Q3 2022 Arch Resources Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Yeah.
Good morning, and thank you for standing by.
Welcome to the arch resources third quarter earnings Conference call.
At this time all participants are in a listen only mode.
And after the Speakers' presentation, there will be a question and answer session Sue.
To ask a question during the session you will need to press star one one on your telephone that star one one and you will then hear an automated message advising you that your hand is raised.
Please be advised that today's conference is being recorded.
And I would like to now hand, the conference over to your first speaker today deck Slone Senior Vice President strategy at Arch resources. 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 looking statements by their nature address matters that are.
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 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 RFC Dot com.
Also participating on this morning's call will be Paul Lang, our CEO , John Drexler, our C O O and that Gil Jim 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.
Jack and good morning, everyone. We appreciate your interest in arch.
Glad you could join us on the call. This morning.
Please the arch team delivered a strong operating performance in Q3 generating a total of $454 million in operating cash flow, while managing through rail disruptions in the west.
Excellent geologic challenges and inflation related cost pressures.
We view this record setting achievement.
Clear evidence of all of arches, most significant strengths our substantial cash generating capabilities.
In addition, our record cash flow performance serve to showcase.
Another one of <unk> core strengths are powerful and value, creating capital return program.
As you know the board relaunched the capital return program in February after a two year hiatus during the build out of Leer, South and it now stands as a centerpiece of our value proposition.
Harshest Catherine turn program is governed by a simple, but carefully considered allocation formula that calls for the return to shareholders, a 50% of the discretionary cash flow via a dividend and the deployment of the remaining 50% principally through share repurchases and or the settlement a potential.
Dilutive securities.
With a $454 million in operating cash flow netted against just $41 billion in capital spending we generated a total of $413 million and discretionary cash flow during the quarter.
That level of cash generation translates quite clearly and the strong value driving returns for our shareholders. What do we run through our capital return Formula.
In keeping with the tenants of this formula. The board has just declared a dividend of $206 $4 million or $10 75 per share payable on December 15.
Complementing this dividend, we also expect to deploy a significant amount of cash associated with the other 50% of our capital return program in Q4.
And while we've delineated several options for the use of the second 50%. We continue to view share repurchases as an attractive investment opportunity as well as an effective means of returning capital.
In addition to the progress we've made in generating discretionary cash in Q3, we also made great progress during the quarter and deploying discretionary cash while simultaneously managing our liquidity in a prudent fashion.
During the third quarter arch deployed approximately 70 $648 million to repurchase nearly 429000 shares or approximately 2% to 3% of our shares outstanding at June 30th.
Along with this we used cash to settle an incremental portion of our convertible debt, thus avoiding an additional 101000 shares of dilution.
In short we've already delivered in a significant way on the value creating potential of the capital return program that was put in place just eight months ago.
As we look ahead, we expect to continue that momentum through ongoing returns as well as our sharp focus on generating additional discretionary cash and to continually recharge the program.
Well the capital return program is the culmination of carefully crafted multiyear strategy. It is worthwhile to recap the team significant efforts. So far in 2022 that got us to this point.
And sung since the start of the year, we've generated more than $1 billion in operating cash flows.
We fortified our balance sheet through the reduction of $427 million or 71% of our total indebtedness.
<unk> contributed $110 million to our industry first thermal mine reclamation fund, which brought it up to its targeted level of $130 million.
And grown our net cash position by $588 million, giving us a $323 million net cash position at the end of the quarter.
In turn these efforts have afforded us the ability to deploy a total of $678 million inclusive of the December dividend under our capital return program.
Which again was just rolled out in February .
This is a great deal of progress in a short period of time and a strong indication that we're committed to delivering on our clear consistent and actual plan for value creation.
Before turning the call over to John I'd like to spend a few minutes talking about the current market dynamics, starting with our core coking coal business.
Even after the step down from historic levels achieved earlier in the year coking coal prices remain constructive and profitable levels. This is impressive given the recessionary pressures that continue to build around the world and more impressive still when you consider the knock on effect. These pressures have had on global steel production.
<unk>, which is down around 4%.
We believe this resilience of the metallurgical markets is largely attributable to the profound underinvestment in coking coal supply in recent years.
Despite strong coking coal prices for the better part of the last six years.
Co global coking coal supply in the major producing regions continues to languish.
In Australia, which is the source of over 50% of the seaborne metallurgical supply coking coal exports are down nearly 7% year to date, even when compared to last year's already weakened levels.
United States and Canada exports are up modestly versus 2021, but continue to dramatically lag pre pandemic levels.
At the same time the outlook for Russian supply continues to dip in face of import bans in many countries logistical challenges and an increasingly negative investment climate.
Our coking coal markets have come under pressure global thermal markets remain at near historic highs.
Shortly.
These strong market dynamics are helping to buttress coking coal prices, while simultaneously, creating attractive seaborne opportunities for arches legacy thermal products.
The price for thermal coal out of Australia currently stands at nearly $387 per metric ton and the price for thermal coal into northern Europe stands at nearly $269 per metric ton.
