Q1 2021 Arch Resources Inc Earnings Call
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Good day, ladies and gentlemen, you are standing by for the Arch Resources, Inc. First quarter 2021 earnings call.
At this time, we are assembling our audience from plan do we underway. Shortly we appreciate your patience. Please remain on the line.
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Good day, everyone welcome to the arch Resources, Inc. First quarter 2021 earnings conference call.
Today's conference is being recorded and I would now like to turn the call over to deck Slone Senior Vice President of strategy. Please go ahead.
Good morning from St. Louis and thanks for joining us today, while we were conducting this morning's call from arches boardroom I want to assure you that the team is widely spaced and following CDC guidelines closely.
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 may be 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 that we filed with the SEC 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 to the investors section of our website at arch RFC Dot Com also participating on this morning's call will be Paul Lang, our CEO, John Drexler, Our C O O and that gives you.
Our CFO after our formal remarks, we'll be happy to take your questions with that I'll turn the call over to Paul Paul.
Thanks, Dick and good morning, everyone. We're glad you could join US. This morning on what we know is a very busy earnings day, and the natural resource and industrial spaces.
I'm pleased to report that the first quarter was business as usual here at arch in all the right ways.
Once again the team demonstrated its commitment to world class execution operating with precision and efficiency. Despite a tough start to the quarter related to the lingering impacts of the pandemic.
As expected the performance at our core our core coking coal operations improved steadily as the quarter progressed and the vaccine became more widely available, culminating with an exceptionally strong March.
Even with less than ratable volumes, we achieved an average coking coal cost for the quarter of less than $60 per ton anchored by the Leer mine, which continues to identify new ways to ratch. It up its performance trim costs and wring out additional efficiencies.
That strong performance at Leer underscores yet again why we're so excited about the impending startup of the longwall at Leer, South while we don't expect Leer south to bachelors cost performance immediately we do expect it to break out from the gate strongly driving our segment costs down and we absolutely believe it has.
The potential to reach approximately the same intensely competitive cost structure is lear overtime.
I'm also pleased to report that the final development work at Leer South continues to go very well.
Just a few months away from the commissioning of the longwall and we're more than confident than ever about the transformational impact the new mine will have on our cash generating capabilities to reiterate we expect it to boost our total coking coal volumes by more than 40%.
Our average coking coal cost by several dollars per ton improve our average coking coal quality and cement our position as the world's leading supplier of high vol. A coking coal. Moreover, leer south startup will represent another significant step in our ongoing transition into a pure.
Play coking coal producer.
As previously announced we continue to explore strategic alternatives for our legacy thermal assets with the clear stipulation that we'll only move forward with the sale if the perspective buyer can meet our rigorous requirements for a clean and responsible transaction.
At the same time, even as we explore the potential sale of those assets. We continue to drive forward with a two pronged strategy of optimizing their cash flows and working down our final reclamation and bonding obligations in an accelerated fashion.
During the first quarter, we made good progress on both fronts, achieving a solid margin in our thermal segment, while moving ahead aggressively with the accelerated closure of our coal Creek mine.
As previously discussed coal Creek represents approximately $50 million or 25% of our total asset retirement obligation in the powder River basin.
And we plan to work the vast majority of the coal Creek liability down by mid 2022.
During the first quarter, we made excellent starting that effort perform the necessary work to reduce coal creek's a R O by approximately $8 million.
Over the next five quarters, we expect to reduce the mines total obligation by another $30 million to $35 million.
Shifting to another critical facets of our strategic transition. We also made important progress during the quarter and refining strengthening and advancing our long standing commitment to environmental social and governance performance.
As we've stated many times in the past, we believe that aligning our strategy with the world's evolving ESG priorities is essential for long term success in our business and we continue to move forward on multiple fronts to do just that.
Of course for arch this begins with our deep and unwavering commitment to excellence in safety and we continue to set a high bar in that arena.
The first quarter, our lost time incident rate was roughly 30% better than our industry, leading 2020 average and four times better than the national average.
In addition arch continued to build out its ESG disclosure efforts, achieving the top score in our ISS peer group and the environmental category.
Moreover, we reported during the first quarter are continuing reductions in scope, one and scope two greenhouse gas emissions, which were down 55% since 2013, and keeping with our strategic shift towards higher value, but lower volume metallurgical products and we've intensified our reduction targets.
For our carbon dioxide equivalent emissions to conform to science based targets for our two degrees Celsius future.
Most significant of all perhaps we continue to realign our value proposition to reflect our focus on steel markets and keeping with the global economies intensifying focus on de carbonization.
We believe that a significant amount of new steel will be required in a decarbonising world given steels importance and urbanization.
