Q3 2021 Arch Resources Inc Earnings Call
Excuse me, ladies and gentlemen, thank you for your patience in holding your conference will begin in a few minutes again. Thank you for your patience in holding your conference will begin in a few minutes.
[music].
Good day and welcome to the Arch Resources, Inc. Third quarter 2021 earnings Conference call. Today's conference call is being recorded I would now like to turn the call over to deck Slone Senior Vice president of strategy.
Good morning from St. Louis and thanks for joining us today, while we're conducting this morning's call from March 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, 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.
Our forward looking statements, whether as a result of new information future events or otherwise, except as may be required by law I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the investors section of our website at arch RSC Dot com.
Also participating on this morning's 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 that the arch team continued to deliver across a wide range of strategic and operating objectives during the last quarter.
In our core metallurgical segment, we commence longwall production at the Leer South mine after a well executed two and a half year build out.
Capitalized on strong market dynamics generated $118 million in gross margin, which was nearly 100% of increase for the segment from the prior period.
We achieved another strong shipping quarter and maintained our highly competitive cost structure. Despite the planned pre startup outage at Leer, South and an increase in sales sensitive costs related to higher sales prices.
In our legacy thermal segment, where we're focused on simultaneously harvesting cash.
Paring down our long term closure obligations, we generated approximately $58 million a gross margin of 43% improvement from the prior quarter.
We further reduced our powder River basin Arrow with additional final reclamation work at coal Creek.
Flex up production to capitalize on strong pricing.
Both domestic and international markets and leverage those near term volumes into a greatly expanded book of higher priced business not only in 2021, but also in the outer years.
In short we continue to execute on our clear and actionable strategy for long term growth and value creation throughout the quarter.
In doing so we set the stage for upward momentum in sales volumes operating margins and free cash flow yield this coming quarter and in 2022.
Turning to our rapidly evolving capital allocation plans with the Leer South longwall now commissioned and in ramp up mode. We intend as previously stated to prioritize the restoration of our balance sheet to its pre 2020 level.
Central to that effort, we intend to pay down debt and or build cash in order to return to a minimal net debt position.
At the same time, we plan to maintain our sharp focus on simultaneously, reducing and defusing the long term closure obligations at our thermal assets through the establishment sinking fund.
Unfortunately, given the excellent near term cash generation outlook. We believe we can make excellent progress on all of these objectives over the next few quarters, even as we take the first steps towards resuming a modest capital return program.
In keeping with this view the board has initiated a 25 cent per share quarterly dividend beginning in the fourth quarter should circumstances continue to merit.
The board plans to evaluate more robust capital return mechanisms in the coming quarters.
Overall, we continue to progress in our strategic pivot towards steel and Coke and coal markets.
Hey from power and thermal coal markets with the startup of the Leer South Longwall, we took a quantum step forward in our transformation into a premier global producer of high quality coking coal.
At the same time, we continue to drive forward with our efforts to reduce the operational footprint of our thermal assets, while simultaneously unlocking there's still significant value.
Central to this effort arch expects to reduce the asset retirement obligation for its powder River basin mines by about 15% during 2021, principally through accelerated reclamation of our coal Creek mine.
Year to date, we've prudently arrow from roughly a $190 million to approximately $170 million and expect to reduce another $10 million by year end.
At the same time, we intend to direct a small portion of the free cash generated by the thermal asked by the thermal segment during 2021 to a sinking fund that will serve to set cash aside to pre fund the final closure obligations for these mines.
Given the strong committed book of thermal business. We now have in place for 2022 and beyond we should be in an excellent position to continue to build this fun during future periods in a smart and systematic manner using cash generated from our thermal assets.
Longer term, we still expect the cash generation from these assets to far exceed their closure obligations with the balance available to fund other corporate priorities and objectives.
With this we continue to drive forward with our efforts to unlock the significant remaining value in these legacy thermal assets.
Towards this end, we leveraged our harder and capacity to flex up our production in 2021 during a period of intense market tightness to secure commitments for the outer years.
Over the last five months, we've made thermal coal commitments totaling more than 100 million tons for shipments in 2022 and beyond and we've now built a strong contract base for both our powder River Basin, and Colorado operations for several years into the future. Most importantly of course.
A strong book of business should ensure robust and predictable cash flows from these assets in the near to intermediate term.
As we've stated many times in the past arches objective is to transition into a pure play metallurgical producer.
However, we are intent on winding down our thermal assets in a careful orderly and responsible way and in a manner that takes into consideration the interests of our many stakeholders, including our thermal segment employees the communities in which we operate and U S power consumers.
Before I turn the call over to John Let me share a few comments on the coking coal markets.
The ongoing rebound in global steel production and the way to wait to the pandemic continues to drive strong demand and robust pricing in the seaborne metallurgical coal markets.
Through August World Steel production was up more than 6% versus the pre pandemic here of 2019, which is an incredible snapback.
Meanwhile, Global coking coal supply continues to lag with exports from the world's largest suppliers, Australia, the United States, and Canada down more than 20 million metric tons when compared to 2019.
As you would expect that mismatch in supply and demand has put significant upward pressure on the market.
Lifting the prompt price of our principal product high vol, a coal to $390 per metric ton F O b the vessel.
While volatility is a fact of life in the commodity business. We believe the overall dynamics appear constructive in the near to intermediate term.
In short we see this as an exceptionally opportune time to be ramping up our leer South mine and in doing so greatly expanding our overall coking coal volumes.
Looking ahead, we expect global steel demand continue to increase around the world supported by the ongoing build out of large.
Steel Mills in Asia has the world gears up for the new Green economy.
With our World class metallurgical asset base premium products like industry, leading ESG performance and top tier marketing and logistics expertise, we're confident that we're well positioned to generate substantial long term value for our stockholder base and other key stakeholders.