Arch has sold over 200000 tons of coking coal to thermal customers for delivery in the fourth quarter of 2022, and we're actively exploring other such opportunities where it makes sense.
On the legacy thermal side of the business arch has continued to deliver on its dual objectives of driving forward with an accelerated reclamation plan, while simultaneously harvesting cash from these assets by.
By employing this logical wind down strategy, we're delivering we believe we are delivering the greatest long term value for our shareholders. While at the same time, providing an appropriate transition period for all of our stakeholders, including our employees our customers and the communities in which we operate.
A major part of this responsible approach is our industry first cash thermal mine reclamation fund, which ensures there'll be an appropriate level of funding on hand to complete final reclamation work at these operations when the time comes to shut them down.
Following this strategy arches legacy thermal operations delivered $97 million in segment level adjusted EBITDA during the third quarter, while expanding less than $5 million in capital.
That brings the total amount of the EBITDA generated by the thermal segment over the past six years to just under $1 2 billion.
While investing only $123 million of capital.
Well Thats an impressive figure we believe the stage is set for more of the same in Q4.
What's more given our significant book of contracted domestic thermal business and continued strength in metallurgical thermal pricing, we're becoming increasingly optimistic about our ability to replicate this year's strong thermal segment contribution again in 2023.
In closing, let me reiterate that 2022 has been a period of great ongoing progress at arch, even with the typical mining challenge as noted earlier, our expanded and upgraded coking coal portfolio continues to generate robust levels of cash.
Addition, we believe the medium term outlook for significant and complementary contributions from our Derisked legacy thermal segment continues to strengthen as well.
In short we believe the stage is set for continued success ongoing value creation and most significantly substantial shareholder returns.
With that I'll now turn the call over to John Drexler for some additional comments on our Q3 operating performance John .
Thanks, Paul and good morning, everyone as Paul just discussed the arch team delivered record operating cash flow and drove exceptional ongoing progress on our strategic plan during the quarter, even as we navigated through logistical challenges inflationary pressures and localized geologic issues.
Most importantly, the team executed at the highest level in the most critical areas of performance safety environmental stewardship and other key ESG metrics on behalf of the entire management team I want to thank the arch workforce for their continued dedication to the highest environmental social and governance principles.
Let's begin with the key drivers of our Q3 performance as indicated our core metallurgical segment generated robust levels of cash during the quarter.
Even as we address the isolated geologic challenges at Leer, south that acted to suppress the segment sales volumes and pressure its unit cost.
The good news is that as anticipated we advanced through that area of tough cutting in early September and have been achieving much improved advance rates and productivity levels ever since.
Looking ahead, we fully expect productivity levels to continue to March upward as we progress through the first five panel district and based on what we have experienced in our ongoing development work believe the conditions in district, two should be better still.
Again, we're pleased with the trajectory we are achieving at Leer, South we're off to a good start in October and we fully expect meaningful improvements in both metallurgical segment productivity levels and unit costs in Q4, followed by further improvements in 2023.
Before proceeding lets talk about what to expect for coking coal volumes in Q4.
As you May have noted we are now projecting based on the midpoint of our revised annual guidance, an increase of around 15% and our coking coal shipments during Q4.
That step up reflects the continuing progress we are making at Leer, South and also underscores. The fact that we expect still further improvements in productivity in 2023, as we move towards our expected normalized run rate.
It's also worth noting that again, given our full year cost guidance for the metallurgical segment. We are also anticipating a 10% or so reduction in average cost in Q4, when compared to Q3.
While that represents significant progress I want to stress here that we would expect still further improvements on the cost front in 2023.
As Paul mentioned and embedded in our projected coking coal volume guidance for Q4, we anticipate shipping more than 200000 tons of coking coal into thermal markets in Q4 at prices generally consistent with current east coast coking coal marks.
As we have stated in the past we remain staunchly committed to serving the metallurgical needs of our longstanding steel customers.
But we are also happy to redirect tons to thermal customers in the absence of more value, creating alternatives in the steel arena.
In fact, we continue to work hard to identify additional crossover opportunities and believe our Q4 shipments could serve to garner further thermal market interest in our high Btu coking coal products.
During the quarter, we also entered into value, creating fixed price agreements with north American customers for a small percentage of our projected 2023 coking coal output.
In total we locked in approximately 1 million tons of business for delivery next year at an average netback of nearly $190 per ton.
Given our anticipated cost structure for 2023, this business should equate to a substantial contribution to next year's cash flows despite constituting only 10% or so of our projected 2023 metallurgical output.
As we have stated many times in the past our primary focus remains the 300 million tonne plus per year seaborne market, where we can compete very effectively and where we have established an expansive marketing presence and an excellent reputation.
Transitioning now to the legacy thermal side of the business I am pleased to say that we continue continued to deliver on the plan for the thermal segment by generating substantial amounts of operating cash flow, while managing capex tightly.
Fortunately we are confident we can accomplish this even while continuing to manage through significant rail service issues, specifically in the P. R. B.
