west Elk is going working hard to make sure we get it back to a cash positive position here.
Fairly soon.
Very helpful. Thank you for that color and on on the PRB you mentioned that.
Potential plan for a dramatic reduction in volume you over the next few years.
And not in your prepared remarks, you touched on this but how should we think about cash cost in it and thats in that scenario and it maybe even taking it a step further kind of how much how much cash could we expect from this asset over over the next few years if it.
That's the plan you ultimately puts you. Thank you very much [noise].
So Lucas I'll I'll stop its first I'm sure others will have some thoughts as well, but you know we were black Thunder I think one of the things maybe just set the baseline here is we referenced this in our remarks for the last decade demand as declines in the powder River basin.
We have responded to that at our operations. If you look at Black Thunder you go back a decade, you know it was selling to essentially close to 120 million tons on a on an annual basis.
Today, we're well under 60 million tons.
The entirety of that timeframe. The mine has worked hard to reposition itself in a way that it was a continuing to produce coal at cost and allowed us to generate significant amounts of cash.
You sit here today, and we look forward you know that.
Our expectation is as we move forward and we're going to continue.
To have opportunities year to responsibly shrink the footprint.
That will be responsive to what we're seeing from a market demand environment.
It will be responsive to our need to shrink the footprint of the operation to address.
Shrinking reclamation obligation as we move forward.
So we I hope is far more wonder.
For them to continue to generating meaningful cash as they have over a very long period of time in our history.
You look to next year and you look to what we just disclosed from committed levels from a volume perspective in the PRB and we feel good about where we stand today you know approaching 40.
46 million tons at a nice market environment, but we're going to.
But we're going to be very careful as we move forward from there you know as we evaluate our opportunities.
Yes, the only other thing I'd add look this is as you think about it.
One thing that continuing to shrink the footprint does is it reduces even though the minor maintenance Capex we had there.
Well, we're just going to keep lot of what we got that stops will we're not going to replace that it's it's become a shrinking it asset.
Look if we you know we do believe we can simultaneously generate cash cash that we could use for some sort of self funding mechanism ultimately.
For final closure.
But so simultaneously generating cash and shrink the pellet plants and so that yeah, Bobby the focus is or what how do you balance that to what degree do you devote resources to shrinking that that that footprint versus generating the cash and ultimately you can use sort of on those long term closure costs and we think we can do both simultaneously and so that's really the plan were.
Hammering out right now and Lucas I think this quarter is a is a perfect example, where there was an enormous demand shock to the system here.
Earlier in the year with a global pandemic and the mine took appropriate steps to reposition itself to make sure that it was responsive to that significant decrease in demand and we've returned that operation generating meaningful cash here in the third quarter.
Okay very good very good job on the cost side.
Okay cool.
Ill sneak one last one in.
There are some 70.
Some requirements for additional collateral and noted that in the fourth.
In the fourth quarter.
Workers compensation obligations would also acquire additional collateral.
It's just kind of it I know this is.
Difficult to say, but what would you say, it's kind of like yeah. We've been good at the low point in the cycle and you had you had some of these conversations here, but what would you say this is kind of it or or is this something that could continue here as we look into 2021. Thank you very much.
Yeah Lucas this is Matt I guess.
First of all I I'm I'm, a little cautious in saying this is this because obviously some of the demand for collateral are outside of our control of.
You know Weve got surety partners and others, who are looking at adjusting to the new normal in the thermal markets and frankly, a maybe a little wide eyed at what they're seeing in terms of how quickly. It's deteriorated the flip side to that is as you mentioned, we're starting to see an improved market price and clearly on the domestic side.
We stepped up a little bit from where we were in Q3.
As for our specifically without much closer to a little yourself startup and frankly as we think about from maturities perspective, what they want to see is the counterparty that's able to fund. These these costs when they come due and we think they are given the profile of the low cost a high quality what are up.
Operations are going to look like post earlier. So we think that there were a counterparty the charities frankly shouldn't need a lot more collateral than what they have today. So I'm, obviously, that's not all within our control there, but what we can control is the quality of what were doing the cash will begin to generate meaningfully in the back half of next year and we think those are things that hopefully.