With that I'll now turn the call over to John Drexler for further details on our operational and marketing performance John.
Thanks, Paul and good morning, everyone as Paul laid out we made excellent progress on virtually every one of our key operating marketing and ESG objectives during the third quarter.
On behalf of the entire senior management team I want to commend the arch resources workforce for yet another quarter of tremendous dedication exemplary work and consummate professionalism.
I'm proud to be associated with such a high performing and talented group and I fully believe that the team's unwavering focus on operational excellence sets the stage for even greater success in the future.
Let me start with our core coking coal segment, where the most momentous development of the quarter quite obviously was the start up of the Leer South longwall.
As Paul noted the operations team did a spectacular job of bringing that world class asset to completion in the face of the pandemic supply chain constraints and inflationary environment that collectively stress the cost and availability of key goods and services at all of our operations.
Of course, because of the team's herculean efforts to keep the project on schedule and on budget. We are currently in the process of ramping the longwall in an environment that should deliver exceptional shareholder value and shortening already rapid payback periods still further.
As indicated the Leer South longwall started up on August 27th and we have spent the first two months of operation lining out the technology and integrating the various systems.
I'm pleased to report that we are making excellent headway in that effort that the leer South operating team is moving up the learning curve very quickly with the assistance of key personnel from Leer and our other metallurgical mines.
And that we're well on our way to achieving a strong sustainable run rate by early 2022.
While the 30 day outage in advance of the longwall start up the gradual ramp in production at Leer, South early inflationary pressures and about a $2 per ton increase in sales sensitive cost associated with higher realizations all weighed on our average per ton metallurgical segment cost.
We nevertheless executed efficiently during the quarter and maintained our strong position on the low end of the U S coking coal cost curve.
Of course, we expect to achieve steady improvements in operating performance at Leer, South going forward, which should act to counterbalance many of the inflationary pressures noted earlier.
We also achieved a solid shipping quarter, despite seeing two vessels with late quarter late can slip from Q3 into Q4.
Given the systematic ongoing ramp at Leer, south as well as logistics chain related challenges in several late year late cans, we have adjusted our coking coal volumes for full year 2021.
We hope to outperform against the midpoint of the guidance, but there are a number of moving parts here and we think a more conservative approach is warranted.
As previously indicated are just focused on obtaining the best price for its high quality products, whether in the 350 million ton seaborne coking coal market, where we expect to ship 75% of our volumes in 2021.
Our and approximately.
In the approximately 20 million ton North American market.
In recent weeks in keeping with past practice, the North American steel producers have begun to lock in their cooking coal requirements for 2022.
We have participated in these tenders and have committed approximately 400000 tons of 2020 to business to date.
Of these awards, we have committed low vol and high vol. A call at both fixed prices of approximately $230 per ton and prices linked to the U S East coast indexes.
We are pleased with these commitments and view them as a good fit for our overall contract book and are continuing to participate in the remaining North American tenders.
As the North American business concludes we will continue to focus our attention on the international Arena, where we plan to leverage our significant terminal throughput capacity strong brand awareness logistical expertise.
And where the outlook for both demand and pricing remains robust.
Looking ahead to the fourth quarter, we expect a modest increase in coking coal sales volumes when compared to Q3, followed by a more significant step up in quarterly volumes beginning in the first quarter of 2022.
While markets will continue to be volatile we project significant improvement in our fourth quarter realizations with an expectation that 25% of our metallurgical output will be shipped to north American customers.
And 75% will be exported.
Of the 75% to be exported one third will be shipped into Asian markets with a total of three vessels into China.
The remaining two thirds of our export volumes will move into Europe, and South America.
I'm also pleased to report that our thermal team continues to deliver exceptional results as well despite the ongoing pressures associated with a declining domestic marketplace.
As you know our focus on the legacy thermal side of the house is to exercise extreme capital discipline and to systematically shrink and offset our long term closure obligations while.
While at the same time, optimizing there's still significant value of these assets in a smart and responsible manner.
Paul detailed the strong progress we continue to make in shrinking our operational footprint.
What was most impressive in Q3 and my view was the fact that we accomplished this while at the same time flexing up our production levels to serve the near term needs of our utility customers, who are grappling with a rapidly rebounding domestic economy and escalating natural gas prices.
The upshot was a 25% sequential increase in our third quarter thermal shipments to a level that we expect to be sustainable in the fourth quarter as well.
Perhaps most significantly we leveraged these incremental 2021 commitments into a significant expansion of our book of business in 2022, and 2023 and even beyond.
Through today, we've committed more than 70 million tons of <unk> coal for delivery in 2022 at an average price across all of those tonnes at approximately $16 per ton.
As a reminder of course, we typically provide guidance for the thermal segment as a whole which includes west elk in the mix.
Based on our existing domestic commitments as well as well as already locked in but not necessarily priced export volumes. Our expectation is that west elk will produce more than 4 million tons in 2022 with roughly half of those tons going into the export market.
As indicated we intend to provide more explicit guidance for the segment as a whole in February but hopefully that provides you with some useful building blocks for modeling purposes.
That effectively leaves our powder River.
River Basin asset sold out for 2022, and our West Elk mine is fully committed domestically for 2022 with only a small amount of export business yet to be finalized for next year's back half.
We believe that we have locked in volumes and pricing in 2022 alone that should deliver a gross margin dramatically in excess of our entire asset retirement obligation in the powder River basin.
Now, let's turn to a quick recap of our ESG execution.
As those of you who have followed the company for some time know the arch team deep commitment to excellence in safety environmental stewardship community engagement and the highest business ethics is a hallmark of our corporate culture.
During the third quarter arch once again demonstrated our overarching commitment to safety as our single highest value achieving a lost time incident rate of <unk> 98 per 200000 employee hours worked.
Which is roughly three times better than the industry average.