Infrastructure development and construction of the central Decarbonize, the carbonization tools, such as mass transit systems wind turbines and electric vehicles.
Before I pass the call to John for some additional comments about our operational performance, let me spend a few minutes on what we're currently seeing in the coking coal markets.
First let me say based on our own experience in recent weeks U S. East Coast Metallurgical markets remained solidly supported with strong continuing interest and are yet to be committed volumes from customers in every major region.
The driving force behind this constructive tone as you would expect is the strong resurgence in global steel production.
As we sit here today steel output appears to be on course to recover to pre pandemic levels as soon as this year.
Steel prices in all major markets remain at historic highs steel mill capacity factors have rebounded to healthy levels and key importing countries, including India are returning to the seaborne market to satisfy pent up coking coal needs.
Clearly this is a solid backdrop for coking coal markets, even with the current drag on overall seaborne demand being exerted by Chinese import policies.
Moreover, E U S East coast metallurgical price assessments continue to enjoy a 30 to $50 per ton advantage to premium quality Australian coals, which we believe is entirely merited based on our direct experience in these markets in recent weeks.
In addition, there continues to be a silver lining to the Chinese import restrictions.
We've been able to expand interest in U S coal generally and our Leer brand, specifically, which we believe is an ideal fit for this marketplace given its great value in use when integrated into a blend.
While we have yet to sign additional commitments into China, given our limited availability in the second quarter Chinese interest for deliveries in the second half of the year remained strong whether such deals ultimately get inked or not we believe we've made valuable inroads into this market.
Which as we all know is the source of more than 50% of the world's steel supply.
In closing, let me reiterate that we remain sharply focused on executing on our clear and actionable strategy for growth and value creation, we expect steel demand to remain well supported for the foreseeable future as a global recovery shifts into high gear.
Infrastructure, driven stimulus efforts March forward and as the build out of the new low carbon economy were sales with our low cost metallurgical assets are high quality product slate industry, leading ESG performance, our carefully cultivated customer base, along with our best in class growth project, we believe arch as well.
Positioned to profit in this environment and drive long term value for our shareholders.
With that I'll now turn the call over to John Drexler for further details on our operational performance during the first quarter as well as what we're expecting for the balance of the year John.
Thanks, Paul and good morning, everyone I want to begin by recognizing once again the tremendous efforts our team has put forth in managing COVID-19.
As indicated we experienced a dramatic decrease in the number of Covid infections at our operations over the course of the quarter due in large part to the quickly expanding availability of the vaccine.
To increase employee access to the vaccine and to drive rapid uptake, we engaged with our employees about the benefits of the vaccine established incentives related to the vaccination process and work to streamline the logistics process, which included conducting several vaccine clinics at our mines.
We are pleased with the success of these efforts to date, which we believe has contributed significantly to the rapid decrease in cases at our operations.
We continue to work to drive the percentage of our employees, who are vaccinated still higher.
As we have stated many times in the past and as Paul has underscored yet again today arch is single highest strategic focus remains the expansion of our world class coking coal platform.
I'm pleased to report that during the quarter. Just ended we made exceptional progress on multiple fronts and supported this mission critical objective.
Yeah.
Of course, the ongoing work at Leer South is the most overt and transformational example of our ongoing efforts to further elevate our metallurgical business and as Paul noted it was an exceptionally eventful three months at Leer, South as the commissioning of the longwall grows ever closer.
As we sit here today, we have taken possession of the longwall system, including all 212 212 longwall Shields, we have nearly completed development work on the first longwall panel. We have commenced work on the younger underground setup room at the end of the panel with a longwall system will initially be deployed we have taken.
Livery of all the rail infrastructure, including the locomotives manned trips and other hauling equipment and we have completed all the major work on the preparation plant.
In short we are in excellent shape as we begin the final drive to the finish line.
I am enormously proud of the exceptional work the operations team has done in a period of just a little over two years to get us to this point.
Most impressive of all in my opinion is the fact that the team has successfully kept the project moving forward on time and on budget in the face of the many obstacles distractions and personal challenges that accompany the global pandemic.
Of course, there is still a great deal to do but we are in excellent shape and well on track for a mid third quarter start.
Over the next several weeks, we will be completing the setup room and begin the underground deployment of the longwall system.
Les over five miles of underground rail line and upgrade the minds belts and motors on the slope to accommodate the huge step up in volume that is about to take place.
As previously discussed the slope work will result in a 30 day outage at the mine.
Which is scheduled to occur late in the second quarter.
To bring all of this work to a successful conclusion and to facilitate a smooth and effective startup. We are taking full advantage of the adjacent Lear team has great experience and expertise which of course is one of the many advantages of building Leer South that is nearly identical totally are in so many respects and so close in proximity.
