Q2 2021 Arch Resources Inc Earnings Call
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[music].
Good day and welcome to the arch resources incorporated second quarter 'twenty 'twenty 1 earnings Conference call. Today's conference is being recorded I would now like to turn the call over to deck Slone Senior Vice.
Our strategy. Please go ahead.
Good morning from St. Louis and thanks for joining us today before we begin let me remind you that certain statements made during this call including statements relating to our expected future business and financial performance may be considered forward looking statements. According to the private Securities Litigation Reform Act forward.
The present 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 file 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.
As a result of new information future events or otherwise, except as may be required by law I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the investors section of our website at arch our S. C. Dot com also participating.
Looking for on his call will be Paul Lang, our CEO, John Drexler, Our C O O and Matt Gili <unk>, our CFO after our formal remarks, we'll be happy to take questions with that I'll now turn the call over to Paul Paul Thanks, <expletive> and good morning, everyone. We're glad you could join us on the call today I'm pleased to report for the arch team continued the execution.
On the food at a high level in the quarter just ended making strong progress on a wide range of strategic and operating metrics.
In our core metallurgical segment, we delivered another top tier cost performance for the for.
Captured of nearly 50% increase in gross margin generating more than $61 million.
<unk> achieved a 20% increase in sales volume and drove towards the finish line of Leer, south with the termination efficiency and purpose.
And our legacy thermal segment, where we're focused on simultaneously harvesting cash and paring down our long term closure obligations we generated.
The only $40 million on gross margin achieved.
Achieved a nearly 25 per cent increase in sales volumes during the traditionally the like shipping quarter <unk>.
Expanded our 2021 sales commitments by roughly 7.6 million tonnes, and we completed 15 of half a million dollars of reclamation.
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Based on the asset retirement obligation.
In short the team hit on all cylinders, while laying the foundation for still greater success in the future.
When you factor into the equation the much improved dynamics, we're now seen in both the coking and thermal coal markets.
We believe the stage of set.
Our paddle and value, creating second half of the year.
Clearly, we had a number of significant accomplishments in the second quarter.
However, the most consequential of these developments in my view was the progress we made in bringing the Leer South mine to near completion.
In many respects the startup of this best in class.
For our stroke project in less than a month will represent the culmination of arch is disciplined and carefully orchestrated 10 year effort to build a true.
Truly world class coking coal franchise.
We're confident we've done just that with the powerful foundation of the Lear and Leer South longwall mines.
Which we expect operating tandem for the next 20 years, we believe we will solidify our strong and durable position as the low cost coking coal supplier of the United States and the premier supplier of fiber.
Paul a coking coal globally.
Notably, we expect to realize the benefits of the new Leer South.
The volumes at very short order at.
At the time when the overall industry is struggling to contain costs and maintain volume levels due to underinvestment, we expect leer south to drive our already highly competitive unit costs lower to further enhance our high quality metallurgical product slate and to expand our own.
In coal output by an incremental 3 million tons per year.
Moreover, we believe we are poised to ramp up the new mine into a strong and resurgent market environment, an eventuality that we had envisioned many months ago and that fortified our commitment to move ahead with the project. Despite all of the significant pressure.
The associated with the global pandemic over the past 15 months.
Most important of all of course is the fact that Leer south will further enhance the already considerable cash generating capabilities of our coking coal portfolio for a wide range of market environments.
Pressure in summary, we expect the Leer and Leer south to serve as the core of the arch value proposition for decades to come.
Complementing our strategic pivot towards steel in coking coal markets of course was the decision to shift to our harvest strategy with our legacy thermal assets.
Is the plan on that front remains the same as we've said in the past and it's very simple, we're going to optimize cash generation minimize capital spending and systematically reduce our long term of closure obligations. We delivered on all 3 aspects of this plan in a very significant way in Q2 as previously.
As Lee noted.
As you know we've been exploring strategic alternatives for a highly competitive thermal assets in the event that we could identify a way to bring forward. The remaining cash flows associated with these operations and of structured and responsible manner to the.
The date, we've been unsuccessful in.
And we're comfortable with that fact.
Say this because we continue to believe that our thermal assets with their low cost high quality products and talented workforce are on an excellent position to generate cash in excess of their final closure obligations.
In addition, we believe arch is well equipped.
Equipped to manage the long term winding down and reclamation of these assets in a way that aligns with our commitment to the highest ESG principles.
In particular, we believe we are well equipped to balance the long term imperative of of net zero carbon future, while balancing the interests of our thermal employee base.
On the south of the communities in which these mines operate and our customers that continue to rely on thermal coal to provide affordable and reliable power to their consumers.
But the progress we reported in the second quarter, where we generated a gross margin of nearly $40 million with our thermal assets while at the same time, making.
Significant progress shrinking their operating footprint underscores why we believe we can do this effectively and in a value creating way.
Before turning the call over to John Let me share a few brief thoughts on the markets.
As discussed steel markets are in full and robust recovery.
The present global steel output on pace to return the 2019 levels if not above during 2021 of those strong market dynamics spurred steel prices to elevate it and even historically high levels starting at mid 2020, where they remain today for.
Fortunately.
After the lag related to the Chinese import policies global coking coal prices have now followed steel and iron ore prices higher.
Moreover, we believe the current market. The current pricing is well supported by ongoing steel demand and constrained coking coal supply growth.
Our significant exposure to market based pricing, we believe we're on an exceptional position the <unk>.
Capitalize on these positive market dynamics in the second half of the year, particularly with Leer South volume entering the mix on the very near future.