While we arent satisfied with that result, and wont be until every one of our operations achieved a perfect zero every single year, we continue to set the industry standard for safety performance among large integrated coal producers.
In addition, we maintained our perfect record in both environmental and water quality compliance during the first nine months of 2022.
Do you consider that we have tested over 100000 water quality parameters at more than 570 water outfall. During the course of this year without even a minor exceedance you begin to understand the level of precision and care that is being applied by the arch operations team every single day.
In summary, we are pleased with the ongoing transformation of our already advantaged metallurgical franchise and remain constructive on the near to immediate intermediate term outlook for global coking coal markets Mauro.
Moreover, we believe that our legacy thermal assets are better positioned than ever to contribute significant excess cash.
And substantial complementary value for our shareholders, even as we execute upon our careful responsible and well funded long term wind down plan for these assets.
With that I will turn the call over to Matt for thoughts on our financial performance.
Thanks, John and good morning, everyone.
And as usual with a discussion of liquidity and cash flows.
We finished the third quarter with unrestricted cash of $210 million and total liquidity of $254 million.
Both slightly higher than June 30 levels.
While earnings were much improved in Q3, not all of that improvement was converted to cash in the quarter.
Operating cash flows totaled $65 million well below our reported EBITDA.
We experienced another significant build in accounts receivable totaling $66 million.
Due to the increase in seaborne metallurgical prices it accelerated in the back half of the quarter.
Additionally, we are required to provide $19 million for margin requirements.
To export thermal hedge positions that are tied to new castle pricing.
And lastly, we spent $8 million in the quarter for reclamation, because we continue to aggressively reduce our closure liabilities in the powder River basin.
Capital spending was $64 million, including the final development expenditures and capitalized interest for Leer South.
Looking ahead to the fourth quarter cash flows will increase significantly as market conditions in both segments remain extremely favorable and capital expenditures return to maintenance levels.
While we may see continued growth in working capital if prices remain elevated.
Margin requirements will reverse as the hedge physical sales are completed.
Additionally, reclamation spending is projected to decline from the levels seen earlier in the year as we near completion of our planned near term efforts at coal Creek.
Next I'd like to elaborate on a couple of topics that Paul discussed starting with our approach to reducing liabilities that are thermal thermal operations.
We have always viewed this effort as having two prongs. The first prong in our priority is to perform reclamation work when possible and as Paul and John have both discussed that is exactly what we've done this year on an accelerated basis.
The second part of our approach acknowledges that there will be times in the mining sequence that don't allow for significant reclamation give.
Given the progress made at coal Creek to date, we will reach one of those points in the fourth quarter.
And we now plan to shift to the second prong by directing some of the cash flows from our thermal mines to a sinking fund.
We have collaborated with our surety partners to develop a program for building this fund to pay for future reclamation.
Part of that program, we have agreed to contribute minimum amounts of $15 million in the fourth quarter and $30 million next year to this fund.
And given the solid thermal outlook the John just outlined we will likely make contributions above those minimum amounts.
In short we plan to pre fund the mine's closure obligations and we expect the funds to build to the aero amount over time.
In advance of drawing down the funds in future periods to pay for final reclamation as it's performed.
I also wanted to provide some additional thoughts around capital allocation.
As just discussed fourth quarter cash flows will be much improved and we expect that strength to extend into 2022.
We've been clear that our initial priority is to strengthen the balance sheet and in the fourth quarter that will primarily be in the form of increasing liquidity.
As we move into next year, we plan to pivot to reducing debt.
While we have not settled on a specific mechanism for that yet we will consider both the term loan which while low cost is also the nearest maturity.
As well as the convertible bonds.
As a reminder, our intent with respect to the convertibles is to utilize cash for the principal amount at a minimum in order to minimize dilution.
Finally, the improved outlook, along with the Leer, south startup and reduced capital spending makes this an appropriate time to resume a recurring quarterly dividend.
For the fourth quarter. The board has approved a dividend of <unk> 25 per share to be paid on December 15th to stockholders of record on November 30.
With that we're ready to take questions operator, I will turn the call back over to you.
Thank you. Thank you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If youre using a speakerphone. Please make sure your mute function is turned off to allow.
So your signal to reach our equipment again press star one to ask a question.
Pause for just a few moments to allow everyone an opportunity to signal for questions.
We'll take our first question from David Gagliano with BMO capital markets.
Okay, great. Thanks for taking my questions honestly, we could take that a lot of different ways. There's a lot of information yet.
Going on.
I think I'm going to try and focusing on the thermal side first.
On the <unk> I think you said or maybe not Jeremy you said 70 million tons of thermal committed at $16 a ton for 2022 that is that correct and if so does that include any of that west Elk volume and how much and what was the price for that west out volume.
Hey, Dave This is John Drexler, and you're exactly right. There is a lot going on and it's an exciting time. So happy to report on all of that and let me clarify the 70 million tons that we discussed in the prepared remarks, that's P. R. B.
Pier B that we said is priced at approximately $16 per ton.
As you know we report as a thermal segment and we indicated that we've got 4 million tons that we expect to ship from West Elk next year, which is higher than it has been previously given the market dynamics there of the $4 million about half of it will go into the domestic market and half of it will go into the export market.
And at this point, we're not ready to provide any specific pricing guidance for that but wanted to give you. The basic building blocks, especially with the <unk> Foundation to lay out there obviously, that's a good piece for us as we move forward.
Okay and then.
A couple of related questions the remaining volumes.
In the out years can you give us a breakdown.
How much you have committed in 2023 and at what price same same numbers is 2022.
And then also if you could bigger picture speak to that.
The previous plans I believe are to kind of wind down the business, 50% rough.
Roughly I think it was like 2022 and 2023, obviously with this guidance 70 million, it's kind of flat year over year, it's actually up a little bit in 2022 versus 2021.