D as well.
As indicated Leer South is the most obvious example of our ongoing efforts to build out strengthen and augment our existing coking coal portfolio, but it is far from the only one in fact, we made critical progress at every one of our metallurgical mines during the quarter on initiatives that should enhance our metallurgical segment performance going forward.
At our linchpin operation the Leer mine the team remained sharply focused on continuous improvement in everything it does and that commitment is self evident.
And the systematic way Lear has improved its performance implemented new technologies trimmed costs.
And wrung out efficiencies.
During the first quarter layers unit cost declined to $40 per ton, even with the lingering impacts of the pandemic.
And despite the less than ratable shipment levels based on our internal estimates that's $35 per ton lower than the average unit cost for the U S coking coal industry.
While we don't expect to achieve that $40 per ton level every quarter, we have locked that figure in our sites.
And as Paul noted that kind of performance is precisely the reason we are so enthusiastic about the prospects of the startup of Lear's companion mine Leer South.
Shifting now to our Beckley mine, which as you may recall produces around 1 million tons of low vol. Coal annually, we took steps during the quarter that should set the stage for an increase in incremental volumes in the minds annual output levels.
Interest in our high quality back from product continues to exceed our productive capabilities by a wide margin and we believe the steps we are taking there should pay significant dividends.
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At Mountain Laurel, we continue to make good progress in getting our cost structure to a solid sustainable place post the transition from a longwall to room and pillar mining.
As you May recall, one of the key components of that effort was the transition of mining activity from the Odyssey, which is leased to the number two guessing which we own in fee.
We now have three of our five continuous miner units operating in the two guessing and.
And expect to move our fourth continuous miner into operation and that seemed later this year.
In addition, we are beginning to reap the benefits in the marketplace of a meaningful step up in product quality associated with the move to the <unk>, where the sulfur is lower and the overall metallurgical characteristics are more advantageous.
Turning quickly to our first quarter operating execution one of the most noteworthy aspects of our performance was our positive upward trajectory as the quarter progressed.
After a slow start due principally to COVID-19 related impacts in January and early February our performance improve steadily and systematically throughout the period.
It's encouraging and we fully expect that positive momentum to continue in Q2.
As a result, we are anticipating an increase in metallurgical shipments of approximately 15% in the second quarter and quite obviously additional improvement in Q3, when the Leer South longwall starts up.
Even when taking into account the ramp time.
As far as our legacy thermal operations, we expect Q2 results to be generally in line with our positive first quarter performance, even was still soft thermal demand and still high stockpile levels at U S power plants.
Counterbalancing those factors to some degree we expect west up to produce and ship at a higher level in Q2, and keeping with our much improved export market environment.
Equally important though is the progress we made on shrinking the thermal operational footprint during the quarter, we were able to complete work totaling more than $10 million towards reducing our pier b asset retirement obligation with most of that work occurring at coal Creek, where we expect to complete the vast majority of the final reclamation work by mid 'twenty.
'twenty two.
In summary, we are pleased with the strong operational execution of our metallurgical platform as well as our excellent progress in expanding the platform's capabilities.
And we are pleased with the ongoing execution on our thermal strategy as well, where we are demonstrating our still significant capabilities for generating free cash while simultaneously shrinking the footprint of those operations.
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 few comments on our first quarter performance beginning with our metallurgical segment, where cash margins were $24 13 per tonne for the quarter.
Benefiting from an improved pricing environment and strong cost control with unit costs below $60. Despite the impact of COVID-19 in less than ratable volumes.
On the thermal side, while John noted the impressive reclamation accomplishments. It's just as important to note. The first quarter margins of roughly a dollar per ton despite transportation challenges throughout the quarter.
Taken together first quarter per ton segment margins were the strongest we've seen since the middle of 2019 and.
And we expect to improve upon that performance over the remainder of the year with the Leer South startup.
Turning to cash flows and liquidity.
First quarter operating cash flows totaled $6 million, which was negatively impacted by a $34 million net working capital increase.
First quarter is typically one where we see inventory build in advance of the great Lakes business that this year's increase was larger than normal given the improvement in production over the course of the quarter as well as an expected ramp up of export thermal shipments in the second quarter.
Capital spending for the quarter was $77 million, including nearly $60 million of Leer, South project costs and $6 million of capitalized interest <expletive>ociated with the project.
Maintenance capital for the quarter was just $11 million with substantially all of that related to the metallurgical segment.
Our primary financing activity for the quarter was the successful closing of the second tranche of tax exempt bonds.
Italy $45 million at an interest rate of just $4 125%.
