Q4 2022 Arch Resources Inc Earnings Call
[music].
Good day and welcome to the fourth quarter 2020 to arch resources earnings Conference call.
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I would now like to turn the conference over to Dexter <unk> Vice President of strategy. Please go ahead.
Good morning from St. Louis and thanks for joining us today before we begin let me remind you that certain statements made during this call including statements relating to our expected future business and financial performance may be considered forward looking statements. According to the private Securities Litigation Reform Act forward looking statements by their nature address matters that are to different degrees.
He is 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.
Wired 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 Youll, 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.
Thanks deck and good morning, everyone. We appreciate your interest in arch and are glad you could join us on the call today.
I'm pleased to report that the arch team delivered another strong operating and financial performance in Q4 with adjusted EBITDA of 256, and a half million dollars due in large part to our core metallurgical segment that had significantly improved sales volumes and unit costs and cash margins.
In short our Q4 results serve as the capstone to an exceptional year for our tree sources.
During 2022, the arch team achieved a record financial performance.
Liver in full year net income of more than $1.3 billion or $63.88 per diluted share generating adjusted EBITDA of $1 $3 billion and reporting operating cash flows of more than $1.2 billion.
We also strengthened the balance sheet repaying more than 70% of our indebtedness.
Turning to us to a net cash positive position less than one year. After completing our leer south growth project and increasing the balance in our industry first thermal mine reclamation fun to the initial target level of $136 million.
Finally, we relaunched our capital return program deployed nearly $900 million over the last year, which included almost $515 million in quarterly dividends and avoiding the dilution of approximately $2 9 billion shares through buybacks and the settlement of more than 90% of our convertible debt.
Yes.
I'm pleased to report that the team continued to extend its long standing industry leadership in environmental social and governance performance during 2022.
Setting the standard for ESG excellence in my view is one of the keys for our success and part of our social contract.
Just a few highlights in this arena, we achieved the best safety record in the history of the company, which is approximately four times better than the industry average we receive just once macro violation across our operating portfolio versus an average of 12 by our peers.
And we received the 2022 excellence in Reclamation award the state of Wyoming highest reclamation honor for the extensive and exemplary work conducted at coal Creek, where we've now completed.
Roughly 75% of the final reclamation work at that operation less than two years.
Well these are sick a significant list of accomplishments.
The work the team did in 2022 to lay the foundation for continued success in 2023 and beyond is equally important as evidence of that progress we're guiding to markedly higher sales volumes in our core coking coal franchise in 2023 as well as markedly lower unit.
Costs for the segment.
We added seven World Class Asian steelmaking customers in 2022 for 2023 shipments.
Setting the stage for long term success in that fast growing region.
We've now contracted about 75% of our projected 2023 coking coal output inclusive of recent sales and at the midpoint of our guidance and we further augment at our sales book for our legacy thermal franchise and are now entering into the year and effectively.
We sold out position with a significant contract book in the outer years as well.
Before I move on I'd like to take a moment to discuss our capital return program, which we re launched in February 2022.
As indicated we've already used that program to reward shareholders at a very significant manner deploying almost $900 million over the last year.
As a reminder, under the program's allocation model, we target to return 50% of the prior quarters discretionary cash flow via dividends and the use of the second 50% of discretionary cash flow on a menu of other value driving an options including share buybacks.
In our view, both the capital return program and the allocation model remain appropriate durable and well aligned with shareholder interests and preferences.
Given this we fully expect these programs to remain the centerpiece of our value proposition as well as our efforts to maximize value for our shareholders.
Now, let me take a few minutes to comment on the coal markets before turning the call over to John to provide some additional color on the operations starting with the seaborne metallurgical markets in the past global Hot metal production has acted as a primary driver for coking coal markets, which makes sense higher hot metal output.
Means increased demand for coking coal.
And that's what makes the current market conditions so interesting at.
At present coking coal prices appear well supported even though global hot metal production, excluding China was down eight 8% in 2022, coupled with the fact that roughly 20% of the global blast furnace capacity, excluding China is idle.
Today, the price for premium coking coal F O b the vessel in Queensland now stands at $385 per metric ton and the price of high vol. A coking coal off the U S. East coast is being assessed at $325 per metric ton.
Moreover, fuel market dynamics are starting to show signs of improvement.
Hot rolled coil prices up around 25%.
In the world's major steel markets.
Just since November .
At the same time, the world's idled blast furnace capacity is starting to turn back on in the face of gradually rebounding steel demand, which is also providing additional support for coking coal markets.
Arch continues to view underinvestment in new and replace with coal supplies as the single most compelling support mechanism for the current construct of coal market dynamics.
In 2022 Australian coal coking coal exports were down 5% or more than 9 million metric tons, when compared to the already weak levels of 2021.
Meanwhile, the second and third largest global suppliers of high quality coking coal and the United States and Canada were up only modestly versus 2021, despite strong pricing throughout the course of last year and both countries continue to significantly under shoot their pre pandemic production levels.
On top of these fundamentals the war in the Ukraine continues to constrain Russian products and the broader market, while injecting greater uncertainty in the overall global coal supplies.