What's the slope after 2022 of the wind down as we go into 'twenty three 'twenty 'twenty four.
So Dave I'm sure others will jump in here, but I'll go ahead and start I think from the beginning.
We've looked at our strategy in the <unk> in the thermal segment, specifically I think we're very clear eyed that over the long term, we're going to continue to see pressure as plants close down overtime. It's why we've had such a tremendous focus on reducing and managing the footprint there that doesn't change for us, but what we've said from the beginning is that we would be.
Sponsored to whatever market conditions present themselves.
And do it in a way that doesn't require us to provide significant and meaningful capex.
To the segment and I'm real proud of the team that.
Is managing all of the thermal segment too.
How they're responding to the opportunity that we have here. So as we sit here today will continue to be responsive to it.
A very positive market environment.
Longer term as that market will shrink will be responsive as we have been we won't change our focus on managing the footprint, but I think one of your most important questions as kind of the path going forward.
We're not going to provide specific guidance for years beyond 'twenty, two but as we indicated in our prepared remarks in this market environment and with what we're seeing from utility interest.
We are layering in significant volumes into <unk> into 'twenty, three 'twenty, four which once again just gives us more confidence in our ability to generate cash as we move forward in multiple years and we've already talked about.
A portion of that cash being set aside.
For final reclamation is as we go forward.
David This is Paul.
The bottom line as well.
Nothing has changed kind of in the macro picture in our view.
What you saw US do in the last five months was take advantage of kind of a unique situation.
The market got tight we still have the ability to flex up and respond to that market.
In order to provide short term volumes, we leverage those into long term volumes from 23% to 25.
And we were able to do it at some very good prices.
But at the end of the day, the glide path down.
We're going to do exactly what we said we're going to shrink this footprint, we're going to do it in a logical way, we're going to be systematic about it.
The opportunity arises where we can generate a little extra cash we will but.
We're pretty sober about where this is heading and how we should be addressing it and the best example of that is coal Creek.
We'll keep mining at coal Creek in a limited fashion as we complete reclamation, but.
At the end game is the same we're working towards closing the operation permanently.
This is Dan just to reiterate what both John and Paul have Sal.
Look the harvest strategy for us for the thermal assets was always principally about one thing which is minimizing the amount of capital spend. So you know our objective there continues to be to invest as little capital as possible really just sort of subsistence levels and continue to operate it.
At current run rates to the extent possible as Paul said it was an opportunistic move here to take advantage of the market that we saw and so look our goal is to is to meet consumer requirements is to generate cash for final closure that continues to be a strong focus of ours, Paul indicated that at coal Creek, we will.
<unk> mined there you know in a limited fashion as long as there is demand or at least in the near term, but we still have a skinny that footprint down dramatically and by the end of this year. The total Aero at coal Creek will be less than $20 million. So we've done what we said we would do which is again skinny down the footprint reduce the asset retirement obligation, but we still want.
To generate as much cash as we can as we as we look to the long term closure obligations and also to avoid leaving a meaningful stranded assets. So we will continue to be opportunistic, but the focus will.
We will be to maintain as little capital spending in the basin and at West out because we possibly can and simply harvest the cash thats still available for an asset and assets that are still have significant value.
Okay. Thank you for that just two other ones.
Yeah, just two quick follow ups one on so first of all on the on the thermal just to round it out.
I think in the prepared remarks or the press release wherever I think I said it I think you said that total 120 million tons sold forward at this point.
In future years, we got 70 for 2022.
And we said David stack, we said more than 100 million tonnes, and we haven't really broken it out we obviously the.
The 70 that we've committed for 2022 only a small portion of that was actually committed this year. So there's a lot of volume in the out years.
Do you assume that we were sitting at whatever 50 million tons or so when we've done additional 20 for 2022 that would mean, there's another 80 million tons or so for the out years and just to reiterate what John said, it's a substantial book for 2023. So we are in a very solid position really strong foundation for 2023. So.
At least into 2023 and even into 2024, you are looking at meaningful continuing cash flows from the thermal assets that are already at this point locked in.
Okay, and then just okay. Thank you for that and then relative to the $16 price for the 70, that's been locked in.
For 2022, 2023, and the volumes of the $80 million has been locked in in the out years.
Up or down versus at $16 price and if you wanted to sell some number that'd be great.
Yeah, we're not going to give specifics in that number but as you look at what's happened in the market here recently, David you've seen all of the near term pricing.
Indications in the market and those that follow the market theres been a real opportunity here near term and we've seen substantial improvement in price.
And so the.
John that 'twenty two period, it might be a little bit backward dated from there, but however, rest assured we're building a very strong book in those outer years and at levels and in prices for new commitments in those outer years that had been above where you've seen.
Outer periods from a historical perspective.
Prices in those outer years are moving up Dave. So we've seen some lift here continue to see lift.
Reality is there's just been very limited investment in new coal production really everywhere domestically and as well as internationally and as a result, there is a bit of a scramble right now as generators look to find additional volumes with gas prices as high as they are at around $5 Theres just been a strong level of burn inventories have come down and so.
Look we're very focused on meeting the requirements of our customers. They have a need and we are doing what we can to respond and that goes beyond just 2022, we're trying to help them build out their their needs and requirements for 'twenty, three 'twenty four and beyond as well.
Okay, and then just really quickly and then I'll get back in the queue, because I've got more but.
Just turning to the other you know a vast majority of the business in that side. The one thing I wanted to ask a 400000 tons committed I think at 230 Bucks a ton with U S steel producers for 2022.
Can you just give us a sense as to what was that number last year for that same quality of coal.
$90 85.
Yes for the pricing was $90 average that we gave was $91. We did $1 8 million tonnes to $91 last year.
And that $130.
The fall of 2020 for shipments in 2021 in northern Iowa customers.