Reduce any additional collateral requirements you know the only thing I'd add is I think its a distinction with us, particularly this quarter.
As Matt pointed out in his remarks.
Q3, we were cash positive by about $25 billion living filter out the JV are they a letter south development costs.
I think we're going to be one of the fear that could make that type of a resolve troubled true.
Yeah.
Yes, no. That's that's very impressive and everyone I appreciate the inflammation and best of luck and that's that's speaking.
That said speaking against.
Excellent. Thank you Lucas.
Again, if you would like to ask a question. Please press star one.
Next question comes from Mark Levin.
Uh huh.
<unk>.
Okay, great. Thanks, very much I'm. So a couple of quick questions one as it relates to the model, but the other more big picture Omar.
On the modeling side when you kind of look out to Fourq you you talked about PRB volumes and and also met volumes any any reason why they would deteriorate quarter over quarter or should they accelerate what's kind of the the sequential thought process that volume.
Well Mark I think you know as we look to the fourth quarter you look at the 1.7 million times that we shift.
During the third quarter as you look at our committed volumes in the Mats segment and you know, we're actually running our operations, especially the high vol. A operations hard you know it would imply essentially committed and so on that side of an additional 1.7 million ton.
Times for Q4 as well. So you know that that is essentially you know we would expect to be flat to Q3, maybe work real hard to mark.
The market opportunities, we see out there to see that increased a little bit, but that's probably a good modeling a place to be on the PR.
On the PRB side once again, if you just look at our committed volumes.
And project that out to the rest of the year you know you get at a run rate, it's essentially equivalent maybe a little bit higher than the Q3 levels and in the PRB. You know we have had some challenges with rail.
We did take some advantages of some push back.
With some PRB coal that we talked about in the last quarter have been converted that is a significant.
In additional volumes ended in 2021 and.
And beyond so you know I think a run rate in the PRB kind of equivalent to the Q3 was probably.
With probabilistic modeling place to be as well.
And Mark you know looking at 'em. We would also expect <unk> cost to be you know a once again, you know well controlled should be another solid margin quarter, and we get a lot of work in the first half to adjust the production writes an article a place as we head into Q4 on the cost side as well.
Okay got it so somebody just want to get into guidance, but just from an E. Because obviously that that price is changing quite a bit but if it sounds like.
If it sounds like volumes are roughly similar and and and and cost will still be controlled its really the best price. It will be the determinant as to what the sequential EBITDA would look like in Q4. The Q3 is that right.
Yep, that's it in a nutshell.
Okay got it perfect and and and and then when you think about.
2021, you guys disclosed what I thought was some pretty impressive pricing, particularly in the PRB. Yeah is that you know if you were to go out and contract additional Johns in the PRB for 2021 are the prices that you guys were showing up. This morning is that is that what you would assume for 2021 I think.
We look at you know cold I actually see kind of the forward price around 12 Bucks, but you guys were well ahead of that in terms of what you disclosed this morning.
So to embark on that on the marketing front with PRB I think we're very pleased I'm very proud of what the marketing team has continued to do it in a challenging environment to secure volumes at prices that you know quite frankly are attractive.
The 45 million tons of commitments $43 million of that lies you know as they come.
Committed over various time periods. So that's a an accumulation of all of those transactions.
I think what you're seeing out the thread right probably is a little bit more reflective of what the current market is for 2021 volumes, especially you know.
We sit here today and look at where the coal markets or EPS things can change right, we'd see improvements on the gas pricing.
There is an expectation out there that we're going to see a electric.
Electricity generation some thermal coal increased.
So we'll continue to evaluate you know whats happening here you know once again, making sure we're taking advantage of the market being responsible out we're going to be managing.
The operations as we move forward.
Well look barco I'll, just wait a little bit lay it all out there I'll just before I do though by what we're doing we're obviously not a there's greater pressure to go out trace volume yeah.