I would also note that thermal coal demand and pricing.
In both the domestic and seaborne markets are stronger than we've seen in many quarters.
This resurgence in the thermal markets was driven by natural gas trading above the for dollar level of at home and a strong global economic expansion supporting prices internationally.
While our strategy for managing the long term 1.
With all of our legacy thermal assets remains unchanged. These market dynamics have the potential to facilitate significant levels of cash from these mines in the year.
Of the vessels.
In closing.
<unk>, let me reiterate that we remain sharply focused on executing on our consistent and clear strategy.
<unk> for long term value creation of growth.
We expect steel demand remains strong in the near to intermediate term.
As the global economy recovers infrastructure, driven stimulus efforts pick up steam in the build out of the new low carbon economy of resumes with our low cost of metallurgy.
<unk> for assets high quality product slate industry, leading ESG performance top tier of marketing and logistics expertise and of nearly complete best in class growth project. We believe we are in an excellent position to thrive in such an environment.
With that I'll now turn the call.
Alerts John Drexler for further details on our operational and marketing performance during the second quarter as well as additional comments on what we're expecting in these areas for the balance of the year John.
Thanks, Paul and good morning, everyone as Paul just discussed the arch team made excellent progress on virtually every 1 of our primary operating.
Operating objectives during the quarter just ended it was an impressive performance by almost any measure and I want to thank the entire workforce for their exemplary work, great dedication and consummate professionalism during a tremendously busy and eventful time.
Before I go any further I want to take a moment to recognize the loss of a life of 1 of our operations.
On 1 of our valued team members Geoff Wendland sustained of fatal injury last week, while performing of repair at Black Thunder.
Jeff was 31 years old and worked as a mill right at the mine alongside his mother father sister and brother.
He had been a member of the Black Thunder family for 13 years and leaves behind the wife and for children.
We are keeping Jeff on the Wendland family on our thoughts and prayers during this difficult time.
Let me begin with the quick recap of the performance of our core coking coal segment during the second quarter, where we boosted our shipment levels by roughly 20%.
Expanded our per ton margin by 25% increase.
So our gross margin by nearly 50% and achieved a small but meaningful reduction on our already first quartile cost structure.
At the same time, we are within weeks of completing our transformational growth project at Leer South.
In summary, we demonstrated clearly and compellingly that we have a potent cash generating and.
Increase in place today and net we are on the verge of bolstering those capabilities significantly in just a few weeks time.
Let me take a few minutes to expand further on the status of Leer, South where the team is driving towards the finish line with focus dedication and energy.
Late last week the project team commenced our planned.
Engender day suspension of development mining during which we will be performing the final preparations for the startup of the longwall.
Specifically the team is in the process of tying the greatly upgraded conveyance systems, which must now accommodate a fourfold increase in volumes to the new preparation plant.
On 30 at the same time, we begin to transport all of the longwall equipment underground and into the setup room using the brand new rail system.
Once those final capstone activities are completed we plan to start up the longwall at the end of August.
It is a momentous development for arch and a remarkable achievement for the project team and the organization.
<unk> as a whole.
In the span of just 2 and a half years of time period that included a global pandemic. The Leer South team has brought this large and multifaceted project to the cusp of completion on time and effectively on budget.
I don't want to commend the entire workforce for this truly impressive achievement.
Munis age as indicated sets the stage for tremendous value creation for all of our stakeholders in the decades ahead.
While we expect to take a few weeks to work the kinks out and to hit our stride, we fully anticipate that the new longwall will be making a significant contribution to cash generation in Q4 and that it will be more or less fully.
Fully ramped by the beginning of 2022.
We are excited by the immediate benefits and volumes cost performance product quality and margin generation and thrilled by the market environment into which Leer south is expected to ramp.
As a reminder, we expect the leer south ultimately to generate up to 4 million.
Which at cash costs in the low $50 per ton level, a level of that positions Leer south like its sister mine leer to generate cash in a wide range of market environments.
When markets are strong as they are now that cash generating capability is expected to be more significant still.
At today's high Vol.
Ton base of $199 per metric ton for instance, the netback per short ton after taking into account transportation is around $145 per ton.
Such of margin promises to have an immediate impact on the corporation's overall financial performance quite clearly.
Let's transition.
<unk> price of our legacy thermal segment, which also turned in an impressive performance during Q2.
As Paul indicated our primary focus with this segment continues to be the harvesting of value even as we simultaneously shrink our operating footprint and reduce our long term closer of cadre of obligations.
But our Q2 performance.
<unk> now added yet again that the cash generating potential of our thermal assets remain.
Asset base remains considerable and that we have the potential to accomplish a great deal in a fairly compressed timeframe.
During the quarter just ended we generated a gross margin of nearly $40 million and expanded our per ton cash margin nearly 3.
Highlights from 98 per ton in Q1 to $2.62 per ton in Q2.
We did this by moving quickly to capitalize on improving demand and pricing dynamics in both the domestic and international marketplace.
In fact, we achieved a nearly 25% increase on our sales volumes during Q2, which is true.
Additionally, the lightest shipping quarter of the year as we moved quickly to fill customer orders at a more than ratable pace and to take advantage of emerging spot demand due to escalating natural gas prices hot weather and a pickup in economic activity.
Importantly, we also mobilized quickly at west Elk in response to much improved.
Proved export market conditions, nearly doubling our shipments at that mine quarter over quarter.
Equally important we also made great progress on our ongoing efforts to systematically worked down the long term closure obligations principally through our accelerated closure efforts at the coal Creek mine.