Okay understood, but this 400000 tons of that was price of 230 sort of average quality.
So David what we indicated was of the 400000 tons committed there is a portion of that that was fixed at $2 30 price and there was a portion of that debt was actually indexed into the domestic market.
Maybe split those that 400000 tons into half of it.
At the $2 30 price half of it at an index, we indicated that the volumes were.
Low vol and high Vol, a high vol, a being our largest product obviously from Lear in Leer, South and then low vol from our Beckley operation.
Okay, great. Thanks, very much for the time I'll get back in queue. Thank you David.
We'll take our next question from Lucas pipes with B Riley Securities.
Hey, good morning, everyone.
The good news is staged questions remind me of his questions from 2011 to 2015 when he asked.
One of your peers about pricing every single quarter and they wouldnt quite answer it either.
But.
But anyways.
Good job and I wanted to make.
Maybe hone in a little bit on Q4, you mentioned, John 75% is going export if I recall correctly and obviously there are a few moving parts here in this market you can get flags different end markets Europe Asia.
If you had to give us a range.
For netback pricing on those export tons in Q4, I would I would really appreciate it just just rough ballpark.
Yeah, Lucas that that's always one of the hardest.
Question to answer, especially in a market that is volatile it is as it is now.
If you look at average pricing for the East coast markers for the third quarter and you compare it to where we are today.
Our prompt basis.
The markets are 50% higher than they were for the average for the third quarter.
And then there's backwardation that comes off of that so predicting where that's going to go is is.
Virtually impossible, but I think what it tells everyone is we expect a substantial increase in our pricing as we move forward. We can talk offline a variety of ways to try to net all of those back to the mine, but if you just take.
Hi, Vale, which is our most important.
Our metallurgical product and take a.
Price today, that's at 390 <unk> East.
East Coast flats convert that to short so back out <unk>.
$39, so you're at $3 50.
Back out transportation at these prices.
There is a.
Variability in that price, depending on where where costs are but for the third quarter, it's at $35 a ton roughly.
You're at $300, a ton netback pricing, but.
But once again, that's changing every day, it's been volatile.
So very difficult to give you a specific number but once again, we are expecting a meaningful improvement in fourth quarter pricing from the third quarter.
But plus or minus 300.
On your export tons is that reasonable.
I'm, giving you the daily price today as you know that's probably come up from from where we even started the quarter at so.
There'll be volatility in that in.
Thats East Coast Platts Theres, a variety of pricing mechanisms as well there is different markets and differentials for all of the variety of products that we have going into Asia into Europe into South America. So once again.
To triangulate for you.
Around those numbers.
But look as we are selling at the index, we're not as you said.
The numbers that Youre seeing reported are the numbers, we are receiving as John said there are different markers out there theres, a queensland price when we talk about our Asian business et cetera, but.
As you look at those markers Thats, what you would expect us to be receiving except for that 25% of North American business that as we indicated earlier was locked in last last fall at $91. So thats ongoing through the course of this year, but the remaining 75% of the international business is in fact.
At those markers that we've just discussed.
Got it very helpful.
Many vessels would they be above or below that that Russ.
Sure.
Look it's really we've been selling mainly we've been selling the Chinese volumes F&B the vessel U S East coast. So while there is.
Theres a delivered in price in China that gets quoted really the Chinese have come to sort of look to buying based really on that U S. East coast price. So they buy it will be the vessel and they manage the logistics.
That's fine for us that works, well and obviously that additional sort of that additional activity on the east coast is useful and tends to add some upward lift to pricing there as well. So we've been happy to have the Chinese buy in that manner, rather than on a delivered basis.
Got it. Thank you. Thank you very much for all of that.
Okay.
I know, you'll you'll issue 2022 guidance at the appropriate time, but obviously there are a few.
A few moving pieces here with.
The ramp up of Leer, South and I wondered if you could remind us kind of ballpark, what you're looking for on medical volumes 2022 and Dan.
Potential cost impact and obviously on the cost side.
This low cost Super low cost mine coming online, but then also you know that the inflationary pressures so so quad.
Allocated quantitative comments would be would be super. Thank you.
Yeah. Thanks, Lucas I think as we look here in.
And sometimes better to be lucky than good, but we couldn't have brought leer south on it or more.
Exciting time in the marketplace and as we've indicated.
The opportunity for a rapid payback for our investment in that asset just shortens with the market environment that we have.
I think we've been pretty consistent on what we expect is as we step into.
A normal ramp and get to Leer, south up a full production rate, which we expect by the beginning of 'twenty two to incrementally add about 3 million tons of additional.
Metallurgical coal into our portfolio.
So taking us rough.
Roughly next year to 10 million tons that we've not provided specific guidance yet we're still looking at all of our budgets and we will provide that but nothing has changed from kind of our views and how we've been communicating. The addition of leer south into the portfolio, obviously, our expectation once we get it up and ramped with the volumes that you'll get from that.
Asset is youll have a very constructive cost environment.
And that will help us with the overall portfolio.
You referred to some of the inflationary pressures that the industry is facing.
Some of those same pressures are the ones that we're benefiting from on the top line right. So part of US wants to see steel pricing at all time record levels and quite frankly energy costs are high that helps on the thermal side significantly as well but.
Clearly, we use a lot of steel in our business, we use a lot of diesel fuel across our portfolio as well. So those inflationary pressures will be out there we'll manage them. We haven't provided any specific guidance yet once again going through the budget process.
Especially with the additional volumes at Leer, South we think that.
We're going to be able to manage that effectively going forward is as we step into 2022 and Lucas remember one advantage of our asset base. Our coking coal portfolio is that we own the vast majority of our reserves at Leer and Leer south in fee. So our sales sensitive costs are lower and tend to be lower we also increasingly.