Yeah, we've got a good volume locked in and we got good pricing good yes.
If the pricing keeps dropping you know we could clearly survive and we'll do well next year, particularly but you know we are where we are you know we're not going to do what we have done in the past.
Let me know.
Related to the CRB, Paul without trying to get too specific but when you handicap the likelihood of either what we call maybe a wind down scenario in the PRB versus an outright sales how would you easy cafe and I knew surety bonds, you guys have already kind of alluded to that.
Would you guys sell the asset you acquired you guys supposed to cash or or provide cash to a buyer in order for them to post surety bonds used to get out of the CRB.
Okay, you know I'll just start by saying I I think I was pretty careful with my words in my opening script about talking about it appropriate buyer.
What I'd be buy at appropriate buyer I would you know loosely defined as someone who will take care of people and probably more as just as importantly, they have the ability to replace the bodies and the permits that step into the leases.
What we do not want to do it I don't think our shareholders want to get into a situation, where when you lose control of the asset would have some took potential future liability. Yeah. We see that play out of the powder River basin, and we're not going to do that.
And I I think there are buyers out there and you know it's kind of hard to handicap, you know as you step back and look at the basin now there have been some non traditional players come in you know they've come in different ways, but.
It's kinda be kinda interesting to see how this process plays out over the next couple of months.
Okay, Great and then this question is for bad and it gets back to Lucas. Its original question is there a way to is there a way to provide what the maximum collateral exposure could be if in fact, you know surety providers got more.
Were nervous for whatever the market deteriorate or whatever the case may be <unk>, what's the sort of maximum amount of exposure arch would have.
Well I mean in theory, Mark the maximum exposure is the amount of the surety bonds, but clearly that's not something that either we or the surety, let's say whatever a division you know our approach has always been to work with the charities as closely as we can to get.
They get them off our operations to see how we operate how we take care of the property and ultimately move towards reclamation.
And get them comfortable there's a the assets they are underwriting for us are ones that adult.
Give them a long term exposure, there, but they're going to have to step into so that's going to continue to be our approach as we went through that you know in our history going through a restructuring the.
Collateral needs you know were something much smaller than the total surety bond amount and we'd expect that to be the case now, but you know it's really hard to say this is a much different than last year on the ballot.
Or at least the surety bond about right now that.
So total for reclamation, its about 550 million.
Okay.
Got it and then not supposed to Mark that's versus an asset retirement obligation of more like 240 million. So that 40 million, okay really very inflated relative to what the long term obligation is likely to be.
Absolutely Okay, no I got it I was just curious what I wanted to have a better handle on that and then just a final question, obviously, yeah that prices it as as but you're taking another CIT I guess the last few weeks as the Chinese sort of a you know a change their import policy, which the bard to Australian ports I'm curious if.
You are seeing Australian exporters.
Discount into traditionally Atlantic basin markets as they try to move coal or how would you kind of characterize the seaborne market given the recent change in circumstances, what what are you guys seeing in the market and what are your expectations going forward.
So mark clearly you are correct, we've seen pressure here over the last several weeks with with some of the policies that you know once again hard to interpret what those policies are in China, but we have seen pressure in the market here recently.
You know I think.
While we've seen those pressures and there may be some reselling upsell all those into the market you know, what what I'll share and what we see playing out kind of on the physical side of things is we continue to see ongoing interest and we see customers booking oh vessels for Q4 bookings vessels for.
Q1, we see customers requesting acceleration of cargos that they've got locked in in Q1 into Q4. You know these are all things that we see today like now as we see pressure on these markets. So you know we think the Chinese a issues will play themselves out we think what was.
Transpiring for.
These issues came into play which was a strengthening market.
With demand returning with with supply being rationalized, we think around the world is going to continue and we expect to see strength as we move forward as we indicated we believe the opening of uglier south here in the third quarter.
I was gonna give us tremendous opportunity here and what we think will be a strengthening market. So markets. It's Dan actually yeah really there has been a lot of time for that for those times to make their way into the Atlantic Basin and quite frankly, when you look at the EPS you actually look at the future strip. It's it's certainly indicating that the market believes that you know those those Chinese policy.