Since the beginning of the.
The year, we have reduced our powder River basin asset retirement obligation by nearly 10% and we expect to make significant additional progress during the year's back half.
I also want to provide you with the quick rundown of our marketing activities in Q2.
As we acted to take advantage of the significant strength in both metallurgical and.
Thermal markets.
And our core coking coal business, we committed an additional 300000 tons for delivery in 2021, bringing our total commitments to $7.1 million tonnes, and leaving just 700000 tons still to sell at the midpoint of our overall sales guidance.
I would add debt we are seeing various.
Very substantial interest in our limited remaining volumes and anticipate having the opportunity to place them on a selective and strategic manner given ongoing market strength.
On the thermal side, we committed an additional $7.6 million tons for delivery in 2021, which prompted us to raise our annual sales volume guidance by 5 million.
On tons again, we expect these incremental sales to be highly leveraging and to boost our thermal cash generation significantly.
Before wrapping up let me share of 1 quick highlight from our intensive and ongoing efforts to extend our industry leadership in the environmental safety and governance Arena.
In May we became the first.
First U S metallurgical coal producer to join responsible steel and ESG driven standard and certification initiative for the global steel industry.
We view responsible steel as a valuable for them for collaborating with our steelmaking partners as together, we endeavor to create a more ESG compliant steel value chain.
In summary, we are pleased with the strong ongoing momentum and commitment to operational excellence in our metallurgical franchise.
And tremendously excited to be on the cusp of augmenting and expanding our capabilities still further with the leer south of startup.
Likewise, we are pleased with the steady and ongoing progress on our thermal strategy, where the thermal.
Team again demonstrated are still significant capabilities for generating cash even while driving forward with an accelerated reclamation plan.
With that I will turn the call over to Matt for thoughts on our financial performance Matt.
Thanks, John and good morning, everyone.
I'll begin as usual with the discussion of the quarters cash flows.
And our liquidity position.
Operating cash flows in the second quarter total just $20 million as we experienced another significant build in working capital.
Metallurgical prices in thermal volume strengthened throughout the quarter, resulting in a substantial increase in our accounts receivable.
Additionally, as Paul noted we.
We spent more than $15 million in the quarter for reclamation in the powder River basin.
Capital spending for the quarter was $71 million, including $50 million of the yourself project development and $8 million of capitalized interest.
Maintenance capital for the quarter total just $13 million with substantially all of that related to the metallurgical.
Segment.
We finished the quarter with unrestricted cash of $187 million in total liquidity of $242 million.
Cash declined from the first quarter, but as expected availability under our credit facilities increased meaningfully in line with the higher working capital.
While quarter end liquidity is below our preferred level, we anticipate the June 30th will be the low point as cash generation improves in capital spending declines in the back half of the year.
Turning to the balance sheet, while our total reported debt is largely unchanged for March 31, the amount classified.
Electrical liability has increased by more than $100 million.
As a result of a change in the presentation of our convertible notes.
The note indenture includes the stock price threshold that was exceeded during the second quarter, which means the notes are now convertible at the option of the holder during the third quarter.
The notes.
As the current premium to the if converted stock value. So it is extremely unlikely that any holder would elect to convert.
However, because of the option to convert is not within our control the GAAP rules require the debt to be classified as current.
Unsurprisingly, we have had no holders convert thus far this quarter.
The.
The convertibles are also impacting the earnings per share calculation for the first time this quarter.
Net calculation assumes that we would settle the par amount of the notes in cash and any premium with shares.
Which results in approximately $1.2 million shares included in the fully diluted share count for the second quarter.
While the cap call that.
We purchased as part of the note transaction would offset substantially all of that dilution the.
Of the accounting rules do not allow that to be reflected in the EPS calculation.
Yes.
Next I'd like to comment on a few aspects of our guidance for the remainder of 2021.
As John noted, we have committed additional volumes in our thermal segment.
Increased sales guidance by 5 million tons at the midpoint.
And our D DNA guidance shows a corresponding increase.
Our cash SG&A is now expected to be $66 million at the mid point.
Largely reflecting increased marketing and logistics logistics expense associated with export thermal shipments.
<unk>.
Along with increased incentive compensation accruals, resulting from expected strong operating and financial performance.
Capital spending is now expected to be in the range of $210 million to $230 million with the increase attributable to the modest additional capital required to complete the Leer South development along with operating.
Opportunistic optimization efforts elsewhere in the metallurgical segment.
While we don't provide specific guidance for cash flows. We currently project strong cash generation for the remainder of the year, given current market conditions and reduced capital spending.
While working capital will likely remain elevated we would.
Would not expect to see increases similar to those we've experienced thus far this year.
As we consider how to deploy these cash flows our immediate priorities will be fortifying, our liquidity position and paying down debt, while simultaneously reducing reclamation obligations.
With that we're ready to take questions.
Later, I will turn the call back over to you.
Thank you.
I would like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star 1 to ask you.
We will pause for just a moment to allow everyone the opportunity to for now.
Our first question is coming from David Gagliano with BMO capital markets. Please go ahead.
Hi, Thanks, good morning.
Question, Thanks for taking my questions.
The first question is actually related to the information provided on.
The in the press releases regarding incremental pricing on the met side.
And then I just wanted to see if you could.
On a square it with the commentary on the call specifically.
Looks like 1 point of 3 million tons of met where.
And.
Committed and priced in the in the second quarter as you kind of back into the math versus what was.
Please go ahead of the first quarter it works out to about $106 a ton for those incremental tons and I'm wondering if you could just kind of comment on either of the quality of that coal or.