As Paul noted the thermal segment has generated nearly 10 times more segment level EBITDA than it has invested in capital over the past six years and the thermal team delivered more of the same in Q3.
To reiterate the thermal operations generated $97 million of EBITDA during the quarter against less than $5 million in capital.
Moreover, we believe we are exceptionally well positioned to maintain that impressive ratio of cash generated to capital expanded in 2023.
In terms of topline considerations, we have a very profitable book of business already in place for our thermal operations for both 2023 as well as for several years into the future along with the logistical network and throughput agreements needed to move a limited, but highly leveraging volume of thermal coal into extremely tight seaborne thermal market.
As for the <unk>, we are now more than 90% committed for 2023 when measured against projected 2022 shipping levels at average realizations that should drive another very strong contribution to cash flow next year.
In addition, our west Elk operation is essentially sold out for next year at a capacity of $4 5 million tonnes.
Given the high percentage of our sales committed at fixed priced.
Fixed pricing combined with the opportunity for incremental export volumes against a very favorable 2023 futures curve, we believe that the <unk> segment's prospects for replicating its projected 2022 cash generation are strong and improving.
We will provide a complete update on 2023 guidance at the fourth quarter earnings call.
Before turning the call over to Matt Let me conclude with a few words about our Q3 performance in the ESG Arena, where we continued to build on our already industry leading execution.
Through the first nine months of 2022.
Our <unk> subsidiary operations have achieved an aggregate loss time incident rate of approximately three and a half times better than the industry average over the same period.
In addition, our subsidiary operations recorded no environmental violations during the third quarter, while extending their string of zero water quality exceedances to 31 months.
Yeah.
Finally, the coal Creek mine, where the arch team has completed roughly 75% of final reclamation work over the course of the past 21 months was honored by the state of Wyoming with the 2022 excellence in mining Reclamation Award.
In short it was another impressive performance by the team, which remains committed to raising the bar even higher in this critical area of performance.
With that I will now turn the call over to Matt for further discussion on our financial performance and results.
Matt.
Thanks, John and good morning, everyone I'll.
I'll begin by providing additional detail about third quarter cash flows, which as Paul noted were highlighted by record operating cash flow of $454 million.
To put that into perspective.
<unk> exceeds any full year total that are just generated in the last 10 years.
In addition to solid underlying operating earnings we benefited from favorable changes in working capital with a decline in our accounts receivable contributing $247 million to the quarter's total.
While this trend was expected after the significant working capital increase in the second quarter. The actual amount was a good deal higher than anticipated.
On the other hand operating cash flows were adversely affected by a $30 million contribution to our thermal reclamation funds with the accelerated payments into that fund now complete.
Turning to the investing and financing cash flows we spent $41 million for capital expenditures in the quarter, while utilizing $186 million in the capital return program with nearly $110 million in dividend payments.
$57 million invested for share repurchases and $19 million used to retire additional convertible bonds.
Discretionary cash flow for the third quarter was $413 million and under our capital return Formula Our board has declared a dividend of 50% of that amount.
Or $10 75 per share.
The dividend will be paid on December 15th to stockholders of record on November 30.
We ended the quarter with cash on hand of $501 million and total liquidity of $593 million, including availability under our credit facilities.
The timing of customer collections late in the quarter, including some payments that were made prior to their due date pushed cash and liquidity to levels that were well above our target.
As I stated last quarter. Our goal is to end each quarter with minimum liquidity of 250 million to $300 million supplemented by enough additional cash to cover a substantial portion of the following quarters dividend.
Before moving.
On I wanted to note one additional liquidity highlight from the quarter.
In August we finalized the amendment and extension of both our accounts receivable securitization facility and.
And our inventory credit facility.
The term of both facilities now extends to August of 2025.
And the size of the securitization facility was increased from $110 million to $150 million.
These facilities continue to enhance our liquidity and provide necessary letter of credit capacity.
We are appreciative of our long term bank partners and their continued support of the company.
Looking forward to the fourth quarter, while we expect improved operating performance discretionary cash flow is likely to decline from third quarter levels.
Favorable changes in working capital in Q3 are clearly not repeatable and in fact, we would expect to see a working capital increase.
Accounts receivable at the end of September we're at much lower levels than normal as compared to our revenues and we expect that relationship to revert to historical norms over the course of the fourth quarter.
From a capital return perspective, we would expect larger cash outflows in Q4.
Both the dividend as we've already discussed and in the amounts deployed in the second 50% of the program as well.
As to the latter the amount we were able to deploy in any given quarter will likely vary greatly depending on the timing of cash flows, especially in relation to normal blackout periods.
Well that worked against us in the third quarter, we are starting the fourth quarter was sufficient capacity, even given our liquidity and cash targets to nearly double Q3 spending levels on the second 50%.
In terms of our priorities for that part of the capital return program. The third quarter activity provides a good roadmap.
Our primary focus will likely be share buybacks, but we will continue to look for attractive opportunities to repurchase the remaining convertible bonds.