Is that a restricting Australian imports potentially right now our imports generally are going to be short lived so certainly there I think the expectation is that this is going to be you know a matter of a couple of months before we see a reset or quite frankly that that clearly isn't that the economic benefit of the China.
Even the Chinese buyers given that the spread between the shot she premium in the seaborne price landed price was about 65, Dollarsone and now our expectation is that that will sort itself out. We don't know we certainly can't compete as you would imagine we can compete very effectively into Europe, and so if we need to compete.
With the Australians and volumes that overflow into Europe, that's fine, but we at the same time, we'll be seeing new opportunities into Asia. So in the end result, we think that all will sort itself. We're also encouraged by the way in which the World Steel Association and others are expecting a spring back in.
In steel demand in 2021, obviously, China is already Repping. When it was as it was then Paul I was fully recovered and is well ahead of last year's pace, but with the rest of the market expecting to sort of pick up we could see a nice bump in demand I mean 2021, it's certainly interesting to think about the fact that.
We've had supply rationalized to meet this step down in demand once we reach sort of a balanced market, which we think we're approaching that now then from here for 2021 22 sort of the upside demand growth could be more attractive than it would have been otherwise. So we do see some positives out there and encouraged by what we say.
Great. Thanks, very much for a term for all your answers.
Mark Thank you Mark.
Oh, we have one more question from Wayne Cooperman from cobalt. So please go ahead.
Hey, guys.
I missed that sorry, but can you talk a little bit about kind of the the pros and cons of you know continuing to run the thermal business at just at kind of the current rate, making some amounts of money versus you know having to fund the liability is when you shut them down and what it what the differences are on a cash flow basis.
You know when you noticed you stand back and you know the way you described to you almost have to because were what the buckets static EPS markets, obviously declining.
We're simply trying to control how that decline occurs.
Yeah look the.
The I think we're better off take it that way, where we work to continually reduced the liability with the cash flow from the operation and doing it at a very systematic and logical fashion.
With that I I made that did you say yet.
Cost $500 million, though to shut down all the mines, there that I misinterpret, what you said.
No. It's certainly it won't cost 500 million, that's the bonding amount.
Related to all of our our minds and those fundamentals are said irrespective of some cases of what the actual obligation or as as Jack mentioned, you know our view of the actual dollar will have to spend to reclaim based on the air on our books at something closer to 250 million. So a significant discovery.
Next between those two but but obviously you know we've got to manage the the amount we're going to spend irrespective of what the regulators say the bond needs to be and Wayne. This is John Drexler, you know one thing I'll point back to because I was on the call. As you know we went through this a little bit when we were shrinking the existing portfolio of black.
Under a while back and reconfigure how we were looking at its <unk> mine into the future I mean kind of repositioned, what we thought we'd be a shrinking footprint than and if you remember we reduced our reclamation liability by $100 million in 2018, so as we.
Forward you know here today, you know those are the things we're going to be continuing to look at as we reposition and shrink the footprint overtime. Hopefully you know once again, reducing that obligation as we move forward.
That does that include like pension and other liabilities or that's just the dip share reclamation number.
That's the reclamation number, but I mean does it.
It was a thermal assets the other liabilities that are associated with those are a relatively minor.
Okay. Good thanks.
That's your way.
I would now like to turn the call back to Paul Lang I need to show the closing remarks.
I would again like to thank everyone for their interest in arch, taking the time today to participate in our quarterly call. Prior to this spring the industry is going through a transformation and is now being accelerated by the global health crisis.
Arches going to embrace these new realities as opposed to starting to them that continuing our pivot towards coking coal markets have pursuing a reduction in our thermal and exposure.
And exposure to our thermal assets.
And next we plan to focus on the items, we can control to achieve our vision of a socially responsible producer of low cost high quality products to the global steel industry.
With that operator, we'll conclude the call I look forward to reporting to the group inside toward stay safe and healthy every war basic [noise].
Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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