For the timing of that pricing considering your commentary.
Price of about net back for high volume pricing right now of the 145 Bucks a ton.
Yes, Dave This is John Drexler.
So as you look over the course of the quarter. Obviously, there was a lot of the movement in market price.
So depending on when vessels shift in the timing.
Or are those vessels.
It could have had a significant influence on on the on the pricing.
You know you look at the portfolio.
Of the 75% of our volume the SEC sported we've kind of stayed consistent debt.
On the splits of that export is going to wind.
<unk> of the the splits of our production so about 70% of our met is high vol. A 15% low vol of 15% high vol. B, so while not getting into a great level of detail on vessel by vessel shipment and quality by quality, if you spread that all across the board of the quarter on the average pricing.
At least in the way.
Lineup with the map you do kind of average back to some of the numbers that you've targeted that you've indicated clearly, though the opportunity as we sit here today is significant improvement in market pricing as we look to the back half of the year demand remains very strong.
Supply responses has been not.
We're doing a significant we've.
We've seen.
The customers struggled to get some of the committed.
Volumes that they were supposed to get from other producers I think that speaks to the tightness of the market and so we think theres tremendous opportunity that we have in the back half of the year with the remaining volumes, we have the ship where we.
Think pricing.
We expect to remain for some period of time here.
Okay. So just as a follow up of is it reasonable then to expect.
That other I think it's another $2.2 million tons of seaborne met left to finalize in terms of pricing I think that's the number is.
Is it reasonable to expect that on average to be.
And that 145 or higher zone.
On that you mentioned on the.
Well it is the right I mean, I guess, it's all going to depend on where the market goes, but where we see the market strength right now I think of.
Our expectation is you would expect to see that obviously, our exports are going to Europe, South America growing opportunity into Asia.
As well and a variety of pricing mechanisms, obviously the markets have been volatile, but once again as we sit here and look at the market today.
We remain.
Confident that we will see a significant and meaningful uptick in pricing as we go forward.
Okay. That's helpful. Thanks.
And then just.
Last part of that question direct sales on the China I know previously there was commentary around 300000 tons I think I don't think we heard anything new last quarter I'm wondering if you'd talk a little bit about.
Any incremental progress on direct sales into China, and then my last question, which is completely unrelated.
On the debt.
Ah side on the free cash flow generation, obviously with Leer south coming down.
If you could just talk to sustain the sustaining of sort of expectations for capex on a go forward basis, and then the plans for the free cash flow.
1 of the priorities over the next you know of.
A couple of years thanks.
Yep, So Dave obviously, the opportunity for the industry in the U S to export into China is 1 that.
He has opened over the course of the year with the physician the China's taken with imports from Australia.
There's been a lot of speculation on how long the that opportunity with last as.
As we sit here and as time plays out as we all know things can change very quickly, but it appears that this is likely to remain in place for some time as a result, we.
We've seen a growing opportunity to get volumes into China as you referenced we entered into a term deal beginning.
Q.
Of of 2021 lasting through Q1, 'twenty 2 of vessel of quarter.
In addition to that we've seen additional opportunities.
To put vessels into China.
Right now we've got 3 vessels that we expect to go to China in Q3.
2 of Attunity for 3 additional vessels in Q4 now the Q for opportunity that we see there will all be dependent on where we can optimize value.
And but the clearly the opportunity is there with where the strength in the market is there's a good opportunity of those made go into China.
We'll see.
On an and offerings continue to play out but.
The volumes that we've been selling into China has been well received the high vol. A quality as is.
Something that we think will have a growing opportunity as we see customers in China get to utilize the that quality of coal and see it's the flexibility and utilization and so.
We will continue to take advantage of of the opportunity that we see in the into China.
And Dave of the Chinese buyers continue on this the DAC the Chinese buyers continue to buy on a pretty prompt basis. So we don't have perfect visibility into Q4, yet, but the other point that we would we would want to note is the premium low vol price has.
Moved up significantly from where you know where we were only a few months ago when the GAAP between U S East coast pricing in Australia, and pricing was so significant so now that you've got that much stronger premium low vol price available. We can look at other opportunities in Asia, as well and sort of determined where's the best place to place those.
Volumes and of course, the overlay always is what strategic for long term. So we're trying to make sure we place those tons of the most strategic manner, certainly trying to capitalize on the market strength, we see today and and avail ourselves of that opportunity.
And obviously on the and try to figure out of the best economics, both sort of the shorter term and the longer term so.
Again still some moving parts there, but the opportunity for Q4 also looks like it could be significant at the China should we decide to move forward on that.
And Dave I guess, I'll try and pick up the last 2 parts of your question if I got them right I think.
As we've said in the past our expected kind of go forward maintenance Capex.
All.
1 billion plus or minus.
I think there's a few optimization projects that are out there but.
At the end of the day, that's kind of the ZIP code, we ought to be looking at.
And I guess onto the the <unk>.
A general question on cash flows and future uses.
As you would imagine with the.
Completion of Leer, South you know coming right around the corner.
The good quarter, we had in Q2. These conversations are going a lot more serious and a lot more detail.
We've not finalized anything specific but generally the outline of what we're thinking is.
Pretty much what we.
We said in the past first and foremost we're going to fortify the balance sheet and reduce the portion of our debt.
The second we're going to continue to systematically address the long term closure of the thermal assets and that's either going to be through accelerated reclamation or through.
Of the establishment of a sinking fund.
And finally and probably just.