Added to this we view the apparent reopening of the Chinese market to Australia, and Kohl's after two years of lockout as a generally positive development.
While this change in position by the Chinese will surely trigger some reorders.
Seaborne trade flows back to their natural markets. It does seem to be part of a larger rebalancing of the global coking coal supply demand equation.
On the thermal side of the business global markets have corrected significantly in recent weeks with Asian pricing continuing to hold up better than European indices on a relative basis.
We believe much of this decline in Europe is attributable to moderating demand for thermal coal in the face of a mild winter weak economic activity widespread energy conservation efforts and the increasing availability of LNG imports at.
At the same time Asian demand remains strong and the New Castle Index is currently trading at $220 per metric ton, which is well above the historical average.
In summary, with the steps we took last year arch is prepared to manage through a period of market weakness should world economic conditions deteriorate further, but just as importantly, we're also exceptionally well positioned to capitalize on the situation when the macro environment strengthens.
Global growth accelerates and steel markets rebound.
In addition, we continue to view the intermediate to longer term coal market dynamics as constructive.
Given the ongoing underinvestment in the space.
Heading into 2023, we plan to keep our eyes squarely on clear concise and actual plan for value creation.
Intend to leverage our competitive coking coal portfolio with its.
Ending customer base in Asia, along with the benefit of our cash generating legacy thermal assets to again provide significant amounts of discretionary cash through 2023 and beyond.
With this we plan to use that cash to continue to reward stockholders through the clearly articulated tenets of our capital return program.
With that I'll now turn the call over to John Drexler John .
Thanks, Paul and good morning, everyone as Paul just discussed the arch team capped off the year in impressive fashion delivering strong operating results exceptional progress on our strategic plan and industry, leading execution on our key ESG metrics.
Moreover, the team set the stage for further value creation in 2023 by driving significant productivity gains in our core metallurgical segment managing costs effectively in the face of significant inflationary pressures and expanding our contract booked in a strategic and advantageous way.
And there could be nothing more important than our safety and environmental performance. Our teams use an employee driven safety process. The cornerstone of which is peer to peer observations and we are set to achieve a critical milestone when we record our two millionth observation sometime in the first quarter those.
Those 2 million observations achieved over the program's 16 years are a true testament to the hard work of the entire arch team.
I couldn't be prouder of the focus passion and dedication our workforce Gibbs to safety and environmental stewardship.
On behalf of the entire management team I want to thank the arch workforce for their great and ongoing contributions to the company's performance and success.
Let's turn now to a discussion of the key drivers in our fourth quarter operating performance, starting with our core metallurgical segment.
As anticipated the metallurgical segment operated at a much improved productivity level in Q4, driving a 16% sequential increase in shipping volumes and just as importantly, a 13% sequential reduction in average unit cost.
Of course, the continued maturation of the layers of Leer, south factored significantly into these improvements.
During Q for Leer, South achieved materially higher longwall advance rates when compared to Q3 capitalizing on much improved geologic conditions, and making steady systematic improvements and overall execution across a wide range of fronts.
The team is sharply focused on maintaining the strong upward momentum in 2023 and through the first half of Q1 that is exactly what we're seeing from the Leer South team.
As you will have noted our 2023 guidance reflects coking coal production levels of $9 3 million tons at the midpoint due in large part to the continue advances at Leer South.
As we have indicated in the past we believe the ultimate normalized run rate for our coking coal portfolio will be around 10 million tons, which we expect to achieve starting in 2024.
We are also guiding to per ton coking coal cost of $84 at the midpoint.
First is the $86 83 per ton, we reported for Q4 and $93.61 per ton for the full year of 2022.
While this is a significant improvement we expect these cost figures to continue to trend lower in 2024, as well and keeping with the projected higher production levels.
As indicated in the release, we expect our metallurgical shipping volumes to approximate fourth quarter shipping levels before increasing incrementally during 2023 remaining quarters.
Our legacy thermal segment also made a significant contribution to our Q4 results. Although that segment's results were dampened considerably by further deterioration in western rail service during the quarter.
As a result of that poor rail performance sales volumes declined $2 3 million tons on a sequential basis and undershot, our customers' nominations for rail movements still further.
Those reduced volume levels also served to pressure unit costs higher which increased nearly a dollar per ton in Q4 relative to Q3.
Even with these headwinds the segment still generated segment level EBITDA of $63 $2 million for the quarter, reflecting both the strength of our contract book and the hard work. The team has done to enhance our operational flexibility in the face of volume changes.
As a reminder, the legacy thermal segment has now generated a total of nearly $1 $3 billion and segment level EBITDA over the course of the past 25 quarters, while expanding just $138 $6 million in capital underscoring yet again, the power and effectiveness of our harvest strategy.
As you are aware the coal industry is dependent on rail service to execute on our plans.
The poor rail performance over the last year in the West has been an extreme disappointment and dampened our results. We've continued to work with the railroads closely and it will be important that they succeed in addressing their challenges in order for us to fully execute on our plan for our thermal segment in 2023.
Turning to our contract book in addition to the strong operational execution. The arch team made further advances in expanding and strengthening both our metallurgical and thermal contract booked during Q4.