At the end of September our remaining authorization for share repurchases was more than $442 million.
Regarding the bonds, we have now settled or repurchased approximately $130 million of the original principal value, leaving just $25 million outstanding.
Assuming a share price of $140 in settlement using cash and shares those bonds would represent potential dilution of approximately 625000 shares.
As a reminder, the cap call that we purchased at the time the bonds were issued remains outstanding.
The capped call is deeply in the money with an intrinsic value of approximately $62 million that would be paid out its exploration in November of 2025.
At that same $140 share price the intrinsic value of the cap call represents an offset of roughly 450000 shares or more than two thirds of that dilution.
As a reminder, the accounting rules do not allow for the value of the capped call to be reflected in the fully diluted share count or as an asset on the companys balance sheet.
Before turning the call over for questions I wanted to address one item that will have a positive material impact on our reported income for the fourth quarter.
As we have disclosed in our SEC filings arch has substantial deferred tax assets, including well over $1 billion of net operating loss carryforwards as of the beginning of this year.
We have maintained a full valuation allowance against those tax assets as a result of uncertainty about the ability to utilize them fully before they expire.
Given our taxable income in 2021, and thus far in 2022, along with expectations for continued profitability.
We expect to release the valuation allowance in the fourth quarter.
This along with expected adjustments to our fin 48 reserves will result in a onetime noncash income tax benefit of approximately 225 million to $250 million.
As a reminder, we continue to expect to pay no cash taxes in 2022.
If coal market conditions remain favorable we would expect to begin to pay cash taxes next year with an effective rate of up to 5% of pre tax earnings.
With that we're ready to take questions operator, I will turn the call back over to you.
Okay. Thank you very much at this time, we will conduct a question and answer session. As a reminder to ask a question press Star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay. Our first question. Our first question comes from the line of Dave Gagliano from D. M O. Dave Your line is now open.
Alright, Thanks for taking my questions I have I have actually a number of follow up questions.
So bear with me on this I'll try and be quick just first of all on the 200000 tons of crossover.
Fourth quarter.
Built into the thermal market what was the price for that 200000.
Dave I think as we indicated the prices approximating what we're seeing kind of the net backs if with the existing met markets that we're seeing today.
Okay, that's actually might remember that given pricing.
Hey, David it's Dirk and remember that some of those times, where committed earlier in the quarter at times when prices were lower as we actually got a premium on some of those volumes, but today. They are fairly reflective of kind of where the marks are to that gap you are looking at pricing today.
Accurate comment from that.
Okay, well that actually is.
I mean, we get them.
Published indices for Atlantic Basin have already prices.
What is the market today for high Vol. A for your call.
It's above $2 80, right nowadays at 283 sort of a range for that <unk> discussed.
Okay. Thank you and then.
I'll get that number you can give that netback you would simply take that and then work it back to the mine the way that we typically do due to the netback calculation.
Okay helpful. Thank you and then.
Ah I see switching over thermal it's been 17 to 19 million tons per quarter roughly.
Is that a reasonable range on a quarterly basis for 2023.
Yes, if you look at the midpoint of our guidance it would kind of imply kind of in that 18 plus million ton range to achieve that.
We've been challenged with a lot of rail issues in the <unk>, we talked about it in the prepared remarks.
We reduced the midpoint of that thermal guidance by 2 million tonnes. If you remember last quarter, we dropped that by 5 million tons. Those are committed times that are going to get carried over into next year at attractive pricing. So we haven't lost that volume.
But but you are correct, we're going to need that kind of that 18 plus million run rate and we're working hard to achieve that.
Dave I think your question was also or the way I understood. It was on 23.
I think if you look at 'twenty two I think it's a good.
That's a good place to start for our 23 volumes.
Okay, and then on the domestic met sales for 2023, I think you said $190 per ton was the average price.
That's correct that's right. Okay. How does that I just don't have in front of me how does that compare to the 2022 contract price average price.
It's slightly lower I think it's it's definitely you know as.
As we follow the trade rags, and where everything's out there. We're very pleased with what we were able to achieve kind of with where the forward curve in the market was in and feel real good about putting in those million tons fixed volume fixed commitment steady.
Steady train service. So we're very pleased to achieve that lock those cash flows in but still provide a lot of exposure for the remaining book and as we described the market that over time, we feel is going to be attractive for us and they have lots of very small discount just kind of where the marks are today and as we just discussed and I just looked exactly $286 today for high vol.
We're it's a very small discount to that actually reflected the marks at the time. The deals were done in fact, a little bit of a premium. So we feel good about what we put to bed and getting that fixed cost business fixed price business done.
Okay.
And are there plans to do anymore is that it for the domestic for 'twenty three.
I think here again, Dave that.
This is Ed we're fine with that our focus is the seaborne market.
And.
I think we're set up.
If it's a parallel this year, we will see dribs and drabs come in.
We're sitting at about 10% of our KOL staying in North America, and that's where we could end up next year.
Okay.