Based on qualifying expenditures to date, we received nearly $29 million of gross proceeds for use in the first quarter with more than $16 million that remains restricted on our balance sheet at March 31.
Yeah.
We finished the quarter with unrestricted cash of $237 million and total liquidity of $250 million.
While cash levels were in line with our expectations availability under our credit facilities was lower than typical.
Availability is determined a month in arrears with our March 31st availability based on February receivable and inventory levels.
As we've mentioned we saw improvement over the course of the quarter with March production and sales levels are the highest in the quarter.
That improvement has been reflected in the availability under the facility subsequent to quarter end as we've seen an increase of more than $15 million.
Finally, while we do not include restricted cash in our reported liquidity the remaining tax exempt bond proceeds will become available to us as we complete the Leer South development.
With the majority of the remaining funds expected to be released in the second quarter.
Lastly, I'd like to comment on a few aspects of our guidance for the second quarter and the remainder of 2021.
Yeah.
The only change in our guidance is with respect to interest expense, which has increased slightly due to the additional tax exempt bonds.
While the remaining annual guidance is unchanged I wanted to address some of the quarterly cadence.
Both our metallurgical segment cost and capital spending will be influenced by the Leer south timing with.
With the highest cost per ton and a significant portion of our remaining capital spend expected in the second quarter.
Before we see a meaningful step down in both in the back half of the year.
Thermal segment cost per ton is also spect is also expected to be higher in Q2 than the rest of the year. Following the typical seasonal volume pattern.
This sets up for substantially improved earnings and a return to generating free cash flow in the back half of the year.
And initially those cash flows will be used to bolster liquidity reduce debt and continue to address reclamation obligations.
Once we've made sufficient progress on those fronts, we expect to resume capital returns to shareholders.
With that we're ready to take questions operator, I will turn the call back over to you.
Thank you.
Ladies and gentlemen, if you would like to ask a question at this time. Please press star and then one on your Touchtone phone.
If you are on a speaker phone you might have to pick up your handset or de press your mute function. So the signal can reach our equipment.
Again that is star and then one if he would like to ask a question today.
Okay.
We'll take our first question.
From Lucas pipes from B Riley Securities.
Hello, everyone. This is actually Matt key here asking a question for Lucas.
What what percentage of seaborne commitments, Hey, how's it going guys what percentage of seaborne free minutes if any.
At this time are currently scheduled for China in 2021 and is there a general target that Connie Argentina aiming for in terms of China sales Derek during the year. Thank you.
So Matt this is John Drexler. Good question as we look at our overall guidance that we've provided for our net book.
We've indicated that 75% of our book is going to go into the export.
Market as we look at the amount that we view going into the Asian market of which obviously, China would be a part of.
We've indicated that we expect about 20% of our book to go into that market now that has not traditionally been China, where it's been going too, but as we indicated.
Earlier or late in 2020, we did see an opportunity to book business into the China market, which we did.
Over the course of four quarters, which.
Which we think has been advantageous to the opportunity that's been out there you know as we sit here today and look forward as we've indicated we see additional opportunities into China.
We think that's a silver lining to the overall issues that are going on right now between China, and Australia, and we will take advantage of that longer term I think you know our view is that ultimately does get worked out in the meantime, though we will take advantage of seeing if there are opportunities to get our product into China.
And we think it will be well received.
And potentially give us further opportunities longer term into that market.
Matt This is Dan <unk> and just to build on that a little bit. So while we do absolutely view this as opportunistic because of what's happening with Chinese policy regarding Australia and imports.
Our experience so far and our engagement suggests that we really might be talking to some folks who are going to be in our book longer term and so that's certainly encouraging so while there certainly is an aspect of this which is offered in this day. We do believe we are creating some long term relationships I. It's been a good experience so far so where fee.
Your line positively about that and as we've indicated we don't have a whole lot of coal.
To sell this year and then we.
We've noted we only have about a million tons at the midpoint and we're being very careful about how we place those times, we we want to as we stated before expand both the breadth and the depth of our customer base as we bring on Leer, South and we really sort of begin to build that book for the longer term.
We do believe in the second half there are some opportunities for for additional sales into China, potentially and whether those come to fruition or not remains to be seen but again. The conversations are good the interest remains very high and in fact would add look it's simply that the tone of the market continues to feel quite constructive for us overall so despite.
You know the.
The Chinese policy issues, which are resulting in the significant disconnect between Queensland price can U S East coast pricing the market tone to us feels constructive we don't envision any issues really with placing the remaining volumes that we have available for the rest of the year quite frankly, we have more coal we'd be we'd be eager to do.