As importantly, we're going to reward our shareholders for their investment and faith in this management team with the share buyback or a capital return program.
What we haven't settled on is the the vehicle we're going to use for the capital return.
You know I think I foresee restarting the dividend.
Point in time that will either go back to some share of the buyback program or special dividends.
You know at the timing of this of course is all going to be dependent on the market.
If things stay as strong as we think they are for the next quarter or 2 this could move quickly.
If you think back to the presentation, we did on Leer South in 2000.
19 at today's prices the payback of that mine is 18 months.
On the cash generation capability is amazing.
Now the good news out of all of this is excess cash is the high class problem and I assure you we will approach it with thoughtfulness and care.
Okay. That's the answers are all very helpful. I just have 2 really quick follow up I'm sorry.
But the use of my last 1 is just because of all of you mentioned 3 vessels in the third quarter, how much coal is on each vessel I don't know the answer to that and then secondly, just on the I'm, sorry, I didn't catch the whats a reasonable expectation on capital spending.
Moving forward on an annual basis because of much of your question. Thanks.
Yes, So day typically with what we're shipping off the east coast Youre seeing those typically in panamax size vessels of 75000 metric tons per vessel.
Is the opportunity that we see going into China.
We are day looking for opportunities and finding some opportunity.
For tenet is to upsize those so that's the goal of but as John said, that's the sort of the standard the standard vessel size and.
On the Capex front as Paul indicated that run rate going forward, we expect to be roughly around $100 million on an annual basis from a run rate perspective, so clearly in a position to be.
As a as a company generating significant and substantial amounts of cash flow to the more than cover the the modest amount of maintenance capital that we'd need across our operations.
Okay perfect. Thank you very much.
Thank you Dave debt.
Our next question is coming from Lucas.
Pipe with B Riley Securities. Please go ahead.
Thank you very much on good morning, everyone.
Hello, Good day Lucas.
My first question of.
On the thermal thermal coal.
It came up a few times in the response of the prior question.
Kind of how it ties in with the overall capital on Eaton I wondered can you remind us what sort.
Sort of figure.
From an economic perspective.
We're looking at today.
Over what period of time do you look to address that.
Thank you very much.
So.
Lucas.
<unk> of indicated from an E. R O perspective that we're roughly at it approaching $200 million on the on an Roe basis.
We indicated that over the course of the.
First half of the year, we've been able to take steps in efforts to bring that down.
<unk>.
10% per.
Merely through the focus of the closure of our coal Creek operation.
Our Black Thunder Operation also has opportunities to continue to address its footprint at the same time continuing in an effort as we see today to take advantage of.
Of market opportunities and to generate cash well in excess of our reclamation needs as we go forward.
You know as we've indicated and Matt can provide some color as well.
In periods of time, where we have opportunities to reclaim like we have now we will take that cash flow and spend it there and then.
As we move forward we envision.
In periods of time, where we don't have the <unk>.
Significant of an opportunity for performing final reclamation to be taking those excess cash flows and committing them to the reclamation as we move forward.
Yes.
Just to add onto that.
John mentioned the.
The roughly $200 million of Arrow, you know as we look at the end of the year with the work that we perform year to date and looking at the remainder of the year. You know that number is likely to be closer to $160 million as we get to the end of the year.
When we look at the.
The the discussions with the sureties and kind of how we will address that moving forward certainly see.
<unk>.
Some contribution to of sinking fund likely late this year.
Well within the the cash flows that we're generating on the thermal side of things and then.
The the sureties would probably prefer to see something more systematic moving forward and I think that's something that as.
As we look at the the way the.
The business is training that makes it makes sense to us as well ultimately what we'll be doing as John said periods, where we're performing a lot of reclamation.
Probably contributing less to of fund like that in periods, where we're doing a lot less work.
<unk>, a little more but really tying that to the the cash flows that we're generating.
Really on the thermal side of things.
And you know, making sure we're keeping a solid base of liquidity and addressing the other needs, we have such as debt reduction and refinancing.
Yeah, Lucas, it's DAC and just to reiterate like the gross margin in the thermal segment was about $40 million this past quarter.
I think we've indicated that that could be stronger still in the third quarter with some of the developments we've discussed in the the pricing strength of etcetera. So you can see that versus a 160 million dollar arrow and the we're generating a very significant amount of cash and can not only do what we're doing of coal Creek, which is directly reduce.
It is the liabilities, but in pretty short order began at the fees that liability in and of significant way with those thermally generated assets, which we think is key and make sure that of the thermal assets ourselves sufficient that we put aside some cash for their final closure obligations, but then also theres meaningful cash leftover for general corporate purposes.
And Lucas as Paul indicated in his remarks, our focus on our strategy longer term I mean, I think we're very clear eyed with in the long term, what's going to happen.
With thermal coal generation with the ongoing announcements of of retirement of plants et cetera, as we've indicated.
For some time now will be response.
Responsive to that we expect our footprint will continue to shrink from of production standpoint, we're going to be responsible to the market. We continue to believe we've got a tier 1 asset base and the ability to produce.
Low cost thermal production and supply the needs, while generating cash, but once again that will all be dictated.
Bye.
For longer term market demand takes us and where.
Executing and planning for that as we move forward clearly right now, though we're in a we have an opportunity to generate meaningful cash, which we're doing from our thermal assets.
You know I guess Lucas.
On final thought on all of this in kind of standard back when we entered.
The year.
Had laid out of plan of about 18 months in coal.
All of 50 or $60 billion to reclaim coal Creek.
We're 6 months into this we're well ahead of that and the costs are lower.