Two more real quick what's the average price for the 90% of thermal that was locked in for 2023 here that is locked in for 2023, just an average overall.
So David it's tax so we haven't we haven't discussed that as yet and I think we've indicated that look this year as realizations in the <unk> were particularly strong. This is going to be 2023 will be another very strong year relative to historic values, we may not quite be to the level, we see for 2022, but it will be another strong year, creating another.
No very solid margin in the PRP and then we do have some fixed price business that we have done out of west out that obviously at very attractive prices given current international seaborne markets and we will continue to explore opportunities to sort of fix additional volumes there into a skills really strong current futures curve.
But as I said right now it looks like it could be a small step down relative to 2022 now having said that there are other things that counterbalance and one point I would certainly emphasize is that we made a $110 million contribution this year to the thermal mine reclamation fund next year that contribution will be de minimis. So in reality that.
Thermal segment, we would expect would generate even more cash for availability to the capital return program.
Okay. Thank you and then my last question I heard the commentary.
But I didn't catch it all regarding the cash flow movements in the fourth quarter I thought I heard at the end there during that commentary that there was.
The net result, with working capital changes was a cash outflow, which to me implies no no.
No variable dividend did I hear that correctly.
David the working capital piece, I think would be a reduction in the cash flow in Q4 as opposed to an increase that we saw in Q3, but overall if you look at quarter over quarter, we should if you will.
Worked through our guidance, where we're guiding to what should be a stronger operating performance in Q4 as compared to Q3.
So with that as a starting point.
Instead of getting a working capital tailwind, we're going to get a working capital headwind in <unk>.
As we sit here generally our receivables are typically about a 100% of our monthly sales amount at the end of any quarter in September that was down below two thirds of the sales.
We want to make sure that we acknowledge the great work that our contract admin and billing groups did in being able to get that and pull some of that cash forward.
But we don't plan on that every quarter and assume we're going to see an increase.
If we go back to those normal levels, our working capital increase could be as much as 100 million.
And that would offset those operating earnings as we look at Q4 cash flow still should be positive, but not nearly as robust as they were in Q3.
As Matt pointed out, though in the fourth quarter for the.
Other the second 50% in terms of the capital we expect to deploy in that area that could be as much as twice what it was in Q3, so somewhat of a counter balance to what could be that negative move on the working capital front.
Yes.
Okay. That's helpful. Thank you for answering all the questions.
Thank you David.
Okay.
Our.
We have our next our next caller.
Is Lucas pipes from B Riley Lucas Your line is now open.
Thank you very much operator, and good morning, everyone.
Good morning Lucas.
Yes.
So I wanted to touch a little bit on the 2023 met coal outlook.
I think you mentioned you have 1 million tons contracted into the domestic market and thats going to be about 10% of your total sales. So.
That implies 10 million tons of met coal next year.
Up pretty nicely from this year.
First if you could confirm that but then secondly.
Were these.
Isolated geologic incidents this year and obviously you can't change geology, I think you did a good job working through it but you can you can anticipate it and you mentioned you the development work.
Gives you increased visibility of what's coming in I Wonder if you could elaborate on that and if in fact, you've maybe down a little bit more development work too.
More confidence in the 10 million tons for next year. Thank you very much.
Thanks Lucas.
Talk about Leer, South we talked about it last quarter.
We encountered sandstone in the current panel we're in as a reminder, we had completed mining in the ramp up of Leer South in panel one.
A successful longwall move in the May timeframe came out of that move and actually saw a very healthy ramp in the beginning of panel two when we encountered very difficult cutting conditions.
Related to sandstone.
As we indicated as we continued to move further east in the first district that first district has five longwall panels.
As we continued to move east to each panel.
All of the geology says that the conditions should improve we should see less of the impact of those types of issues that were that we experienced during the quarter.
And as we are developing those new panels, we have continuous miners out there developing the head gates, we are experiencing better conditions, that's what's giving us confidence as we move forward that we're going to see improved productivity.
Probably more importantly is as we're now developing down into district to once again, where the overall geology should show improvement we are experiencing that as well as we have continuous miners down there. So that's why as we're continuing to progress here.
Our confidence in the level of productivity continues to get stronger.
So we expect that improvement to.
To continue to play itself out as we look forward to next year, you're exactly right you know and as we've indicated before.
If everything is running as expected across our platform.
We should see the opportunity to produce up to 10 million tons on an annual basis. So we haven't provided specific guidance on all of that.
Yet we will do that at the fourth quarter earnings release. However, once again, we've talked about this before with each of our operations.
We look at all there.
Activities.
We are comfortable that that $10 million.
Arena is around where we should see the capability to produce.
Okay.
That's that's very helpful very good to hear thank you.
Are you for that.
My second question I may have missed this but the cadence.
Any buyback from here, how should we think about that considering.
The movement of working capital your minimum cash targets.
The dividend that's payable in a little over a month.
Hi.
How should investors approach.
The level of buybacks between now and Karen Thank you very much.
Yes. Lucas. This is this is Matt and really probably the.