Put it into the market because the demand has been has been significant so we're feeling quite good about all that Matt I think it's important to note that even currently work we're sold out through Q2, we're turning away business for for prompt interest on the met side and once again further indication of what we see as strong markets moving.
Forward and as Dirk said.
With 1 million tons left to move we feel very good about our opportunities as we move forward.
This is this is an important issue. So I think just kind of the last little bit of color.
You know obviously.
As you look at forward curve, especially the low.
The steep increase in <unk> prices in the back half of the year.
Market is building their own that they think this is going to get resolved, whether that's right or not its clearly out there, but you know you look at the pricing the day CFR into China is about or in China is about $220.
Yeah, its largest arbitrage I think any of us have seen its about $100 right now.
Seems that this will get solved at some point in time.
But as Dirk said, you know we're going to take advantage of this you know we're gonna users. So not so much to put off a spot vessel or two we're going to use to build our customer base.
Important market.
Got it this is a really helpful detail I really appreciate it gentlemen, and just a quick macro question for me just to wrap things up here.
Given that U S steel up weighted pricing has held up really well here probably longer and better than I think a lot of people thought kind of going into this period.
What's your kind of current expectations for U S met coal production in 2021 or is it kind of improvement do you expect other kind of producers in that region to be able to ramp to kind of keep up with this a strong.
A strong kind of a free market here.
Yeah, Matt it's deck and in line I'll, just I'll start listen we saw as you know we've seen a lot of rationalization out of the U S. Here over the past two years or so 2018 quite frankly, we were at around 80 million tons of metallurgical coal production. That's al said to 72 million tonnes in 19.
A 57 million tons in 'twenty, we absolutely believe there is some amount of that production that can come back button, but we think there's a fair amount of it that is that is either out permanently or at least persistently and that it's going to take a much higher price. So we could certainly envision use.
S metallurgical supply bouncing back in the mid sixties. This year again some of that reduction was simply mine's running at lower capacity factors running fewer shifts et cetera, but when you go back to Q4 of 2018, there were actually a 163 coking coal mines in Q4 of 18 operating.
In Q4 of 'twenty, there were only 108 and while we haven't had a chance to look at all the data yet for Q1, the MTA that it's not all in as yet it looks like we're going to see something very comparable in Q1 of 2021. So we're not seeing a return of.
Some of those mines that shut down those higher cost operations. So we think there is that ongoing structural change as we see degradation of depletion, particularly in central Appalachia of some higher cost mines and so we do think it's going to the U S is going to be a a smaller player going forward. We don't expect a return to that 80 million.
In times that we saw in 2018 really at any point in the foreseeable future, even if we see a meaningfully you know.
More significant move higher in pricing as we should see a little bit of a bounce in terms of demand in the U S. But that's not going to be huge we really are more focused on a 330 million times.
Born coking coal market, rather than the 20 million ton or so north American coking coal market.
But certainly it can help tighten our tightened the market to some degree it's a it's not an insignificant piece of the overall marketplace for us and so we do think there's an opportunity there and certainly we're hearing some of the North American buyers, who are beginning to look around to see okay. If we have to augment our position.
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They bought most of their times and in the fall of 2020 as they always do but if we have to augment our position where are we going to find those times that we've been having those conversations so feeling positively about that and you know Matt I think just to add to that and I think it builds on it and we've talked about it a lot fundamentally the long term view of supply into the market in a market that we.
Over time, continuing to to require additional amounts of metallurgical coal quite frankly around the world on the supply side, there's a challenge of the lack of capital that's available to the marketplace and so.
As the price continues to rise and there is not as meaningful of a supply response is theres been in the past it can.
Put the opportunity to see you know a longer.
Market opportunity with higher prices moving forward and why we feel so fortunate and excited about the position that we're in here.
To get Leer, South completed we think at a very good time.
To put ourselves in a position to be in a position to generate significant amounts of cash quite frankly, no matter, where the market cycle goes we don't think there are that many opportunities quite frankly around the world that we've had here that we've capitalized on and that will move forward with.
Did I say.
Deca, John puts us in a great perspective, the only thing I'd add is when you think about when the volume started dropping in the U S. Metallurgical production prices were quite a bit stronger there in the $1 70 to 180 range sitting.
Sitting here today, you know we enjoy these $1 50 and 160.
If you think that production was being shut down at 15 or $20 higher.
I'm not sure what's going to be needed to bring some of this production back.
Yes.
Got it that's that's really helpful color I appreciate it.
I'll wrap it up there, but good luck moving forward I.
I appreciate all that.
Well I appreciate your interest.
Okay.
Okay.
And again, ladies and gentlemen that is star and then one if he would like to ask a question today.