First our metallurgical book inclusive of new contracts signed during the first several weeks of this year. We have now entered into commitments for nearly 75% of our expected 2023 coking coal production at the midpoint of guidance via an advantageous mix of index based and fixed price contracts.
Importantly, and as Paul noted the coking coal books Asian waiting continues to increase as well during.
During the course of 2023, we signed first time commitments with seven leading steel producers in Asia that we could easily foresee becoming stalwarts in our contract book long term.
That's important of course, because Asia is almost certain to be the primary growth driver for steel production over the next several decades.
By becoming part of these steel producers coke, making blends and demonstrating the tremendous value in use of our high quality coking coal products. We are building a strong durable and beneficial outlet for our future metallurgical output.
The marketing team made great strides in continuing to build out the thermal contract book as well as a result, we ended the year in and effectively sold out position for 2023 with our western operations.
Importantly, we already have a significant book of thermal business signed for 'twenty 'twenty, four and a solid start to contracting in the out years.
While we are facing some headwinds in the thermal segment from still weak real service weak natural gas pricing and the recent pullback in international prices. We believe we are still positioned for another strong year of EBITDA generation from our thermal assets.
As noted in our guidance table for the year, we have already locked in an attractive margin for our thermal segment and would expect that margin to expand further as we lock in pricing on incremental export volumes.
However, it's important to point out that the Western rail service remains a significant question Mark and is likely to constrain our total export opportunity for the year.
Our existing guidance includes 750000 tons of priced exports from west Elk.
As we sit here today, we are reasonably confident that we will export an incremental 500000 tons of west Elk coal that is not currently reflected in the guidance table and hope that there is meaningful upside to that number.
Based on today's market prices, we would anticipate that those 500000 tons alone would add another dollar per ton to the projected average margin for the segment as a whole.
Of course, if the rails can facilitate additional export volumes beyond that level the margin expansion for the segment would be greater still.
In summary, while we are pleased with the success achieved over the course of 2022 'twenty 'twenty. Two we are squarely focused on the future and on the opportunity ahead.
We fully intend to leverage our platform of low cost operations and our portfolio of committed sales to again generate significant value and cash flow in 2023 and beyond.
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 begin with a few comments on the fourth quarter financial results, which were a strong end to an outstanding year.
EBITDA for the period totaled $256 $5 million, an improvement of more than 15% from Q3 levels.
Net income for the quarter was $470 million and included an income tax benefit of $253 million from the release of the valuation allowance on our federal net operating losses.
As we discussed previously the release of the valuation allowance is a noncash item and was due to the significant improvement in our income levels and expectations for fully utilizing the federal Nols.
Yeah.
From a cash flow perspective, operating cash flows for the quarter totaled $194 million, which despite the improvement in earnings was our lowest quarterly total for the year.
We had an increase in working capital during the quarter a trend that we expected and discussed in detail on last quarter's call.
Included in the operating cash flows as a nearly $6 million contribution to the thermal mine reclamation fund, including interest that was earned on the funds.
We completed the planned accelerated funding earlier in the year and but now anticipate only modest contributions inclusive of earned interest as we target keeping the fun in line with the Black Thunder Arrow liability.
Capital spending for the quarter totaled $78 million. This was the highest quarterly total for the year and resulted from the delivery of several items that had been delayed by supply chain issues.
As we move into 2023, we would expect the quarterly run rate to revert to a more ratable cadence.
I'll discuss the capital return activities for the year in more detail shortly.
But discretionary cash flow for the fourth quarter was $116 million and consistent with the capital return Formula. Our board has declared a dividend of 50% of that amount or $3 11 per share.
The dividend will be paid on March 15th to stockholders of record on February 28.
We ended the year with cash on hand of $273 million and total liquidity of $401 million, including availability under our credit facilities.
Cash and liquidity at year end were essentially at target levels.
Turning now to the capital return program as we previewed in October we came into the fourth quarter with cash levels that were well above our targets and an expectation to use that excess cash to ramp up capital returns.
As you can see we clearly followed through on those expectations deploying nearly $352 million during the quarter.
That breaks down as follows $192 million of dividends paid.
$101 million to repurchase nearly 690000 shares and finally $59 million to retire convertible bonds.
Yeah.
Paul has already mentioned the full year dividend, but I wanted to provide some additional detail on the second 50% of the program.
Including the reduction in the diluted share count that he mentioned.
For the full year, we deployed approximately $367 million on stock and convertible bond repurchases.
With $208 million used to retire convertible bonds and the remainder for share buybacks.
Prior to launching the capital return program, our fully diluted share count was approximately 21 6 million shares.
Notably had we not bought back shares or settled convertible bonds. During the year that number would actually have increased by $1 2 million shares to almost 22.8 million shares by year end.
That's principally because absent the steps we took to settle the bonds, we would've incurred additional dilution stemming from the 2022 dividend payments because those payments resulted in an increase to the conversion rate for the convertible bondholders.
That's why in a nutshell, we prioritize the settlement of the convertible bonds rather than share buybacks at the launch of the return program.
We knew that in doing so we would not only reduced the diluted share count at the time of the bond repurchases, but we would also avoid the additional dilution, resulting from the dividend payments throughout the course of the year.