The vast majority of our reserves at mountain Laurel that we're currently mining in the number two gas theme. It was really only beckley, where we're paying a royalty of consequence, we do have about a 5% severance tax we pay based on the topline in the netback and the state of West Virginia. So we do have sales sensitive cost clearly, we're going to have some upward pressure from the sell side.
Of course, but would say that we are we are on a relative basis advantage given our given our reserve base and the fact that we own so much of our of our one of our own reserve base.
Terrific.
That really makes it different when you are selling.
300 Bucks at the mine and my.
My last question and then I'll turn it over you commented on the tightness in the thermal coal market.
What would it take to increase your 2022 thermal coal production.
Lukas I think if you look at it.
The run rate that we have in the third quarter that we say is sustainable into the fourth quarter and beyond.
That gets you back into some of the numbers, we were reporting for the thermal segment.
So.
As we look at our portfolio without significant and material additional capital investment.
With the fleet of equipment that we have.
We had scaled down the utilization of that fleet to be responsive to the market environment.
To bring some of that back online its minimal levels of capital. It's we're making sure that we're managing it prudently.
But we think that.
These levels, we can sustain through 'twenty, two and we will continue to evaluate them moving forward, where the market's at and what type of capital required, but once again in the overall portfolio of our capex requirements it should be.
Insignificant.
Lucas This is Paul I guess the bottom line is.
We're not going to get back on that treadmill.
We had an opportunity to ramp up production in Q3, and Q4, we leveraged that into sales in 'twenty two and beyond.
We did we did that without spending any capital to speak of and without really having any issues with people.
You're just not going to see us spend cash and try and wrap this mine back up.
Going to be smart about what we do and as Dirk said. This intent here is to harvest cash and probably more importantly set aside cash for the ultimate closure.
We do that we have lots of flexibility with that cash is sitting in the sinking fund will make direct decision at the right time to close that in mind.
Got it.
Terrific well really appreciate it and continued best of luck.
Thank you Lucas.
We'll take our next question from Nathan Martin with Benchmark company.
Hey, good morning, guys.
Nate.
Pretty good pretty good discussion already so a lot of my most of my question. So it's probably been addressed maybe just a couple quick points of clarification.
Yeah, obviously with the <unk>.
Guidance of around 70 million tons for 2022.
A little bit of a ramp up there and I heard Johns comments to say that 2 million tons plus or minus in this quarter is that kind of a good run rate to think about just confirming I think you guys had mentioned that.
Coal Creek is youre kind of winding it down but it sounds like maybe you could run that some in 'twenty two as well just kind of curious where do you expect the bulk of the.
They're in a thermal side to come from.
Yes.
Good question and as we've indicated coal Creek.
Our expectation continues to be that will close that down.
And we talked about the significant progress that we've made there.
Even through where we sit today, our expectation is through the end of the year.
Of all of the disturbed yardage, there will have essentially reclaimed about 70% of all of that disturb yardage. So you can see we're dramatically significantly shrinking that footprint.
And so that has been ongoing what's left and where the opportunity lies for US is a very small piece one pit.
That quite frankly continues to have outstanding cost structure, and it's a small piece of the overall footprint remains and so in this market environment. If prices continue to indicate that at call as needed. We have the opportunity to continue to evaluate that and move that forward we wouldn't expect.
Spect, a significant increase in volumes from coal Creek.
Lower quality product at an 8400 product.
<unk>.
And we've been very minimal levels of production there.
And while we may flex that up a little bit the vast majority of the opportunity that we have is going to come out of black Thunder.
The 8800 Btu product. So Nate it is also very low cost, though so it's a nice it's a nice margin and it's worth it's worth it to us its worth maintaining that small.
Footprint again, a bit of a postage stamp with just the active pit.
In fact, there is a need for that quality and so far we're seeing some level of need. So we will see where we go with the ultimate closure, but again the objective. The coal Creek was always to reduce that reclamation obligation and we've done tremendous amount of work. We will continue to do over the next couple of quarters.
Got it yeah that makes sense. So I just wanted to clarify the 10 million tons for next year kind of assumes a little bit of coal Creek and it sounds like it.
I mean, and then you just kind of touch on the cost side, which is where I was going to go next and Lucas touch someone on the met side of things, maybe with the thermal business again higher tons looks like.
Positive for on a cost per ton basis, maybe some pressure from inflation labor.
Any commentary on where thermal costs kind of could go next year also with.
West Oak are just ramping up from let's call it 3 million tons, plus or minus this year up to four plus it sounds like.
Yes, Nate so.
An interesting dynamic you've got an increased volumes that are occurring one thing and Dirk talked about it in the eastern portfolio or the met portfolio, where sale sensitive cost we have a lessened impact given the ownership from the reserves.
In the PRP as a reminder.
A third of the sales prices in the form of sale sensitive cost. So as you see the ramp up and for US. That's a good cost pressure to have but it's one that you need to factor into any type of projection and cost.
Outside of that.
If you look at at least in the PRP the types of cost pressures. We have one of the biggest ones will be diesel fuel, we consume about 30 million gallons on a on an annual basis.
Where our average diesel price has been over the course of.
2021 to date.
Where we are today, it's a 25% increase on those costs alone as we've looked at the overall kind of portfolio.
And tried to at least maybe give you guys a little bit of direction and once again. This is not formal guidance at this point, we will update that post our budget as we report our fourth quarter numbers for next year, but it wouldn't be outside the range to expect 5% to 7% type increase.
Inflationary pressures outside the sale sensitive costs and once again, you look at fuel costs such as diesel you look at you can look at steel pricing, we use a lot of steel.
Obviously steel costs have doubled from 2020 to 2021.
And so those are the types of things, we'll continue to look at and manage and we think we can manage effectively but we will be affected by that.
Thanks for that John just to confirm I think you said for thermal specifically.
From a guidance I completely understand that 5% to 7% next year outside of that one third sales price sensitive.