And we will move on to Nathan Martin from the benchmark company.
Hey morning, guys. Thanks for Oh, no net.
Yes, maybe kind of start off on the met side pricing came in a little stronger than expected you. Obviously know the U S East coast prices continue to be at a premium to the Australian coal it looks like your price some additional export tons since the last quarter, an incrementally higher level.
I was going to ask about your forward thoughts on price and supply demand most of that has been addressed through last few answers.
I would ask you now that China's ban on Australia coal imports have continued since roughly October.
Finding that you are competing more against the Australian tons out there in the supermarket or buyers still hesitant somewhat to shift away from normal suppliers.
I think obviously, that's something that we're going to watch closely as it evolves over time, depending on how long the dispute between China, and Australia goes but as of right now we've not seen a whole lot of movement of traditional buyers into the traditional markets I think longer term there is concern that they.
Go out and buy an adjusted the blends that.
They have gotten very comfortable with in the traditional markets that they are buying from that that could change very very quickly. So we haven't seen a lot of dislocation with that yet, but obviously, it's something we continue to watch closely and it's counterbalanced with some of the additional opportunities that we see as we've discussed.
The Chinese markets.
Just to.
To build on that a little bit and we did talk a little bit about supply demand, but more broadly look this is a significant development in the marketplace. The import restrictions in China, and quite frankly, if China imports less significantly less than the 48 million tons of seaborne coking coal they imported last year that will weigh on the market of course.
Counterbalancing that really is an attractive you know demand story, otherwise and you can certainly see that you know very readily and where steel prices are around the globe. They are stratospheric and continue to continue to be the.
The outlook I think continues to be quite strong for the near term.
If you look at manufacturing the most macro level you look at manufacturing PMI globally. They are at about 55%. So clear clear expansion expansion is sort of trends there. The restarts of blast furnaces continue apace capacity factors are back.
At steel mills are back to levels that they were pre pandemic or approaching those levels. All the discussion about economic stimulus is certainly potentially helpful and could push steel demand higher and continue to provide important support and we're seeing you know big consumers like India get back into the market.
You know in a significant way. So look we're encouraged by the fact that in 2021, we could see just based on the first few months, we could see.
Steel production get back to even back to 2000 2019 levels and happening you know that quickly one year. After the pandemic would be unimpressive rebound and as we talked about the supply on on the U S side of things.
Is clearly continues to be under pressure and Paul said, it well, it's going to take more you know higher prices than des to coax additional times back from the market we think.
And then but when you look around the globe you still see the same sort of level of Underinvestment. The major coking coal producers are guiding lower not higher which is interesting to see so those are significant counterbalances to the Chinese policy you've highlighted so as we've indicated while that certainly is a concern.
Tone in the market that continues to feel constructive we continue to see very good interest in our available tons. The forward curve is showing strength out through 2023. So we're really feeling fairly positively about the market even as we continue to watch the situation carefully and in China.
Great color guys. Thanks, I'm, just just real quickly with those 1 million tons left met you have on price you mentioned roughly sold out for the for the first half it sounds like.
Do you expect to maybe price those you know somewhere in the back half.
Any thoughts there.
Yeah, No we'll move those in the back half of the year in.
All indications from everything we're seeing in the market is that we expect strong market environment to be able to move those tons into.
We're turning away business near term.
And we just think that we'll roll right into the back half of the year and gives us a great opportunity to move that volume at attractive prices I mean, I think at the end of the day to day, it's probably going to go out it's going to go out on index at the time it shipped.
As most of our exports shipments are.
Got it thanks, Paul and then.
Shifting a little bit you guys pointed out you know what we noticed as well that met shipments during the quarter lag reported production numbers any additional thoughts there was it rail service vessel timing other logistical issues and.
Object those additional coal tons to move sorry.
So Nate that good question. So you know we had a strong production quarter and you saw a $1 5 million tons of sales some of its seasonal for us.
Some of our coal moves via the Great Lakes and so the lake season doesn't open until after the first quarter. So that's a portion of it.
We do have a longwall move at Leer coming up here.
So there's some preparation in advance of that in.
Having coal available for the shipments as we've indicated we expect a step up from 15% in our shipped volumes in the second quarter.
And then even further in the back half of the year as we bring Leer South online mid third quarter. So.
Everything is lining up with our plan and our book is as we had expected.
And they certainly that 15% we look we hope that proves conservative when you look at the timing when you look at ship shipping schedule et cetera. There are vessels there right at the end of the second quarter. So we'll see how that plays out but you're right. We build meaningful inventory. The trajectory is quite is quite positive in terms of production. So we feel good about all that but.
That could just be timing, so again, hopefully the 15% is conservative but right now we think that's a reasonable number to share.