And that's exactly what happened in some the $367 million, we used for stock and bond repurchases translated into a reduction in the year end diluted share count of more than $2 9 million shares.
With a reduction of $1 1 million shares from buybacks share buybacks and the remainder attributable to the bond repurchases.
On a per share basis that is effectively an average price of $125 per share.
In comparison had we focused our efforts solely on share repurchases that same amount of capital would've bought back less than two 4 million shares at more than $154 per share.
So all the amount of capital returned in 2022 was impressive on its own the way in which the capital was deployed in the sequencing of that deployment has also significantly benefited shareholders.
Before moving on I wanted to touch on two final points related to the convertible bonds.
First with the repurchases that we completed in the fourth quarter. We now have just $13 million of principal that remain outstanding that.
That represents just eight 5% of the original issuance.
Second the capped call that we purchased at the time of the bonds were issued remains outstanding and full and has an intrinsic value of $62 million representing.
Approximately 425000 shares at yesterday's closing stock price.
Yeah.
Turning now to 2023 and starting with the first quarter. We are clearly encouraged by what we're seeing in the met markets. So far this year.
With higher index pricing quarter to date relative to Q4.
While we expect to capture that benefit in our first quarter earnings the cash flow timing is likely to be delayed.
We expect a significant build in accounts receivable this quarter.
As many of our Asian shipments are initially built it a provisional price from last quarter with the final true up ultimately to be received in Q2.
Additionally, aside from these pricing dynamics, we typically see an investment in working capital in the first quarter and we expect that to be the case again this year.
Yes.
Before turning the call over for questions I wanted to provide some brief comments on a few of the financial guidance items in the release.
First our capital spending this year will be in the range of $150 million $260 million and consists entirely of maintenance capital with over 80% of that related to the core metallurgical segment.
Despite the inflationary environment, we have maintained the capital guidance in line year over year.
Second you'll note that we expect net interest expense of less than $5 million, reflecting our tremendous progress in reducing indebtedness during 2022.
Notably interest income on our cash and short term investments will largely offset the interest on our remaining debt.
Finally, with respect to income taxes now that we have released the valuation allowance, we expect to have a more normal tax provision on the income statement with a range of 10% to 15% of pre tax income.
For 2023, we expected cash tax payments will be less than 5% of pretax income as we continue to benefit from net net operating loss carryforwards.
As you model years beyond 2023, we would expect the tax provision and tax payments to be more closely aligned in that 10% to 15% range as we will have utilized most of the Nols.
With that we're ready to take questions operator, I will turn the call back over to you.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Lucas pipes with B Riley Securities. Please go ahead.
Thank you very much operator, and good morning, everyone.
I'll start.
Good job on the on the progress at Leer and near South on the cost side, that's that's really impressive.
Aye.
One is I spent my first question here on the met side, then and just get a little bit more sense for the cadence of shipments throughout the year.
Is it pretty ratable do we expect maybe a little bit more here at the beginning.
Is it back end weighted if you could.
Some color on that I would appreciate it thank you.
Hey, Lucas John Drexler, how are you or is the cadence on the on the volumes as we indicated in the release.
As we sit here today, where we're looking like we're going to be flat from Q4 to Q1, and then if you take the midpoint of the guidance and kind of distribute that with the difference of what we ship in the first quarter right now the expected cadence would be kind of ratable for the back three quarters of the year. So.
We're happy with the progress that we've been able to make at Leer and Leer South in and are thrilled with the increase in the volumes that we expect to achieve over the course of our 23. So that's kind of our view on the cadence right now.
That's helpful. Thank you and then switching to the thermal side John you made some comments in the prepared remarks I think it was a.
500000 tons could move the total margin in the thermal business by a dollar if you could just.
Mind us what the dynamics are there and then the sales guidance for the year I think from the low end to the high end of about $8 million.
Tons.
What is what are the key drivers there would appreciate I appreciate that color and then as you look out to 2020 four.
How is the thermal sales book position today, and what's your outlook in light of the weaker gas price environment. Thank you very much.
Yeah. Thanks, Lucas you know as we sit here today that the and we talked about it throughout the course of the prepared remarks. The challenges that we've had really had been rail over the course of 2022 it's significantly limited our opportunity deliberate coal into the export market you know as.
As we sit here today that coal going into the export market, even with with some of the pressure that we've seen on some of those international pricing still nets back to a very healthy margin for us and so those 500000 tons that we're looking at right now we're fairly confident we're going to be able to get those exported Ah.
They're not priced right now clearly, though at todays market price those will be leveraging in and would add a dollar per ton to the margin more importantly, though we think there's a larger upside on the exports as well if the rails perform we could continue to enhance that thermo margin significantly.
If we have the opportunity to get more coal off the coast.
Look at those volumes at stack those those volumes are principally off the west coast and so youre looking at a new castle price of $220. If you look at the spot and sell at those prices you know that's what that would translate into given our expected costs at west. Alex. So you can you can see the 500000 tons is it's still quite leveraging its less than we'd like to ship.
It's less and we hope to ship, but it's the amount we feel we feel confident about at this point and still it is a significant uplift in the average realization and then the average contribution out of the total contribution for the thermal segment.