Correct.
That's correct I think that's a good way to look at it Nate.
Okay perfect I appreciate that guys.
Maybe just one other housekeeping type, but thought I mean.
Inspiration wise with met prices being where they are today.
Any thoughts on that.
How is transportation health service for you guys to the export markets.
Obviously the vessel slipped.
200000 tons I should say from third quarter to the fourth quarter with some of that transportation related labor related et cetera, and then what.
What are you guys seeing on the cost side right now from a rail transportation perspective. Thanks.
Yeah, I mean I'll start it off this is Paul.
You know I'll tell you that Q3 started off a little rough for rail transportation than kind of played out as the quarter wore on so.
And in general not a lot of complaints about the eastern railroads.
The western railroads also struggled in the early part of the quarter, particularly out of Colorado, the West coast because of the fires.
Set that aside you know rental services I think it's it's tight we're all concerned about what's going to happen on these vaccine requirements in those issues.
How that all plays out between the big railroads and their employees.
On the cost side, particularly in the East obviously as you know we've talked many times in the past our rail radios tied to the east coast indexes and it's usually a one quarter lag. So we will see as we saw.
The price of step up in Q3, we will see that increase in rail in Q4.
Relatively substantial.
Just round numbers that could go from the low to mid <unk> to the upper forties low fifty's.
Yes.
That is what it is on these rail rates.
Yes.
Okay.
And then just two on one point on that ultimately that rail rate does get cap. So it doesn't just continue decline beyond those levels, but as Paul said, certainly could see that kind of level in Q4, and probably worth considering and then we'll also say that look on the rail served as well as Paul said, it's been very solid we are ramping.
And Leer South so one of the cautions here on Q4 for volumes has been we need to make sure that as Leer South ramps, we get sufficient service too to make sure that we are able to deliver those higher volumes and that will happen, whether it's a little slower in Q4 or not remains to be seen Nathan where those cap at as you've kind of once again.
Look through all the modeling is probably around $60 is.
At that level and so at these prices.
Ultimately, we could see that.
John you read my mind, because I was going to be my next question. So I appreciate that.
You guys as always for all your color and I.
Appreciate the time and best of luck through the end of the year.
Thank you Dave.
We'll take our next question from Alex hacking with Citi.
Yes, good morning, and thanks for the time.
I apologize I missed the first few minutes of the call. So if this was already addressed and then I apologize.
And in terms of the sinking fund I mean.
Back of the envelope 70 million tonnes.
<unk> dollar price.
Even conservatively for dollar margin, that's going to more than cover that cash generation is going to more than cover the existing ROE. So I mean are you looking to fully fund that next year.
<unk>.
How youre thinking about it today.
So Alex this is Matt Hill, Jim I'd say.
The ultimate timing for when that sinking fund really fills is going to be dependent not only on the thermal cash flows but the other priorities. We've got in terms of debt reduction and balance sheet strengthening as well so.
In certain scenarios, where cash flows are strong across the business I don't think it's unreasonable to think that you could see it.
<unk> be completed in the timeframe of next year, but probably it's more likely to maybe think about it in terms of the next couple of years given the strength on the thermal side again, if met prices stay where they're at clearly that could accelerate but if we see those come off it's probably better to think about over a one to two year time frame.
I mean at the end of the day, Alex If you think about it there is the argument about how fast you can do this.
The faster it's done well.
Take this issue off the table and it's.
Basically ring fenced the thermal assets.
And to the extent, we can do that without breaking a sweat as what we need to strive to do.
And Alex just one one point on modeling I wouldn't think about a $4 margin for the pier B any way, we're probably remember at $3 increase $3 50 increase translates into another dollar sale sensitive cost. So you should factor that in that we will see what west out does that clearly west out to push that margin up meaningfully so if youre talking broad.
That makes sense, but from a <unk> perspective that might be aggressive.
Okay. Thanks, Thanks, Thanks for the color and.
It makes sense and then just on the Capex side.
For for next year.
Any change to kind of your previous thoughts around Capex next year, you've obviously got the additional thermal volumes coming through but as you mentioned, that's really capex kind of light volume, but any.
And any commentary around Capex next year would be helpful. Thanks.
You know Alex we were spectrum, we're headed into maintenance capex in the Ole.
One thing I'd say is the inflationary cost pressure we're seeing.
On the capital side is real and a few model somewhere between I think next year, given the inflation and what's going on.
125 to 150.
Those are still pretty loose numbers.
As we work through the budget, but I think that gives you the ZIP code of where things are at.
Okay. Thanks, so much it's very helpful that was all my questions.
Thanks Al.
We'll take our next question from Michael Dudas with vertical research.
Hi, good morning, gentlemen.
Good morning, Michael how are you.
Great. Thank you.
Ignore feaster here in the New York area, but were surviving no leaks in the roof yet so.
Can you remind on black Thunder like what's how long this lease run and what's the recoverable reserves left in that mine as you are operating it today is just to give a ballpark because I don't think.
And the question has been brought up here.
I can I'll take a shot.
I don't track it as good as I used to it's about seven or 800 million tons and the lease runs reduce automatically every five years.
Right.
Right, Okay, so 700 million tons.
What would be the and then the run rate this year would be.
We did.
What we just indicated for 2022 at 70 million tonnes kind of sold out.
And the CRB Wood Deca.
Decades of work right.
We also indicate and I think acknowledged that we expect that to come down over time, while markets are strong right now as we've done in the past, we will responsibly shrink production if markets arent requiring that so that would extend the opportunity there as well once again, if the markets are given the opportunity to continue to sell coal.
And Mike Remy reminder, obviously, we've come down from $1 1 billion tons of thermal coal consumption in the U S. In 2008 about 500 million tonnes.
This year, so clearly with about 20 gigawatts of additional closures for the next two years. Our expectation is the market continues to shrink and we will continue to manage down our production appropriately.