Sure and to target.
Got it thanks, and then obviously the 15% you guys just went through.
Any idea can you give us any thoughts on the cadence as yourself those ramp up maybe mid <unk> and the <unk> and even 'twenty two from interest in that perspective.
Well incrementally we've indicated that.
We expect with bringing Leer south online that we're going to see a step up of about 3 million tons on an annual basis.
We're real excited is as we bring leer south on line, but we've acknowledged there'll be you know a quarter or so probably of ramp time, bringing a brand new longwall up and running.
So we've not given specific guidance on the cadence into the third and fourth quarter, but with the mid.
Third quarter startup of the longwall, and then having a full quarter of production in the fourth quarter was that longwall running I think you can back into some high level estimates of what that would mean from a from a volume perspective.
Thanks, John and then finally just thoughts.
It would be when you might get more specific on your update on your plans for Black Thunder, obviously things with coal coal Creek sound like they are progressing as planned also it seems like west Elk tends to get overlooked at times when discussing your plans for your your legacy thermal <expletive>ets in the future. So can you give us an update on that line as well. Thanks.
Yes make us Paul I'll start off and maybe talk about the macro picture and let John maybe talk specifically about what's going on but look I think we feel pretty good about the strategy that we put forth.
Last fall.
You know, where we're basically following a two pronged approach in the first is we're going to continue to shrink our footprint.
That first starts with coal Creek, where we're working very rapidly to bring down not always easy.
R O, but we're also bringing down the bonding amount.
And second we will continue to you know run these things for cash and look for.
Possible buyer of the <expletive>ets.
I believe and I you know I think it's true that as we carry on this parallel path, particularly as we dropped a liability and bonding the universe of buyers will expand and that's <unk>.
Some point they will cross and we'll just keep this past going what I like about it is we control. This process and you look at the first quarter, John and his team made great progress.
<unk> executed on the plan.
So I'll add I'm real proud of the teams out there and I think Paul really hit it on the head when we have the opportunity to control the process and I think it is really what makes us unique.
In the basin in the <expletive>ets that we have there tier one <expletive>et with black Thunder.
And so real opportunity to continue to generate significant cash even in a challenged market environment, we've talked about it before the history of that operation as it reduced its production volumes over the last decade to be responsive to the market environment continued domain and outstanding cost structure, and we expect that moving.
Forward as they continue to focus.
On on reducing the footprint as well generating cash taking a portion of that cash and reducing the footprint. The team at coal Creek has done a great job as well we're off to a great start we feel real good about our progress.
The remainder of this year and into early in the first half of next year and our ability to complete the vast majority of the reclamation thats going to be required there.
And so we will continue to move down that path in earnest.
And be responsible as we move forward.
<unk> stack I mean, a real advantage that they over the next five quarters, we can focus intensively at coal Creek, which really isn't a meaningful contributor hasn't been a meaningful contributor to EBITDA, while we optimize cash flow the black Thunder and continue to operate at current levels, which again is important because we want the thermal <expletive>ets to pay their own.
Way here with the ultimate closure costs, and we feel very confident about their ability to do that and generating significant amounts of cash at black Thunder. Certainly helps helps helps drive that so again, it's a nice position to be and to have you know to be able to focus on on final reclamation at coal Creek, but still opt in.
<unk> cash generation at Black Thunder.
Perfect. Thanks, guys again for your time and take care.
Yes, thanks very much Nate.
And we have a follow up question from Lucas pipes from B Riley Securities.
Hey, good good good morning, and thank you very much for taking the follow up question then.
It's a it's a bigger.
Thanks for your question, but.
Over the past few years whenever there was a question on M&A.
If I recall correctly the answer was along the lines of look we have yourself and when was that.
Whenever we benchmark anything against yourself.
Leer South is just so much better value.
So I wonder again, this is bigger picture, but with the new yourself here upon completion could M&A would make more sense in the met coal space. What are your thoughts on that and then maybe more broadly.
Feeling pretty quiet on M&A and coal more broadly and wondering if you have any updated thoughts on what could maybe evolve over the coming.
Six months thank you.
So this is Paul I'll start off and if a deck of John has anything to add that'd be great. But you know I think everybody can agree that consolidation ultimately.
I should say ultimately that decreases costs overall is a good idea and.
Beyond that principle, though it gets difficult to actually get these deals done.
At the end of the day.
One of the things I think as we get Leer, south up and running and continue to address our.
Situations powder River basin and demonstrate that we can in fact get this liability down get this bonding.
Juice the world opens up considerably as we continue to head down this path.
Yeah.
It's hard to envision exactly how this plays out because every company not only in the U S, but even overseas has.