From a thermal perspective at least is the.
Wide range in the guidance that we provided the 8 million tonnes. So much of that is driven by where the where the rails are going to perform we are sold out essentially at the midpoint of the guidance I don't want to go all the way back to the beginning of 'twenty two but if you remember as we worked through the course of 'twenty two because of the significant rail challenges we had we.
Ended up shipping last call than we had committed over the course of the year right now our guidance you know kind of aligns with what we were able to ship in 'twenty. Two we're hopeful that the rails continue to improve which would give us some additional opportunity, especially with the leveraging export tons that we just discussed.
And look at that again that it's for 2024, where we're probably not ready to go there yet it's premature for us to talk about the sales book and quantify that in a significant way, but we do have a very solid foundation. We have built we feel really good about where we are in the pricing. We've achieved so we would expect a strong pricing you've seen here or you expect to see in 'twenty.
'twenty three to roll into 2024, as well, but we're not ready to give a precise volumes as yet I would only say again, it's a really quite solid foundation, we feel quite good about our position for 'twenty four as well.
That's a lot of color I really appreciate that.
Best of luck.
Thanks, Lucas Thank you Lucas.
The next question comes from David Gagliano with BMO. Please go ahead.
Hi, Thanks for taking my questions I just have a couple of quick ones I think.
Kind of talked about it a little bit, but I was wondering if I could just ask directly what what's the split.
In the.
The average price of $17 50 at a time for.
Overall U S thermal what's the split between Permian and west Elk embedded in that.
So David it's about call. It 15 to 25 or so is kind of the P. R. B price on the 65 million tons or so of that John referenced and then west Elk. Obviously provides the you know the the uplift from that level for the average for the average committed pricing on quite frankly again fairly Mas.
Just export tons and the volume splits about 65 five.
Correct absolutely.
Okay. All right helpful. Thank you and then just on there was a comment earlier about you know potential working capital build in the first quarter I just wanted to.
Ask you that can be quantified obviously just to help of the calibration of the.
That's one of the variable dividend.
Yeah, Dave This is Matt.
One of the things John highlighted in his discussion was the success we've had on the Asian customers. You know the the good of that is that you know those are some some great customers that hopefully will be long term.
Folks that we'll sell to and be in their book for a long time. The downside if you want to look at it as in a rising price environment, we will hang up more of those receivables on the balance sheet and so that's what we're expecting this quarter as you see the the P. O V price rise throughout the quarter the way some of the pricing works there is a provisional.
Just that we'll bill out and collect in the quarter, but that true up to the higher pricing will come next quarter. So when you look at it the receivables I think we'll see a fairly significant build in receivables much more so than what we saw in Q4.
And then you know there are some typical seasonal working capital items that we faced in Q1 inventory build related to the lake season business typically some of the payables will decline from year end levels to the end of first quarter as I look at it I think we could see in a working capital build this this quarter of at least $100 million.
And you know obviously most of that will get back later in the year and in a lot of it in Q2, but here in Q1 expect to see a pretty significant headwind.
David This is Paul.
And I think I said last quarter I think the biggest surprise any of US is how lumpy the working capital can be and you know.
My guess is we're going to see a corresponding.
The impact on dividends in 2023, where they're just not going to be ratable theyre going to be up and down but you know obviously over the course of the year, it's going to even out it'll all work out.
Okay.
Okay, Great. That's very helpful. Thank you and then.
Sticking with the capital allocation just on the buybacks, obviously nice number this quarter and you know after adjusting for working capital and any reason to expect a on a quarterly basis, the sort of the 50 50 split.
To move that much in one direction or the other between specials and buybacks.
I mean right now David I think the way the program was set up with the allocation model, you know, where we're going to stick with it 50 presented on the discretionary cash flow to dividends is very simple people understand it.
Absolute working capital changes, it's it's very simple.
It's a little more lumpy is going to be the repurchases and what we do with the other 50% but.
David I think we believe the program is working well, it's been well received by our shareholders.
And our plan right now is to stick with things.
David It's a fairly simple formula, but as Paul said, we're gonna help because we pay the dividend in arrears in the way we pay it.
And to be lumpy, but our general view is you know 10 quarters from now when you look back over what's been what's been paid out for the you know the first 50, the second 50, they're going be relatively equal because again, it's just math, having said that we are going to see lumpiness quarter to quarter. So we tried to provide guidance around that not always pass.
We will provide precision.
But again, it's the.
50, 50 will hold it just may not hold in any given quarter.
Perfect. Thank you. It's very helpful. Last question I know, there's gonna be quick but not that quick really quickly now last question can you talk a little bit about the customers on the U S. Thermal side I know, it's early days the numbers haven't been good on the on the demand side.
Can you just speak through you know potential as we get into the year for you know maybe deferrals and how much is kind of open for.
Reopening and stuff like that you know plus or minus how much in that in that and that and the committed volumes for 2023.
Yeah. Good question, David I, you know as we sit here today and we look at the book for 'twenty three.
You're right there are some headwinds we referenced those but at the same time, you know as as we're talking and looking at customers and in the inventories that they have you know we continue to see that there's demand for rebuild that needs to occur from an inventory level that we believe it.