But the opportunity is long lasting should that should those continue to be a market.
Right. So that's why I kind of wanted to point out towards given what's been going on and those things have happened. So very quickly here in the last several months.
Any chance to accelerate that value creation in the marketplace.
I think as anybody paying attention.
I mean, I mean, Mike if you mean I mean, obviously, we have taken advantage of the opportunity obviously by selling into 2020 too aggressive right now.
That's been the goal is to take advantage of what you've described which is.
This energy Crunch that we're seeing here in the U S and really internationally as.
As the World economy is really snapped back and Theres been underinvestment.
And coal production really everywhere, we've talked a lot about the thermal assets here on this call, but it's been really profound on the cooking side, as well, which creates a really attractive opportunity and potentially.
Tractor supply demand balance even with that downward pressure on consumption that we just discussed what we've said all along.
We we've got a great asset in the PRP, great quality, great cost structure, great people running the operation and.
What we've seen in the marketplace as we've seen with what's happening in the marketplace, we've seen utilities come and they're interested in multiyear deals.
We've tried to take and leverage the near term opportunity as we've indicated and build out our book of business.
Give us some stability in cash flows well beyond 'twenty two and so those are the types of things, we'll continue to look at and evaluate as we move forward.
I think this is cyclical or is there a little bit of lag structural kind of stuart's given what's going on in the world. It's amazing how much you have seen the word KOL in the news over the last.
Yeah.
Look we've said it for some time, there's been a significant lack of investment in.
New supply.
And we think they'll continue to be a lack of significant new investment in coal supply and so we think the future is going to look interesting is as we move forward and obviously Mike go ahead.
If you can say if I caught the end of the day.
It's not dissimilar to what we talked about last quarter. I think you asked me a similar question.
High natural gas prices.
We have low utility inventories.
The ability for the producers to respond is not what.
The utilities I think thought it was.
It just doesn't exist anymore and the investment has not been there and throw in higher priced exports.
Some of these things will work themselves out.
As we said we saw an opportunity and that's what we did we took advantage of it.
And Mike obviously, we're not equipped to talk about oil and gas side of things, but right now clearly with domestic natural gas at $5 with with gas trading the equivalent of $30 in Europe that certainly feels like the oil and gas side is experiencing some of the same pressures. So if the alternative fuels continue to be really quite expense.
And we've seen some sort of shift here then yes, I mean, obviously the opportunity can be longer lasting I think it's important that we continue to point out that regardless of what we see here. Our strategy is really quite clear we are not going to deviate from that our plan is to continue this pivot towards coking coal markets, but continue to be opportunistic with the assets, we still have in place.
<unk>, which are great assets as John said tremendous cost structure high quality and all of that but not to start to chase not to start to put additional capital into those assets. Instead, just harvest the remaining value potentially over many years, but harvest the remaining value.
I guess the bottom line, it's good to have low capitalized assets to own these days.
The energy market.
Absolutely.
One final question for me.
On the coking coal side.
Observation from polar John on the ability to.
Meet the world's needs for this coking coal on the ground labor productivity you read stories, you hear anecdotally about retention getting miners.
Do you get a sense you I'm, assuming you guys are pretty pretty locked down given your long life reserves and quality, but you needed some thoughts on what's happening around you and is that something that could lead to some more dislocation as people are anticipating some flows coming out of the U S. Over the next several quarters.
Yeah, Michael I think quite frankly labor is an issue.
You've heard us talk about our views on that so just to reiterate we we feel good and clearly our most important asset is our people.
And given the long live nature of our assets and the cost structure. The fact that we operate them.
Very safely.
And have a competitive.
Wage and benefit structure is always something that our team.
Minimizes the impact to our operations, but it's something we're paying close attention to right because we are seeing.
That labor and some of the challenges around it around us, especially I mean, you've seen.
Wage opportunities present themselves in other industries, we've heard stories, where someone can go out and.
Work for the cable company is alignment and make equivalent money too.
That's what they're making underground ore or even drive a bus school bus.
Those are the types of stories anecdotally, we're hearing those didn't used to be.
Challenges are opportunities.
For someone to step out and make that kind of money. So those will be things that we continue to look at and evaluate we're seeing it across a lot of the industries.
We work with.
We will continue to manage it and we don't see any issues from our perspective as we move forward Michael the only other thing I'd add to what John said is.
If you think about it if we were to.
Bringing leer, south online or start that construction today.
We debate this number but the cost of that project, if you could get the financing.
Its probably I don't know John 25% increase over what it was for us.
As John said, maybe we were just good as lucky, but the fact is this incremental or response.
My guess is it's going to be higher cost and require some capital.
Those arent good recipes for long term.
And I remember there are still some controversy and you guys actually announcing are you going to do this in the midst of.
Difficult market into patients you showed so.
Great decision on that well done thanks, gentlemen.
Thank you Michael.
Yes.
That concludes today's question and answer session. At this time I will turn the conference back to Paul Lang for closing remarks.
I'd like to again, thank everyone for their interest today. These are exciting times at arch, we delivered leer south into a robust market environment capping off our transformation into a premier producer of metallurgical coal for global markets. We sold our thermal segment production forward had historically strong prices and then.
In a manner that ensures healthy levels of cash generation well in excess of their final closure obligations.
We've taken the first step towards resuming a healthy capital return program through the reinstatement of our quarterly dividend and we've laid the foundation for returning our balance sheet to its historically strong status, which we view as an invaluable point given the inherent volatility in the markets in short we've maintained our clear consistent.
And actionable strategy.
Doing so have set the stage for ongoing value creation and future growth.
With that operator, we'll conclude the call and we look forward to reporting to the group in February stay safe and healthy everyone.
This concludes today's call. Thank you for your participation you may now disconnect.
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