Directionally of his team are doing an outstanding job of getting this done and it's the very issue that we've talked about.
In the past we think these liabilities are conservative and we're doing a great job taking care of them in a very systematic way in the minds of carefully and Fortunately, bringing those cash flows the bear even while we're doing this work.
That's very helpful really appreciate the comprehend.
So the response from all of you.
My My second question is.
2 layered.
Layer, 1 as we look out to the completion of the yourself and then 2020 to met coal volume whats the reasonable range to expect there and then.
Typically.
The handle the late summer domestic contract season kicks off in.
And obviously.
Very strong steel prices in the domestic market and the very strong market environment there.
How many of this factor into your decision to sell more domestic versus export export prices of course.
Over the failure of a.
Very robust as well so so would appreciate.
The volume outlook.
<unk> there and then how you think about the marketing commercial aspects. Thank you very much.
So Lucas yeah.
With regards to Leer, south and bringing it up online.
In August and you know, maybe the transition to an annual run rate basis.
We have always envisioned leer, south being the sister operation to Lear essentially.
Similar longwall system similar conditions, what have you.
The produce kind of in a similar format to layer over time as we get it right.
Amped up and get it running so the yourself ultimately we envision for.
Producing up to 4 million tons of of metallurgical coal.
As we have indicated in previous discussions about bringing it online into our portfolio. We expect the step up in our annual metallurgical production from 7.
Tons on an annual basis prior to Leer, South to 10 million tons of subsequent to Leer South as a reminder for everyone. The Leer South operation.
It was built out of an existing continuous miner operation called Sentinel Sentinel operated in a different seemed the clarient seem it did produce high vol. A.
<unk> volume.
But that mine essentially has been transforming from that smaller continuous miner operation at a million tons a year into what is now of Leer, South ultimately of 4 million ton of year operation. So that's kind of the the difference in the step up of 3 million ton.
<unk> of your south will be producing.
At a 4 million ton up 2 of 4 million ton annual run rate if that if that makes sense.
And relative to your second question I think as I caught of on the domestic sales we are starting to see those RFP comes out come out.
Yeah look I think you rewind a couple of years, we were about 50.50 for 5 years ago on domestic international.
Continued to drop to about where it will be at about 25% this year.
Lucas I could see us dropping considerably from that.
We set this up with the intent.
Ted of being able to export most of this coal if you recall, we did the deal with DTA, where we expanded our capacity.
And we also have set up our agreement with <unk> at Curtis Bay So on.
Our eyes are set predominantly on the international market look if the domestic prices.
Work out and there is of value to having a certain amount of domestic sales for <unk>.
The reasons everything from train cycling too.
How fast we are paid.
Look we will gladly taken if the values there, but we're quite comfortable putting all of its coal into the international market.
And if we have to.
Look at the stack and on timing just does appear perhaps it's going to be slightly later this year. So we could see we could see settlements occur somewhat later than they have in the past, but as Paul said.
Very comfortable with that and very relaxed about the process and.
The the values they are great and if it's not again we.
Continue to set our sights on the much bigger market, which is the seaborne market and just as a reminder, the seaborne market as the 350 millions on market North American market is arguably 17 or 18 million tonnes. So in any scenario, we're primarily focused on on the seaborne market. If we ended up being 100%.
Committed on the seaborne market that.
We'll work for us.
Terrific.
Very helpful. Thank you very much and best of luck.
Chuck.
Thank you Lucas.
Thank you. Our next question is coming from Nathan Martin with the Benchmark Company. Please go ahead.
Hey, good morning, guys congrats on the quarter.
Alright. Thanks.
Thank you.
A lot of my questions have been addressed but maybe I'll just.
So with a few operational type of modeling questions maybe the.
First if I look at the net side of the business and look at the first half sales.
Can you, let us know maybe how much of the sales of our domestic.
Business. So I guess in other words of the $1.8 million tons of you guys have committed in price for the year, how much of that is still less shift here in the second half.
So Nate I think just once again without getting into a whole lot of specific detail on just running with the kind of what we've always applied as our general guidelines.
About 25% of of our overall sales are into the domestic market, having worked through half of the year.
On that.
You would expect that half of the of that has has been shipped.
Although there is a.
You know of late closure of season at the beginning of the year, but that also affects.
Right at the end of the fourth quarter as well. So once again, just as a general guideline I would say, we're 50% through our domestic commitments.
Okay. Thanks, so thanks for that John.
And then maybe I'll just going over to the thermal side of the business on their great quarter. There. Obviously you guys raised for your guidance.
The shipment guidance of about 5 million tons, you mentioned in your release you expect another strong performance on 3.2.
Is that both from a shipment and cost perspective, and then maybe any commentary on how shipments broke down in the quarter between <unk> and the west Elk.
And you know how.
So you see that evolving here in the second half with both domestic and international demand quite strong.
Yes so.
From from an overall perspective, we've been very pleased with what we've seen in the in the thermal market.
As we look at the opportunity to place additional volumes into those markets.
We put 7.6 million tons to bed.
About 80, 85% of that was on.
Associated with Black Thunder.
<unk> the remaining 15%, 20% so.
The splits to about 6 million tons for black Thunder $1 million of half for West Elk.
We indicated that the opportunity to export.
For West Elk opened up and opened up meaningfully so we've taken full advantage of that and work to get west dealt to us to a position where it's fully loaded for for the position that it's in and we've made great progress on essentially our.