It will continue to play itself through over the course of the year you know well.
<unk> will continue to evaluate things as we move forward, but we have good confidence that a well for what our committed levels are that we expect to ship those over the course of the year.
So Dave I mean, if you'll recall.
Call last year in 2022, there was an awful lot of coal conservation going on because of poor rail performance and so you know generators would've been burning more coal and they just didn't have the inventory they couldnt get the volumes and so as a result, they are focused on rebuilding those inventories now now clearly it's been a slow start to the winter in terms of weather and demand has been down there.
So gas prices very low so that will have an effect on burned so far were not hurt hearing from any of our customers.
They don't want to continue to receive.
Full amount of their full allocation.
Rightly so there's still struggling to get the kind of rail service that they that they expect so if.
It's a mild summer as well you know, perhaps we can start to see that push back but right now we don't expect it to see that we think theres going to be here.
Sort of rebuilding of these inventories and more you know to more normal levels.
David I think Dirk touched on the frustration of some of our customers on rail service.
And I think if you stand back and look the eastern rails had the same issue that we hear about it and.
In the west with Eastern rail services basically settled their problems at about four or five months.
You know frankly, the Western rail service has gotten worse in the fourth floor.
It's extraordinarily disappointing what theyre doing in their ability to bounce back and that frustration has come through from our customers.
I think if they can get the rail service I feel a little more optimistic this year about them, taking what they contract.
Okay.
Okay, great very helpful. Thank you. Thank.
Thank you David.
The next question next question Nathan Martin from Benchmark Company. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Okay.
I think most of them have been addressed at this point, but maybe just drilling down a little bit more than expected shipment cadence center John had some good comments there, but maybe on the met side any planned longwall moves to be mindful of Paul you just said it sounds like Eastern rail services is moving along fairly well, but as Curtis Bay.
Back up to running at a 100% again and then on the thermal side again rail service continues to be poor. It sounds like how do you expect that maybe to affect the cadence or timing of shipments on the thermal business.
So Nate from a longwall move perspective, you know our operations have gotten exceptionally good and efficient at moving the walls from panel the panel Leer South just right at the beginning of January of this year had a very successful move from panel to the panel three we've got several moves scheduled over the course of the year depending on.
Vance rates you know the.
Something might get pulled into 'twenty three are our or push out to 'twenty four but all of that is incorporated into the guidance and our teams have high confidence on the ability to execute on the plan that's out there and I don't see any significant.
Impacts of variability to to kind of the cadence of our production over the course of the year.
And I look at it I'm.
Sorry, it's been a slow start obviously on the rail side I mean, you do have typical seasonality Q2 tends to be you know a lesser period because of weather and the P. R. B on the thermal side Q3 tends to be a strong shipping quarter. So there certainly could be some level of lumpiness, but again, we start out Q1 is a fairly slow.
So you know stay tuned I think you know if you look at the cadence. If you were just to make it ratable over the course of the year to that midpoint of 70 million tons would be 17, and a half million tons a quarter as Dirk indicated.
There is typically some seasonality and in a in a traditional year, but then when you got the rail impacts and challenges we do expect improvement from Q4, but probably not on a true ratable basis in Q1 for the full year at the $70 million a ton.
The midpoint of the guidance for the year, if that if that helps.
Yeah, No. That's very helpful guys and just real quick Curtis Bay is that kind of backup there running normally at this point.
Yeah. Nate we are you know over the course of the year things are you know they address the issue that started in January of 'twenty, two and work to to kind of repair the facility.
The logistics team here did an outstanding job of managing that issue over the course of the year.
As our Curtis Bay continued to make repairs our opportunity to to participate continued to increase their at Curtis Bay and as we world into the end of the year. There we're not seeing any issues with Curtis Bay is as we go forward. Okay, I'll, just say Nate that see effects effect.
They are they delivered on the operating side, they've got Curtis Bay, it back up and running.
No complaints on the east.
Great Great to hear guys and then maybe as it relates to the full year 2003 met segment cost per ton guidance, what met price or you're kind of embedding in your 79 to $89 a ton range there.
So as part of the reason for that wide range is a lot of those different variables that are out there including sales price.
Mind, everyone that given the ownership structure of the reserves that we have out in the east where we own the majority of those reserves are sale sensitive cost in relative terms our our.
Fairly modest kind of we guided to about a 7% range type sale sensitive cost number so you know.
We're not going to provide specific guidance on what what the market range was but once again, it's all incorporated in into the guidance that we have out there.
And then just a reminder, that 7% and 5% of that is severance tax we pay to the state of West, Virginia, which I think underscores further the strength of.
Our position and the fact, we own the vast majority of our reserves and fee. So we really are in a quite a good position and feel very comfortable that you know while sure higher prices will have some effect on our cost its fairly modest and so not that difficult for us to to encompass.
Those sorts of increased prices within it within the range we provided.
Yeah.
Got it I appreciate that guys and then maybe just finally, a bigger picture question I guess timely reports out this morning tech might be looking to announced the spin off of its met coal business as early as next week. According to Bloomberg I know you guys. Obviously can't comment specifically on deals, but you know how would you maybe characterize the current coal M&A.