The best way to look at it we clearly came out of Q3 with a little more cash on our balance sheet than we wanted to quite a strong collection performance in the last couple of weeks of the quarter, which as you know.
Our blackout period around earnings so that really limited how much of that cash we could deploy in Q3.
That puts us in a very good position as I mentioned in my remarks, as we head into Q4 so.
As I indicated in those remarks, we think we could as much as double what we spent in Q3 on.
The second 50% of the program and as we said that's likely going to be buybacks just to put that in perspective.
We did buyback over 400000 shares nearly 450000 shares in Q3 and so.
If we're able to hit that that doubling level of that depending on the share price, we could buy back as much as a million shares or maybe even slightly more slightly more as we go through Q4.
Lucas I think one of the surprises for all of us.
We've put a lot of thought into the capital return program when the allocation method.
What.
All of the modeling that we did I think what surprised US was how lumpy cash flow can be at the end of the day.
Matt that was kind of generous, but I think it will last day of the month, we received almost $100 million receivable. So great story, but it really kind of makes the numbers a little distorted.
And we've had quarters, where people didn't pay on time. This was one of those weird quarters, where people paid ahead of time so.
Unfortunately, I think the.
The capital return can be a little lumpy, but I think the bottom line is the intent is the same and that is 50% of discretionary cash flow is going to go to the variable dividend in the second 50% will ultimately end up is share buybacks or the.
The buy down of the convertible debt.
Very interesting well maybe at current inflation rates people, just can't wait to get rid of their cash so.
I really appreciate it.
I really appreciate the perspective and continued best of luck.
Thank you Lucas Thanks Lucas.
One moment, while we compile our next question.
Okay. Our next question comes from the line of Nathan Martin from the Benchmark company.
Nathan Your line is now open.
Hey, guys. Thanks, Thanks for taking my questions.
Yeah, maybe I'll start off just touching on <unk> coking coal realizations.
Possibly a little lower than some had thought just based on someone like prior conversations obviously, we saw a lot of volatility in the price during the quarter.
Maybe can you give a little more color on that result, and then I guess really what I'm trying to do that as well just looking forward to the fourth quarter is let's just say we assume for example, benchmark stays flattish quarter over quarter in the fourth quarter, which I think it's actually averaging pretty close to that right now, but given the fact that prices have been notably more stable.
We're in the third quarter is it is it unreasonable to expect realizations to be up in the fourth quarter. Thanks.
So Nate.
Just kind of reviewing the performance for the third quarter. If you just take the benchmark for high vol. A I think it averaged for the quarter around $2 74.
<unk> that to short and then back out.
$60 of transportation costs associated to get it from the mine to the port.
And you are kind of back into that mid 100, <unk> hundred 80, $587 a ton.
Obviously across our portfolio, we're shipping to a lot of different places around the world. So you are affected by a lot of different benchmarks, but at the end of the day, that's kind of the big driver that high vol, a price and kind of netting back using that type of methodology.
So I think from our perspective, we feel that we had.
The achievement of the price was kind of where we expected it to be for the quarter as we move forward. Once again kind of name where that price is going to be for the quarter and it's going to be a big driver as far as what the final outcome will be.
But as we sit here today, we would expect.
If things were to stay relatively flat from where they are now we would expect with essentially a modest uptick but it would be very modest once again, depending on what you're showing us that youre coking coal price today at <unk>.
Across our portfolio as we move into the fourth quarter.
So they just connect that final dots I remember the number we reported for our realization average utilization on the coking coal side was 180 950, So we view that as actually a premium on having outperformed where the market was through the quarter and then remember too you also have some level of volumes that were a bit lower <unk> volume.
We are a bit lower so actually on a realization basis fairly strong in Q3 relative to the benchmark numbers.
Got it thanks for that commentary guys.
Yes.
Not surprising to see full year coking coal shipment guidance coming down.
Maybe a little bit lower than expected. So maybe can you guys talk about what gets you to the high end versus the low end of that revised guidance is it still mainly logistics space sounds like production is improving just any color there would be great. Thank you.
Yes.
Nate I think.
The issue that we continue to work through is how well is that ramp at Leer South post styled as sandstone going to continue as we move forward that's a big driver here as.
As we work to the end of the year.
You have to look at the flexibility of all of our operations and where they're at the other item that kind of impacts are what we're looking for in the fourth quarter given the timing of how we're continuing to mine at our two longwall is both leer and Leer South we actually will have both operations, we expect both of them to be in.
Longwall moves prior to the end of the year.
Typically you don't see two longwall moves falling in the same quarter.
But we're going to experience that here and so that's just giving us a little more conservatism around the number that we're looking at here longwall moves are nothing of any significance for us. They are kind of part of the routine operation of the mine.
We get them done very efficiently very effectively typically in the east and a 10% to 12 day timeframe, but having two of them fall in the same quarter, it's kind of giving us a little more caution as far as what we're looking at from a guidance perspective.
And some of the some of those numbers in terms of guidance, we're assuming that logistics continues to be.