And of Black Thunder, I'd say, we're arguably to a point, where we're essentially sold out as well just given kind of the profile that we see the opportunity for the third quarter from a shipment perspective as its typically traditionally the strongest quarter of the year.
In the basin for the first time in many.
Are there for the second quarter.
Which is typically the weakest.
<unk> was very strong for us in the basin. Once again I think speaks to the tightness in the market and the demand that's out there that additional volume is helping obviously from a cost perspective I haven't touched on this but non us we'll do it here.
Overall given.
Many core strength in the economy.
And what we see from <unk>.
The cost pressures, we do expect some modest inflation as we move forward from diesel perspective from materials and supplies. However, that's all incorporated in the guidance that we're projecting so we have the opportunity to continue to manage with.
The the demand that we see and the strength that we see in volumes moving forward and we're very comfortable that well.
We'll manage that very effectively as we move forward.
This is Paul.
1 of the.
On the thing that struck me in Q2 was.
It was an odd quarter of appear to be as I look back over the last 20 years.
The only think of a handful of times, where Q2 jumped up in volume.
And.
Obviously, it's for a lot of the things we've talked about natural gas.
I also think there is an issue out there that I don't think as I understand there is well understood and that is.
Of the minds did not react I think like a lot of people.
Thought they would.
The volume has picked up in the mines had trouble struggling.
No.
There is an element out there of that.
The belief that there is this endless tap in the pier B.
Probably a little bit misnomer.
The amount of invest.
But that's going on out there has really dropped and the inventory people are carrying are much lower income.
Consequently, the ability to react like the old days I think is disappear.
2 of large degree I think that's what you saw with our impact or a pickup in sales in Q2.
Okay. Thanks for that guys and then I guess.
On the back of the comment Paul are you guys, having any issues with labor is that the.
There may be slowing down any potential supply response.
Nate I'll, let <unk> talk about specifically, but the short answer is no.
Look.
And a lot of ways, we were very fortunate that we did the ramp up of <unk>.
<unk> South we startup that in a downturn, we were able to hire of the mine fully.
Keep.
Keep things online but.
I kind of tell you I know others are having problems, but we're not trying.
The ramp up for do anything exactly crazy, we're just trying to sustain.
It's got a different view of.
The good commentary Paul Nate.
Free with Paul I mean, if you look around the industry. I think you are seeing others struggle and see challenges from a labor perspective, we've got a great opportunity with our portfolio we have.
Have a tier 1 long term low cost assets and I think the workforce sees that they know that they get a fair compensation. Good benefit package outstanding safety performance and they will get to be in an environment that provides them a tremendous amount of opportunity over a very.
Long period of time, and that's very powerful.
And I think we're very pleased with low turnover rates.
With that being said, we're not naive to all of that so we're constantly looking at ways internally to make sure that we're training our workforce giving opportunities.
The people the step up through the ranks and earn their supervisor certifications and get their electrical cards all through training programs that we have in place just to make sure. We continue to provide those opportunities. So we feel real good with where we are with our workforce and how we're moving forward once again, it's not something.
For credit we get complacent on our rest on our heels here, we'll continue to evaluate it but we feel good with where we're at right now.
That's great color I appreciate it guys and then just 1 last thing I guess.
We had a lot of good commentary earlier on the call as far as the potential uses of free cash flow.
It seems like a day in your first goal is to improve your balance sheet maybe.
Maybe 1 question related to that can you give us an idea of what level of the net debt for leverage you would feel comfortable with in this environment.
So we go for moving forward with the what you called the Unmeasured capital return program. Thanks.
Yeah, Hey, this is Matt.
Something free pandemic, we had targeted net debt levels around essentially neutral holding as much cash as as we did debt and the reasons for that fairly conservative stance, we're on a pretty volatile industry, whether it's net pricing or or thermal volumes and the way those can move around clearly as we bring leer south on you know another.
For a low cost asset that's going to hopefully.
On.
Be a homerun in market environments like we have got today, but probably more importantly, as we think about the balance sheet.
On a pretty stable source of cash generation, even in tougher markets.
I think we can at least consider weather.
The other very more leverage makes sense you know the offset to that is as we look at the the markets and their view of thermal coal having to make sure that we've addressed any refinancing risk around the debt. So I think ultimately we're going on we're going to start to move here in the back half of this year towards a much higher liquidity position.
Put.
All of those in a spot much closer to where we've been historically.
We will look at the ways, we can address our debt tower.
Really look at the refinancing risk and to the extent, we can refinance the portion of the near of maturities that we've got and Unfortunately, we don't have anything really that close but to the extent we can refinance those.
I think the path in terms of improving the balance sheet can be a little longer but need to make sure that we're not putting ourselves at any risk as we think about the refinancing of those as well so.
Kind of a.
I will say in an open mind about how we're going to take care of the debt, but clearly start building liquidity first.
<unk> <unk>.
Reducing the debt to give ourselves really the options that we need to take care of debt maturities as they come due is the way we're looking at it as soon as we're in a position we feel we've got debt under control and the capital return is something that we think makes a lot of sense.
Nate I guess the only other thing I'd add is that we have.
The other relatively high class problem.
Our debt is very low cost most of this is.
Our average is under 5% so.
Beyond looking at extending the term loan and maybe paying it down a little bit.
Yes. This is pretty cheap paper were holding and we.
It will be pretty measured on how we deal with it.
Great I appreciate all the information guys and best of luck in the second half.
Thank you day thanks, Nick.
Thank you we have time for 1 final question before we conclude today's conference. Our last question will come from Michael Dudas with vertical research.
Please go ahead.