A landscape, where do you have any interest in adding some high quality met coal assets.
Right.
As we've said in the past, we will look at everything and consider about it anything.
It's a very difficult environment to do a deal and you know it.
You you talk about what is the environment.
It's effectively frozen there there's lots of reasons for that and I think anybody or everybody should agree that if there is a deal out there that have lower costs and in our case does it does.
That hurt us on a quality basis.
We'd probably take a lot of interest in it but you know absent that it's hard to put a deal together right now and we.
We will keep looking and we'll keep considering but frankly, we're in a good position.
On the low end of the cost curve frankly were well below the average cost go over the rest of the U S.
You know if our downside cases simply harvesting cash and turn it back shareholders that's fine.
Okay.
I appreciate those comments Paul I'll leave it there best of luck to you guys in 2023.
Alright, Thank you for your time.
The next question comes from Michael Dudas with vertical Research partners. Please go ahead.
Good morning, gentlemen.
Morning, Michael.
Hum.
So adding.
Adding those seven Asian customers, you can put that in context relative to your comments in your prepared remarks.
You know utilization starting to improve some hot metal coming back.
Is that helping your product kind of get noticed in the marketplace, then and with regard to looking at the best netback value for arch long term is how important you think as you will be going forward is that going to be a significant marketing of the tons that you have in the market for export customers.
Sounds that's like would you like to do if the economics makes sense.
Yeah, Mike I'll I'll start off broadly and see if tech or John want to add in.
Literally our thinking has been in the last couple of years is to expand our customer base in Asia and.
The logic is fairly simple.
Both the U S and European blast furnaces are are slowing down or you know for a variety of reasons, you know starting to move away and the real growth on the raw steel the hot rolled steel is in Asia. So we have purposefully done this jump.
Jump to the Asian markets.
Spent a lot of time and effort in there.
And so.
So Mike I'd say look we've now crossed over 40% of our volumes moving into Asia, We think that's really important and strategic.
That is where the growth is going to be as Paul said, the Europeans are looking at some migration away from integrated steel production towards more Eas and maybe Dr. I with Eas. The the Asia market is not the Asian market is full speed ahead on new integrated steel capacity being added and post COVID-19 the projects that were put on.
Pause have now started back and are moving forward with great momentum as we look out between now and 2030, we could see 70 million tons of additional hot metal production manifest itself in southeast Asia, including India.
And that that's a that's.
A huge market opportunity for us the vast majority of that will be served via the seaborne market and so we absolutely believe its strategic would also add that look we think we've got the ideal product for that marketplace, because we've got with our Leer South product. We've got the high CSR that Australia provide the 70 CSR kind of kind of prop.
That along with the plastics properties that make it great for blending and Youre looking at you know steelmakers that are that are.
Weighing their options and trying to find blends of multiple products, while adding our high vol. A product really makes those blends so much more effective because of those plastics properties. The temperature range. The fluidity. So we are we do believe we're getting traction there and a better understanding of the value of the product and these seven customers are.
Indicative of that but certainly as we look forward, we expect Asia to represent an increasing percentage of our mix and Michael I'll add just to recognize the marketing team and the tremendous work that they've done to go out and to secure additional business in these Asian markets. We've talked about it for some time the deck just alluded to the qualities of the <unk>.
That we're producing and wanting to get it introduced into a growing area like that the marketing team's done an outstanding job of.
Getting those relationships getting opportunities to have the product test it and then executing on the ability to enter into contracts. So it's been a big win all around and you know just to kind of wrap up that discussion. In addition to the growing demand there.
We'd hinted on this a couple of different times, it's there's just a complete lack of investment globally.
And new production and so we see a tremendous opportunity here as we move forward.
And think we're positioned very well.
No. That's that's very well said gentlemen, it just won't work.
Follow up maybe on your on your last comment there John .
Do you think U S can contribute what do you think you can contribute to export met in 2023 and even in the next 24 and 25 is there the ability to kind of maintain those numbers should still or I would assume there's still going to be these are struggles.
Yeah, Mike, It's Jack and look we.
We are comfortable with the fact that demand could slack and if the macro environment continues to slow and weak and we're in a great position to sort of ride out any kind of trough. So I want to say that first so we're not we're not making this projection for the market for great market strength and broken and at the end of the business cycle, We will say this.
Right now you're right, you've got steel production and hot metal production now.
Starting to show signs of kicking back off after declining by nearly 9% last year in the world Excluding China.
And yet the supply side continues to be under a lot of pressure So Australia was.
Was down nearly 9 million tonnes in terms of production in 2022 coking coal exports in 2022. They are the big horse in the seaborne market as you know.
But they are they are now down 30 million tons from the peak year of 2016. They they ended the year at about 158 million tonnes versus the peak year of 188 million tons. In 2016. So you continue to see that.
The Underinvestment that John mentioned manifest itself in a very significant way. The U S is really the same story, you've got degradation to depletion of the reserve base, you've got relatively limited investment and so despite the fact that last year in 2022 average high vol. A price was $350 U S exports increase.
By 1 million tonnes Canadian exports increased by 2 million tonnes last year and those are the three biggest suppliers in terms of high quality coking coal. So yes, we continue to see pressure on supply and believe that is going to continue in 2023, which suggests that the market could retain this strength.