Each of them have there kind of a situation like we have with the powder River basin. So if the stars aligned I think it makes sense, but right now our focus is controlling what we can control and the best thing. We can do overall is the path we've had it down in the powder River Basin, We're gonna take care of coal Creek then we're good.
Move onto Black Thunder.
Lucas This is John Drexler, I think one of the fundamental things you've seen from arch is its focus also on that tier one low cost <expletive>et base and I think that's served us well and it's what we've indicated over time that we're committed to and I think it lends back to Paul's discussion that we will tread very carefully on any op.
<unk> we have to.
Evaluate any opportunity and through the lens of what's the quality of the reserves and the cost to produce and so I think that's a significant component of any evaluation. Its typically left a high bar, but that doesn't mean that there aren't opportunities out there as we move forward and that will have the opportunity to evaluate.
Lucas it's Dan Thanks for jumping on we know you have a lot of competition.
A number of other calls going on so we appreciate you being on the call.
Look I would simply add that.
We have said again and again the point of Leer, South I mean, we took a we took a pause.
In terms of.
Returning cash for a range of reasons market, driven et cetera, but also we took a pause to build a bigger cash generating machine, we've done that and we're really quite comfortable simply operating the <expletive>ets, we're going to have with with Leer, south generating a lot of cash and ultimately looking at it as strong capital return program as we've as we've had in the past.
So that continues to be our primary focus again as you know and as we've said many times, we will kick every tire and look at what's out there and maybe theres a diamond in the rough that you know as we as we indicated with Leer south for from for many years before we made the decision to move forward with Leer, South we are always going to be screening everything against the organic.
<unk>, we had already in house, we talked we said that for about three years and then sure enough. We decided that this smart growth project there with Leer South we move forward with it. It's really the same holds now and we still have a very significant reserve base. The leer reserves can accommodate additional investment we are in absolutely no hurry.
To move forward with any of that but that's what we will be screening any opportunities against and that's a pretty high bar. So we're going to be very careful as we as we <expletive>ess any opportunity out in the marketplace.
And Meanwhile, our.
Quite comfortable continuing to run the <expletive>ets, we have and returning cash.
At the end of the day Lucas our fallback is from the next 20 years effectively which these four mines are set up to do we're just going to generate cash and return to shareholders.
Very very helpful. I appreciate all the color and best of luck and thanks again.
Lucas. Thank you I know as Dirk said, we know you're busy today.
Yes.
Oh, just another earning season.
[laughter] once you do Lucas thank you.
Sure.
Yes.
And we'll take a question from Paul Gait from is from our international.
John.
Thanks, very much indeed, guys.
Thank you very much.
And look your IC answer my question, probably in the last sentence.
Of you apply from previous although it was just just on the conversation around sort of M&A.
I suppose my question was how do you compare that because of course buying back your own stock is exactly the same as an acquisition and so far as it increases the Polish exposure to the reserve base that you already have and you get to do it at zero premium and zero execution risk.
Just making John.
And what would it be you know how would you compare that with sort of anything else because I sort of struggle to see.
Something in a let's say the St jurisdictional sort of exposure you guys have in the U S and here I'm thinking about you know that's a bit the recent troubles that we've all seen in Mozambique. For example, you know still in the political bit combined with the quality and cost position of the reserves.
And the likes that you've got.
Thanks.
You know, it's a pretty high bar versus sort of just increasing our exposure to what we already have it.
But.
Yeah, Paul I think you're right I mean at the end of the day, we don't.
Increase our costs or trade or trade down or a quality product.
Yes, we're comfortable with where we are at if that's what we ended up doing from the next decade, that's fine.
Yeah, Yeah, Yeah. The company as you say you wanted that.
But that last sentence.
The previous question, but thank you very much indeed.
Well thank you Paul.
And there are no further questions in the queue I would like to turn the conference back over to Paul Lang for any concluding remarks.
I'd like to thank everyone for your interest at arch and taking the time today to participate in our quarterly call.
As we noted earlier it is a busy day.
I guess my final thought is when we announced the plan to develop Leer South in February of 2019, we had great hopes and expectations for the project sitting here just a few months for the longwall start up our enthusiasm for the project has not diminished if anything its gotten stronger.
John and his team continue to do a great job managing the huge effort that are on the cusp of delivering a major mining project on time and on budget.
This in and of itself is a great accomplishment.
We're excited about how it will continue to transform arch for the years to come.
With that operator, we'll conclude the call and I look forward to reporting to the group in July stay safe and healthy everyone.
Yeah.
And once again, ladies and gentlemen that does conclude today's conference. We appreciate your participation today.
Okay.
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