Gentlemen, good morning, I'm glad the squeeze me in.
What a difference.
Yes, good to hear from 1.
Well 1 of the difference a year makes right.
Hey man.
Okay.
Just briefly I wanted to just touch on something Paul mentioned in his <unk>.
Our prepared remarks.
You talked about the the lag effect certainly of the Chinese situation in Australia and the the.
The import export flows of the of course, starting to catch up that a little quicker than the global coking coal markets.
As.
China, or if things start to normalize and I'm not actually predict when but does that environment.
Still going to allow an opportunity for arch to get above normalized reasonably price prices for their coal even as the shifts occur and I assume obviously of the tightness of the supply market and the lack of response that youre seeing it positions you to do that strategically given your ex.
Dealing with much more different.
For customers than you had in the past zone.
Yeah, Hey, Mike it's deck.
Thanks for the good question look we it's hard to know exactly where this is all going to go clearly we don't profess to have any great insights into when the the issues between China and Australia get get settled.
And if they do the.
I would say that even today, even if this proves to be sort of a longer lasting kind of an issue. We've really set up nicely to visit and positioned ourselves to move these additional volumes into China and are building some relationships that we think could be fairly durable. So we're enthusiastic about that.
Right now, we see a pretty constructive supply demand balance even with the lock out of Australia in tons. So that's positive and if you look at the steel demand and steel production so far.
In 2021 globally and it looks like we're on pace to be back at 2019 levels. This year, if not above in fact.
China is going to be up 7.
On <unk>, if you based on the first 6 months the world ex China is up 1% versus 2019 levels. So a pretty rapid rebound and then when we look at that versus sort of supply on the cooking side.
We had a rationalization of about 35 million tons in 2020 of coking coal supply and so as the.
We look.
Look at that we think that there is going to be plenty of pull here for coking coal volumes, even with continuing tensions there and in the Pacific Basin, with Australia and with China.
So we do feel good about the overall balance of the marketplace. If you look at where China's today, China imported about 4 million tonnes per.
Per month of coking coal last year on average this year last few months, it's been around 3 million tons. So really has recovered a good bit relative to sort of where they were even without the Australian volumes. So again, we feel good about that balance we feel good about our ability to maintain sort of relationships within China.
Quite frankly.
Yes, we have 1 large physical buyer that has signed up for term business and has proved to be a really solid customer and could be part of our order book for a long time, even if things go back to sort of their more normal courses. So again, we feel good about being the we can be flexible that we can react whether the the situation persists whether.
As we have to see of reopening of the gates in China, Australia and volumes either way the balance looks really quite constructive to us as you point out significant under investment for the past few years.
On the pandemic is the only exacerbated that situation so.
We're going to we know the market is the commodity market, we know we're going to.
See peaks and troughs, but overall on balance we see a pretty constructive market environment of for the next 5 years or so.
Michael the.
Of that hit on it the the lack of investment longer term.
It's going to be real interesting to see the impact to that into the markets.
On a long term basis, there's just a lack of investment around the world.
As demand remains high.
With the large mining companies around the world not investing and replacing.
Depleting reserves.
It has the potential to create some very interesting opportunities on the long term as.
As we look for.
That's actually haven't even and if you look at sort of the supply response as I said, we had about 35 million tons of coking coal that was rationalized from the market last year. If you look through the 6 months.
We're on pace for less than half of that return of the market even with these prices and in fact for the first 6 months, it's appreciably last.
Now our assumption is that maybe 15 to 20 million tons comes back into the market, but it's being pulled by much much stronger pricing.
Another data point just for the U S. Q4 of 2018. There were there were 171 coking coal mines are operating if you look at Q2 of 2021 only about 112.
<unk> 3 coking coal mines operating so significant rationalization and really minimal response again, reflecting this idea that there's been underinvestment very few expansion projects announced.
And beyond just the decision not to move forward with investment you have the issue of not being able to if you don't have access to capital.
On the U S and now we're also seeing permitting issues emerge in a significant way in places like Australia, and Canada, and so a lot of a lot of downward pressure on on supply and a lot of a lot of barriers that likely could keep this this market in and of constructive place for a while I guess.
1 final thought on the.
His question.
It was best for you while the the.
The global trade routes kind of rejiggered themselves with the dispute between Australia, and China now that's down the prices came up.
As the stack said, whether this last for another month or another year of it doesn't really matter I think the most important thing from our perspective.
The news, it's clearly opened up a new set of customers in China that frankly, we have not done a lot with for the last couple of years and.
Probably more importantly, we've introduced this high vol, a product which is relatively unknown in China.
And we're getting great reception for that and I.
China for us it's been of great positive.
Well, it's a good thing arch zig when everybody else Act. Thanks, gentlemen.
Thank you Mark next day.
Thank you that concludes today's question and answer session. Mr. Lang at this time I will turn the conference back to you for closing remarks.
I think I'd like to thank everyone for your interest in arch and take the time to participate on our quarterly call today.
These are exciting times at arch, our mines are running well and we are ready to deliver leer south into a robust market.
The collective effort that made this possible is truly an indication of how strong our entire team is.
Operating employees that worked through the pandemic with focus and professionalism for the marketing group the place us in a great position to capitalize on the current environment into the corporate staffs of creatively financed in support of the effort during an unprecedented period I am very proud to be associated with such.
For the outperforming team and eager to move beyond the development phase of the significant project.
With that operator, we'll conclude the call and we look forward to reporting to the group in October stay safe and healthy everyone.
This concludes today's conference call. Thank you all for your participation you may now disconnect.
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