For some period of time again, we don't needed to we can do well in a market that is less robust than the one that persists right now, but the fundamentals do continue to look strong.
Michael the other thing related to this.
So we used to always talk about what we need is an average of about $150 East coast price for the World to work you know you think about that now in the guidance. So that you are hearing from a lot of the U S producers.
$50 breakeven that number has moved up dramatically and as Dirk said look we don't need it to be 200 or $300 to do well, but it is interesting where it's settling in at.
Look I don't I don't think.
150, as a normal going forward price structure or cost or price.
Price structure is going to be the norm going forward.
Yes.
Although well said Jim I appreciate those observations. Thank you.
Thank you bye.
The next question comes from Chris <unk>.
With Jefferies. Please go ahead, hi, Thanks, operator, Hey, guys. Thanks for taking my question.
And I apologize I mean, you you touched on some of this already but you know that you were talking about kind of the structural supply problems in the in the seaborne coal market, which are not going to get solved easily.
And you know we went through a year last year when when Chinese demand for met coal at least was very very weak Chinese domestic coal production increased to us so pretty astonishing when you consider how bad China, whereas last year, how strong the core markets where anyway. So the debate now that we're hearing from a lot of investors is whether or not this china recovery will be steel intensive.
Uh huh.
Overwhelming consensus view is that it's going to be consumer driven it's not going to be about steel, but we're hearing from some of the big iron ore miners that they're already seeing evidence of a pickup in activity in real estate and construction.
And there's been a lot of policy shifts in the China housing market that could drive potentially a pretty strong recovery in kind of steel for for construction, which I think the market is probably not really expecting. So my first question is are you guys seeing any evidence yet of an increase in in kind of demand in the Chinese steel market and then secondly.
If that does indeed play out and you get a kind of stronger than expected recovery in Chinese steel demand.
What does that do to the met coal market I mean again coming off of a year, where Chinese demand was horrific what happens is that there's a bit of a V shaped recovery how do we how does the world solve that problem for a whack of met coal.
Thank you.
If that is such a good question and as indicated.
Last year Hot metal production was way down and that's the key driver in coking coal market. Then yes, you can go markets, where were very robust and so China, China continues to import 40 million tons of seaborne coking coal that that certainly supports that car the market. We're in if that does in fact ratchet up.
Right. That's additional pressure we saw in November you had 25 million tons or so of European steel mill capacity that was idle 10 million tons of that has now come back. So again, we're seeing signs of a pick up elsewhere as well and so China Wade back into this market in a significant way it certainly could provide additional support.
And so.
Yes.
We agree.
The market continues to fly Fi continues to look very tight if not entirely evident where the volumes are going to come from.
There are a lot of variables I mean on the on the on the other side of the equation with thermal prices down youre going to see less crossover times, but that's relatively modest compared to the sort of the driver represented by increased hot metal production. So there are a lot of puts and takes here, but but we also see a pretty constructive market environment.
<unk> as we sort of head into 2023.
Great. Thank you.
Okay.
The next question comes from Lucas pipes with B Riley Securities. Please go ahead.
Thank you very much for taking my follow up question.
I first wanted to touch on the initial target being reached at the Reclamation fund.
Should we expect kind of a minimal contributions this year or or not and if so what what could be maybe the contribution so longer term. Thank you very much.
Yeah, Lucas, we essentially as we noted really completed the accelerated funding during 2022 and you know what we're really going to target now is just to make sure that you know as changes in the future obligation take place that we're continuing to try and match what the ultimate obligation will be with what's in the fund. So I think this year you can see.
That fund grow by somewhere in the neighborhood of $20 million. Some of that's going to be interest. That's just accruing on what's there some of it will be modest contributions that will make them over the course of the year and then you know look as we look at it in the interest rate environment that we're in you know after this year I'm not sure we will have to make much in the way of additional contributions as the interest.
Accrues on that fund.
One that we've already got in place I think we're going to be in very good shape to have the obligation fully funded.
I think for modeling no Matt the best way to look at it it's about $5 million a quarter correct.
Okay.
Very helpful. Thank you and and Matt I do want to.
Congratulate you on the share repurchases that was about $20 per share of <unk>.
Better pricing things to the convert.
Acquisitions, you did so well done there Matt can you remind us what the share count is today.
So you know the diluted share count today is.
Call. It just under 20 million shares that includes all of what's underlying the the remaining convertible bonds are the warrants that are outstanding and the employee shares the basic shares today, you know call.
Call. It just around 17 5 million shares.
Very helpful. Thank you for taking my follow up questions and again best of luck.
Thank you Lucas.
This concludes our question and answer session I would like to turn the conference back over to Paul Lang, CEO and president for any closing remarks.
I want to thank you again for your interest in arch, Yes, 2022 was a year of tremendous accomplishments for the company in terms of ESG execution financial performance shareholder returns and critically building the foundation for even stronger future.
With our clear strategic direction low cost strong book of business and talented team.
I'm confident that we're poised for ongoing success as we move into 2023.
With that operator, we'll conclude the call and we look forward to reporting to the group in late April stay safe and healthy everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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