Bit a bit challenging.
Particularly as you look at vessel shipments and so we would expect to end the year with with healthy inventories not excessive but healthy inventories. So look we could certainly outperform that midpoint number, but we think that it's prudent to guide to the levels. We are guiding to and we'll see where it goes and if we don't ship in Q4, we could be shipping additional volumes in Q1.
So we'll see how it all plays out.
That's a good question can you remind me I think you guys had $1 1 million tons of inventory at the end of the first half kind of where where does that stand today.
Yes, I think we're right at around 900000, a million tons right in that arena right. There so essentially flattish over the course of the quarter.
Got it thanks, Thanks John .
And then maybe kind of shifting gears to the cost side and then John you just alluded to this too.
Two longwall moves and Leer south in the fourth quarter, maybe contributing to a little bit of an increase in full year met coal.
Cost guidance.
How would you expect that to kind of trend heading into 'twenty three I think maybe in the prepared remarks, there was some commentary around where we would expect that they're going through.
Any additional color there would be great.
Yes, Nate I think.
Clearly we are operating as an industry in an environment, where there are a lot of inflationary pressures. It's affected a solid is affecting us also but the biggest driver for us and the biggest thing that will move forward from where some of the challenges that we had from a production standpoint and volume related so as we move forward with the improvement in volumes, we're seeing in Q4 and <unk>.
Spite the inflationary pressures once again, we see a 10% drop in fourth quarter unit costs.
As we step into 2023, we expect that improvement to continue we haven't provided guidance yet.
But a modest improvement from the levels that we've seen in in 'twenty. Two just from the expectation of improved volume performance in 'twenty. Three is what we're expecting and we'll provide a full update in the fourth quarter earnings call.
On our projections, so Nate again, just do the math and connect the dots. So if our costs have been around $100, a 10% step down puts us at around $90 and as John said, if we see another market step down from there. We certainly believe that that will put us.
Very very easily and nicely into the first quartile in terms of cost and really well to the left on that cost curve. So we feel good about the trend obviously, we want to take it as long as we can go but some prudency in some in some caution here given just an intense inflationary environment.
Got it very helpful guys I'll leave it there. Thanks for the time best of luck through the end of the year.
Hey, thanks for the call.
Okay, one moment, while we bring on our next caller.
Okay. Our next question comes from the line of Alex Hacking from Citi. Alex Your line is now open.
Good morning, Alex Hi, Hi, good morning, how are you.
I'll just ask maybe a quick one.
Is it coming to the end of the hour on.
On the met coal.
Shipments it sounds like at the moment. The mine is may be the bottleneck earlier in the year. It was the logistics.
Yes, I mean, I guess as we head into 2023, I think you know you've discussed that you're hopeful that the mine.
Leer South can support run rate close to 10 million tons, a year, but do you think that.
The U S rail and Port logistics.
Can support 10 million tons a year next year.
And also do you think that the market can support 10 million tons next year, given all the closures that we've seen in European blast furnaces, I guess, maybe you could discuss.
The current market conditions, and whether or not youre, having challenge any challenges place Nicole Thank you.
Yes.
Alex This is Paul I'll start with it's in megawatt drexler jump in here, but as.
As you look going into fourth quarter and into 2023.
I got to tell you the eastern railroads I think are doing a pretty good job.
Getting back on track with things and we really have no complaints about what they've done in the last couple of months.
And I think we're getting really good messaging on 2023, and obviously the one big thing that will help us as Curtis Bay coming back fully online sometime this quarter. So we're expecting to head into 2023.
In pretty good shape all around.
The verb for one second from your question.
The west is.
Particularly with the <unk>, we've had one of the railroads just have terrible performance.
Fortunately, we are heavily weighted to that railroad and it's been difficult it's cost us a lot of money this year.
But.
Back to the broader question on the market, we're cautious about what's going on in Europe , and I think frankly, that's why you're seeing us put a lot more emphasis on Asia, and particularly India, and Thats, where we see our market ultimately growing towards and Thats. What our plan is threats anything yes, no no I think Paul it's excellent.
I think just to add to that despite some of the challenges that we're seeing with economic conditions with kind of the concern around.
Closures.
We continue to see on the supply side a lot of challenges.
Even despite the significant and healthy price <unk>.
<unk> seen a lot of challenges in Australia and that was even before they had some of the issues with whether you have the threat of industrial action with BHP.
In Australia, there has been a lot of noise around.
Just a lot of concerns or specific logistic.
Mine issues.
Across the world. So there continues to be a lot of support in the markets that we see out there that we continue to take advantage of it.
Okay.
Thanks, I appreciate the color.
Thank you Alex.
Operator are you there.
Yes.
Okay.
Okay.
Our next question comes from Michael Dudas from vertical research Michael Your line is open.
Thanks, guys good morning, everybody.
Okay.
Paul or John as you budget as you are in the budgeting process for 2023 is it prudent to look at your input costs labor et cetera.
To keep it flat from where it is today.
A significant.
Plus let's say, 5% or do you see any indications that there may be some moderation in from these high levels you see some maybe help that could come about in 2023.
Yes, Mike.
Great question and it kind of one of those crystal ball type questions, but I think you're hitting on an interesting point right as the industry has worked through this year, we've all encountered significant at very healthy inflationary impacts.
<unk> seen significant increases in steel input costs.
Fuel costs.
Skyrocketed from last year.
Those are areas, where maybe there is flattening our moderation that can occur but as as once again, we will update with what full expectation at the next call as we look forward.
Kind of hard pressed to see a significant decline in those types of inflationary pressures, but at the same time hopefully we're not seeing the same things that affected all of us over the course of this year as we move forward. So maybe there is maybe more of a return to modest inflation, but.
We can all debate, where the economy is ultimately going to go here and but I think once again from a modeling perspective, a modest uptick.
Ongoing inflation might be prudent here from where we are today.
Right I think you can make a great point the industry and you guys have absorbed all this amazing input costs and labor et cetera. So I think that could be helpful. Going forward. Just one quick follow up looking at the PRP and looking at your expectations for next year shipments mid point and looking forward.
If.
And you set up some longer term contracts that you indicated in your trials looking longer term.
Is.
As the accelerated deceleration of the output from those from Black Thunder.
I guess, how long versus when you put out the plan was a two or three years ago, what the falloff might be in production how does that look today, given the market the market demand price and what you've done with your re their funds so far.
Look I'll start and maybe that I'm sure will jump in on this but I don't think really anything has changed in the <unk>.
We could all argue the public policy side of this but.
I look at it from a pretty pragmatic point of view.
And less coal powered power coal fired power plant was built 10 years ago in the United States.
And the average age is creeping up 47 48 years.
This trend is continuing I think we will see slowdowns and retirements over the next two or three years.
This thing is heading towards a pretty fast decline rate.
And I think as we look at what we're doing we're taking into account that ultimately it glide path on thermal coal consumption in the U S and we're tailoring our black Thunder operation towards it.
And I think we can have in the industry can have on the thermal side are very profitable.
Period of time, where this call is going to be needed and we will do very well, but we're not going to do is invest anything to increase production. If anything we're just going to continue to follow the market and I think the industry will do well if thats kind of the tech that's taken.
Mike we were at about $1 billion $1 1 billion tons of thermal coal consumption in the U S. In 2008 last year that was about 520 million tons. This year around 190 million tonnes. So but the reality is that as Paul said the coal fleet is aging out and we're seeing retirements, we could see some extension.
In fact, we've seen about 15 gigawatts of extensions announced here in the REIT in recent months, which is which is certainly helpful.
Have about 500 million tons of reserves on the PRP that are permitted and that we fully intend to mine that would allow us to produce at these sorts of levels for the next several years and generate a lot of cash there.
But in the end, we do believe that the fleets can age out because we arent building any new coal plants as Paul said, we are getting aged age on these plants. So.
Our view hasn't changed and we certainly believe there is an opportunity to generate a lot of cash over the next five to seven years from these assets and we built a really strong book of business that we plan to leverage. The fact is that that book is not just strong for 2023, but we've got a lot of length on it as well we've got strong commitments for 'twenty four 'twenty five 'twenty six so feel good about.
What we can do there, but we don't we have our view of where thermal coal consumption is going to use hasnt changed I guess, one final point look this year coal conservation has been a significant part of the step down in consumption utilities, just arent able to get the time. So would say that we are seeing a little stabilization likely could have seen generate.
And coal demand for power generation it roughly equivalent to 2021 levels. This year the utilities cant get the coal so.
The fact is that demand has has stabilized here at that and that could persist and Michael I want to wrap up real quick we are swift kind of final comment on that the teams at our operations in Wyoming, and Colorado, they're doing an incredible job.
With this very challenged.
This kind of environment that you see out there.
There's plenty of opportunity and we've worked real hard they've worked real hard to make sure that we are all in a position that where these windows of opportunity are created we're going to we're going to make a lot of hay, while the Sun's shining and Thats, what theyre doing theyre doing an incredible job.
As Dirk indicated we believe theres a lot of lengths there we need to stay on the right point of the cost curve in the operations or regions that we're operating in and take advantage of these market opportunities and the teams there have done a wonderful job.
I really appreciate those thoughts excellent job guys. Thank you.
Thank you Sir.
Okay, I would now like to turn it back to Paul Lang, President and Chief Executive Officer for closing remarks, Paul.
I want to thank you again for your interest in arch as I've mentioned earlier 2002 has been a period of great ongoing progress for the company. We've completed the hard work and taken the necessary steps to build a compelling cash generating model. Our focus now is to continue to refine our operating platform and to wring out additional efficiencies.
In all aspects of the business.
Along with this we believe entire it's entirely appropriate and we fully intend to continue to reward our shareholders for their investment and trust over the last several years.
With that operator, we'll conclude the call and we look forward to reporting to the group in February stay safe and healthy everyone.
Yes.
Very good. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Thank you.
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